Planned Economy - Economic Planning Versus The Command Economy

Economic Planning Versus The Command Economy

Economic planning is a mechanism for resource allocation of inputs and decision-making based on direct allocation, in contrast with the market mechanism, which is based on indirect allocation. An economy based on economic planning (either through the state, an association of worker cooperatives or another economic entity that has jurisdiction over the means of production) appropriates its resources as needed, so that allocation comes in the form of internal transfers rather than market transactions involving the purchasing of assets by one government agency or firm by another. Decision-making is carried out by workers and consumers on the enterprise-level.

This is contrasted with the concept of a centrally planned, or command economy, where most of the economy is planned by a central government authority, and organized along a top-down administration where decisions regarding investment, production output requirements are decided upon by planners from the top, or near the top, of the chain of command. Advocates of economic planning have sometimes been staunch critics of command economies and centralized planning. For example, Leon Trotsky believed that central planners, regardless of their intellectual capacity, operated without the input and participation of the millions of people who participate in the economy and understand/respond to local conditions and changes in the economy would be unable to effectively coordinate all economic activity.

Another key difference is that command economies are strictly authoritarian in nature, whereas some forms of economic planning, such as indicative planning, direct the economy through incentive-based methods. Economic planning can be practiced in a decentralized manner through different government authorities. For example, in some predominately market-oriented and mixed economies, the state utilizes economic planning in strategic industries such as the aerospace industry.

Another example of this is the utilization of dirigisme, both of which were practiced in France and Great Britain after the Second World War. Swedish public housing models were planned by the government in a similar fashion as urban planning. Mixed economies usually employ macroeconomic planning, while micro-economic affairs are left to the market and price system.

The People's Republic of China currently has a socialist market economy in place. Within this system, macroeconomic plans are used as a general guidelines and as government goals for the national economy, but the majority of state-owned enterprises are subject to market forces. This is heavily contrasted to the command economy model of the former Soviet Union.