Central managed economy

What is a central managed economy?

A centrally managed economy (also: planned economy, but not to be confused with the professional discipline of the planned economy, means that only the state has the right to provide goods and services, thereby eliminating the market mechanism (supply and demand balance).

A planned economy is a so called top-down economy, that is to say: At the highest level of an imaginary pyramid, the economy is determined by a few people and propagated down to the lowest level (the consumer). In a planned economy the consumer can only control the offer by moving politicians to do so. That is why it is also called a supply-oriented economy.

Centralized economies are mainly encountered in the communist state system, but in some capitalist states the state also partly determines the price of certain products (mixed economy). A Dutch example is the prices in health care that are determined by the Healthcare Authority. A centrally-led economy is still present in Cuba, North Korea, Vietnam, Laos and in a state of disintegration in the former USSR and the People’s Republic of China (now a form of a partial free market economy due to economic reforms develops).

Planning economy compared with market economy

Within a complete planned economy all production factors are in the hands of the state, in. completely free market they are in private hands.

In order to influence the offer in a free market economy, a consumer chooses whether or not to buy a product. However, the consumer can not force a producer to produce product X or Y. In a planned economy, the government has that power and can thus decide that certain products must be produced more or less.

According to some, a competitive offer leads to choice stress, which is solved when the government decides which products and services should be available. A planned economy could be a solution for that. Others do not consider a large choice a notable problem and want to be able to choose for themselves.

One of the frequent criticisms of the planned economy is that of the economic calculation problem. In order to determine the right prices, the government must have complete information concerning not only all the circumstances of the production process, but also the supply and demand, according to this criticism, and this is considered impossible.

Therefore, a planned economy will function less efficiently than a free-market economy, in which the market solves this problem by coordinating the actions of individuals. The most famous version of this criticism is from Friedrich Hayek. That the market can really solve the economic calculation problem, or even better than a planned economy, is being countered by some heterodox economists.

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