A planned economy (also called a command economy or centrally planned economy) is one in which production, investment, and the allocation of goods are determined by administrative decisions of a central authority — typically the state — rather than by the interaction of supply and demand in markets. Output targets, input quotas, wages, and prices are set through planning instruments such as multi-year plans, material balances, and state procurement orders.
The archetype was the Soviet Union under Gosplan, which directed the economy through successive Five-Year Plans beginning in 1928 under Stalin. Similar models were adopted across the Eastern Bloc, Maoist China (where the first Five-Year Plan ran 1953–1957), North Korea, Cuba, and Vietnam before its Đổi Mới reforms in 1986.
Key features typically include:
- State or social ownership of the means of production
- Administrative price-setting rather than market clearing
- Quantitative output targets for enterprises and sectors
- Restricted private enterprise and limited consumer choice over capital allocation
Economists distinguish planned economies from mixed economies (where the state intervenes in an otherwise market-based system) and from indicative planning — used in postwar France through the Commissariat général du Plan — where plans guide but do not bind private firms.
The principal theoretical critique is the economic calculation problem, articulated by Ludwig von Mises (1920) and Friedrich Hayek (1945), which argues that without market prices a planner cannot rationally allocate scarce resources. Empirically, planned economies tended to produce shortages of consumer goods, soft budget constraints (a term coined by Hungarian economist János Kornai), and weak innovation incentives, though they could mobilise resources rapidly for industrialisation or wartime production.
Most former planned economies underwent transition to market systems after 1989. China and Vietnam retain Communist Party rule alongside extensive marketisation, while Cuba and North Korea preserve more of the original model.
Example
In 1928 the Soviet Union launched its First Five-Year Plan under Gosplan, setting binding output targets for steel, coal, and grain across the entire economy.
Frequently asked questions
Socialism refers to social ownership of the means of production and can take many institutional forms; a planned economy is one specific mechanism — central administrative allocation — used to implement it. Market socialism, by contrast, combines social ownership with market exchange.
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