A centrally planned economy, also called a commanded economy, is an economy in which a central governing body, like a government, makes overall economic decisions about the production and distribution of goods. Typically, centrally planned economies are distinct from market economies, where such decisions are typically made by consumers and businesses. In a centrally planned economy to total output is determined through a planning system that considers all relevant inputs into the production and distribution of goods. There is a balance of demand and supply of resources. Planning may be used to address such issues as allocation of available resources between potential uses, allocation of workers to maximize output, allocation of profits and losses, and the regulation of capital expenditure.
The planning function in centrally planned economies is usually much more intrusive than in market economies. In markets, the process of matching supply and demand for a particular good occurs on the market floors, allowing prices to vary according to the relative value of the good to the buyers. Planning, on the other hand, is more localized, often involving governmental intervention to ensure the proper allocation of resources.
A centrally planned economy could be described as having a level of detail. Centralized planning requires detailed records of production, distribution, consumption, and saving. In fact, to understand how well the economy is doing, one would have to go to the government offices to get the details. For instance, one would need to know how much was spent on fixed assets like factories, how much was saved in the form of interest and dividends, and how much was channeled to running the financial institutions. It also has to be known how well the central economic plan is being implemented because no one is going to tell you what the real state is without going to the government and obtaining the relevant records.
Another criticism of centrally planned economies is that they tend to focus too much on the command economy element of the economy and not enough on the non-monetary elements. The fact is that without the money factor, it is impossible to conduct business. If the money system is not operating correctly, then the command economy element of the economy will not be able to operate, and so the non-monetary elements of the economy are ignored and are not addressed in any serious way.
However, this criticism can be countered by saying that the central planning element of such economies provides the necessary information needed by the citizens for them to understand their economic standing and make appropriate decisions. They can use the record of previous economic performance to evaluate the performance of the present government. This means that although the government may not do a very good job of actually running the economy in practice, it does ensure that basic policies are taken into consideration, such as encouraging savings, and making sure that the distribution of income is fair. In fact, it is rarely possible to achieve all of this in the way of centrally planned economies because there are just too many complex issues that need to be carefully addressed.
In any case, the most important aspect of centrally planned economies is the ability to regulate the economy. This is the aspect of the centrally planned economy that makes it possible for it to survive in the long term. The reason for this is that the collection of information needed to effectively regulate the economy is usually controlled by the central government itself. For example, in Cuba there are no restrictions on the amount of imports that can be made into the country, nor are there any controls placed on how those who export goods should do so. There are no real restrictions on foreign investment, nor are there any systematic controls exercised over the disposal of consumer goods.
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