9 Advantages of Centrally Planned Economy

There are several different ways that an economic system distributes resources throughout a society. When it is the government or state that makes these decisions instead of privately-owned businesses and their customers, then you have what is called a centrally planned economy.

What distinguishes a centrally planned economy from a market economy is that the production and distribution responsibilities and resources are 100% controlled by the government or state. Even though there may be businesses which control the transaction process, the CEOs of those companies have a role to play in the governing of society too. These companies are the only ones that are permitted to undertake the provision of services or production of goods.

There are 4 other parts to this definition.

1. The government makes the economic decisions in addition to controlling all aspects of production.
2. The state also decides how all resources are used or distributed.
3. The government determines the final price for all goods and services.
4. The state is in a position where it must make these decisions for society to function.

The reason why most governments shy away from a system that is a complete centrally planned economy is that the system does not take the will of the people or their needs into account. It will always make decisions based on what is good for the government instead of what the overall society requires. Most systems are not a complete free market economy either, instead choosing to combine the two elements into something that offers public service coordination and pricing protections.

These are the advantages and disadvantages of a centrally planned economy to consider.

List of the Advantages of a Centrally Planned Economy

1. Prices are kept under control in a centrally planned economy.
Because supply and demand does not enter into the equation for a centrally planned economy, the government can dictate what the prices should be for everyone in society. That makes it much easier to set cost levels to a place where the average consumer can afford to have the items that they require. The theory is that by creating a system where everyone can have what they need, then there are no longer class systems present that can start to separate the “haves” from the “have-nots,” which is a step toward overall equality.

2. There is not the same level of economic inequality in this system.
In a centrally planned economy, the only people who tend to get “wealthy” from their employment or actions are those who hold high-level government positions. Even then, the net worth is tightly controlled for most parties in the system. Because the goal is to ensure that everyone receives the same access to all of their needs, you will find that the inequality of wealth in this system is considerably smaller than it is in free market systems.

3. You will not see a duplication of resource allocation in this economy.
The centrally planned economy wants to become as efficient as possible when producing and distributing goods. It can create an advantage in this circumstance because the state controls everything that is offered to consumers throughout society. Instead of spending resources on the same product made by three different companies, there is one state-owned enterprise which is responsible for each item that is necessary. This advantage goes up and down the value chain. Think about the last time you went shopping for toilet paper. How many brands were available on the store shelves? Instead of encouraging multiplication, this system seeks to use those resources elsewhere while offering one essential choice each time.

4. There are lower levels of unemployment found in centrally planned economies.
Because the government is the one in charge of all of the businesses is a centrally planned economy, then they are responsible for the overall unemployment rate. You will find that jobs are readily available in this system because the goal of the state is to ensure that everyone has work to do. Although you may not receive a choice in what you get to pursue as a career, the government does make an active effort to find positions that are representative of your skills, education, and talent.

You can still find artists, musicians, and other creative careers thriving in the midst of a centrally planned economy. The only difference is that the state can decide to move you into another position, such as toilet paper manufacturing, if they deem that such a transfer would be for the greater good of society.

5. A centrally planned economy eliminates waste from the system.
When you have multiple firms all competing with one another for customer revenues, then it is true that you can inspire more innovation than you would typically see in a centrally planned economy. You will also discover that a lot of waste occurs when there are inferior products which don’t make the grade at the consumer level in that system. Instead of writing off the discarded elements as a loss, a centrally planned economy will not allow them to occur in the first place. Competition is discouraged in this system because of how resources receive allocation.

That’s not to say innovation cannot occur in such a system. The state is consistently working to make improvements in the production and distribution cycles to reduce costs. You just won’t have multiple firms working on the same research simultaneously.

6. Distribution responses are improved in a centrally planned economy.
When Hurricane Maria struck Puerto Rico, the island was largely forgotten by the United States from an aid standpoint. President Donald Trump even mentioned that is was challenging to bring supplies there because the island was surrounded by vast amounts of water. Over one-third of those who applied for aid in the aftermath of this storm were denied aid because they didn’t have deeds to their property. It took months to restore basic power throughout the territory. Hospitals are still sitting abandoned after 24 months of recovery because there aren’t enough resources available.

In a centrally planned economy, these problems would be easily solved because the government would have the means to move resources as needed to wherever an emergency happens to be. State-owned companies can ramp up production immediately to produce more items that people might need for their survival. That process decreases the response time necessary to deliver help when compared to other economies.

7. Each person receives the same chance to pursue their goals or dreams.
The idea of a centrally planned economy is to eliminate the decision-making processes for the average person over employment, goods, and housing. Most systems even provide households with a residence in this economy as partial compensation for their work. You may not have any choice with regards to where you get to live, but it is also a cost that doesn’t come out of your paycheck. There are zero inherent household benefits that can give one group a beginning advantage over someone else. The idea is that the way you get ahead in this system is that you use your own gifts and talents to the betterment of the nation.

8. If you want an education in a centrally planned economy, then you get one.
The government requires workers with specific skills in a centrally planned economy, so it works hard to ensure people receive the schooling necessary to become productive within this system. There may be restrictions on the subject choices which are available in some years, as well as limitations on your schedule since you may be asked to work as well. If you want to receive an advanced degree, this economy is one of the better ways to make it happen. Your education is a priority if you make it one.

9. A centrally planned economy often emphasizes manufacturing and agriculture.
When a centrally planned economy is the driving force of an economy, then the two sectors which see the most success are usually manufacturing and agriculture. These roles do more than encourage the GDP to rise because of domestic productivity. It is a way to build the infrastructure by offering the population access to food and raw materials that are necessary for production. It works to drive innovation forward because the need to produce higher yields and affordable products never really goes away.

Although there is no competition in a centrally planned economy between businesses, the government still competes with itself by looking for new ways to reduce costs while providing opportunities.