Centrally Planned Economy

Published Jun 25, 2023

Definition of a Centrally Planned Economy

A centrally planned economy is an economic system in which the government makes all the important economic decisions. In this system, the government typically owns and controls all the key industries, decides what goods and services will be produced and how much they will cost, and also decides how much to pay workers.

Example

A good example of a centrally planned economy is the socialist economic system that was in place in the Soviet Union from 1917 until 1991. During this time, the Soviet government controlled virtually all aspects of the economy, including agriculture, industry, and transportation. They owned and operated all the major industries, set production targets for those industries, and determined the prices that consumers would pay for goods and services.

The government also determined the wages that workers received, as well as the amount of goods and services that were allotted to each individual. The government used a system of rationing to ensure that each individual received a set amount of goods and services, regardless of their income or social status.

Why a Centrally Planned Economy Matters

While a centrally planned economy can offer some benefits, such as a more equitable distribution of resources and goods and services, it has also been shown to be less efficient and less innovative than other economic systems. With the government controlling all aspects of the economy, there is little room for private enterprise or individual innovation to thrive. As a result, economies that rely solely on central planning often experience slower growth and development than those that allow for market forces to play a greater role.