Section 3 Centrally Planned Economies

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Objectives

After studying this section you will be able to:

1. Describe how a centrally planned economy is organized.
2. Analyze the centrally planned economy of the former Soviet Union.
3. Identify the problems of a centrally planned economy.

Section Focus

In a centrally planned, or command, economy, the central government controls the economy. Central planning has limitations and disadvantages not found in market economies.

Key Terms

• socialism
• communism
• authoritarian
• collective
• heavy industry

Centrally planned economies operate in direct contrast to free market systems. Centrally planned economies oppose private property, free market pricing, competition, and consumer choice.

How Is a Centrally Planned Economy Organized?

In a centrally planned economy, the central government, rather than individual producers and consumers in markets, answers the key economic questions of production and consumption. A central bureaucracy makes all the decisions about what items to produce, how to produce them, and who gets them. After collecting information, bureaucrats tell each firm what and how much to produce. It is up to the bureaucrats to ensure that each firm has enough raw materials and workers to meet its production goals.

Government Control of Factor Resources and Production

In a centrally planned economy, the government owns both land and capital.

Government posters in Cuba (left) and Cambodia (right) try to inspire worker productivity in these centrally planned economies.

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