The planned or centralized economy is an economic system where the key economic questions about what, how, and for whom to produce are resolved directly by the state.
The planned economy has as its main objective the equal distribution of income. For this, the state must intervene in the economy and take care of the tasks of distribution of resources. They demand the replacement of private property by collective property in the means of production, change, and distribution. It is a type of economic system contrary to capitalism or the market economy.
Its origins are in the Soviet Union, after the First World War. Later, it expanded to the economies of Eastern European countries. At the end of the 20th century, it was replaced in practically all the countries that applied it (the 100%pure system was never applied).
Although the concept of communism is broader, it is associated with the planned economy.
Key elements of the planned economy
There are three essential elements in the functioning of the planned economy. We will now explain them.
State or collective property
In the centralized planning system, private property is eliminated. All resources and products remain in the hands of the State, which represents the “collective property” that is, of all members of society.
The State determines the prices of the productive factors and also the prices of the goods and services produced. The market has no function as a mechanism for resource allocation.
The organization of economic activity is determined according to a centralized plan in which the State indicates in detail, for a given period of time, the production objectives, the technology to be used, the resources available for production and investment, etc. The benefits of the companies and the desires or preferences of the people do not have any interference in the allocation of resources.
The state also defines a system of distribution of goods and services so that there are no different social classes.
There is strict control of compliance with the established plan, eliminating completely the entrepreneurship, innovation, or appropriation of profits.