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Advantages and Disadvantages of a Centrally Planned Economy
The basically planned economy is when the government controls the means of production, these goods are allocated to people according to their needs. Governments usually do this in one of two ways: central planning or income distribution. Central Planning involves the policy of a central, political organization to control the economy all out.
Top-down organizational planning often involves a central authority that assigns values to all goods, which is then distributed down to regional and local governments. Here we discuss the Advantages and disadvantages of a Centrally Planned Economy.
What is a Planned Economy?
A planned economy is an economic system in which the government owns or controls the production or income distribution of a particular product. In a planned economy, government planning replaces the market.
PROS and CONS of Centrally Planned Economy
| PROS of Centrally Planned Economy | CONS of Centrally Planned Economy |
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Advantages of a Centrally Planned Economy
The planned economy cause the reason for its popularity. There are many Advantages of a Centrally Planned Economy such as
1. Prices are kept under control in a centrally planned economy
In a centrally planned economy, the government is the sole price maker. Therefore, there are no profits for the people and companies. Because of this fact, it will be difficult for any firm to compete against another firm. This is due to the fact that profit-making is not a part of the operation. In short, any firm doing business can only survive until it runs out of competitors.
2. A Centrally Planned Economy eliminates waste from the system
Because there is no profit-making element in the plan, there will be no waste (costs) lost. In a planned economy, there is virtually no need for waste since it is all designed to meet the needs of society. It is almost impossible to design an economic system that can meet the needs of society. This is because every economic system has got its own variations in which it works. The variations in each system are due to factors that are not considered during the planning or by resource use.
3. low level of unemployment
Because of the unemployment benefits and the forced centralized wages in a centrally planned economy, it is easy to find employable people. Thus, there will be no unemployment level since everyone will be employed. It can also be said that no one will be unemployed.
4. Ensures Equal Distribution of Wealth
The distribution of wealth depends on the needs of a particular person. The production capacity is usually fixed in a planned economy. For example, there might be only one factory in a country but it produces excellent goods.
It results in the production capacity being higher than the demand. In such a case, the government will induce factories to produce goods that are needed by the people. Also, it is planned that each person gets an equal amount of goods.
5. Eliminate Monopolies
The highest profit-making businesses in a centrally planned economy, when they engage in competition with other businesses, eliminate all the profits. The monopolies are nonexistent. It is because the prices of the goods are fixed and no business is allowed to make a profit.
6. Planning leads to full employment and the elimination of poverty
It is almost impossible to be poor due to the fact that everyone will be employed by the government. There is also no such thing as outdated technology. This is because whatever the main technology is, that would be the main technology in use. Also, it will be impossible to lose employment. It is because there is no competition and the business will always be in operation.
7. The Government Establishes Price Controls
Since the government owns the means of production, it can easily control the prices of goods and services. It is also easy for the government to control the supply and demand of goods and services. By controlling the price of goods, it can easily control inflation.
8. The Government owns the Monetary System
It is very easy for the government to regulate the economy by establishing different policies and by creating a forum. The government has complete control over the currency and how it is used. If there is inflation, it can decrease the money supply. If there is deflation, it can increase the money supply.
9. It leads to Better Planning
Because the government owns the means of production, it can always ensure that it matches the needs of society or people. This is because it has complete information on all the prices, sales, profits, and losses.
10. Increases National Income
The government would have the power to increase or decrease production in order to increase or decrease national income. As a result, it will shift the income as necessary. Because the government owns the means of production, it can establish laws that require what kind of work they do.
11. Reduces Inequality and Social Division in Society
Since there are no profits, inequality will be reduced tremendously. Also, the competition and profit that causes social division will also be eliminated. It will be easy for the government to give people everything they need.
12. Ensures Economic Growth
Economic growth can be attained due to the fact that the government controls the economy. In the absence of a centrally planned economy, there will be economic slowdowns because of different reasons such as lack of money and investment by big businesses.
13. Distribution Responses are Improved
As a result of the control over the prices and distribution of goods, it is easy for the government to distribute according to need. This eliminates any chances of hoarding and black markets. It is due to the fact that government is the sole owner of the goods.
14. High level of living
In a centrally planned economy, the government controls the resources and allocates them to its citizens according to their requirements and needs. It is not difficult to understand that in this case there will be no scarcity of anything. This is because the government will take care that there is enough for all, including the poor and needy.
15. lower Income inequality
All people will receive equal income and the old will be paid the same as the young. In addition, a centrally planned economy has got no difference between workers and employees. It is because the controls and planning that are done in a planned economy will ensure all have a decent standard of living.
16. Free Education
Since educational institutions are owned by the government, there will be no worries about obtaining educational materials. It is because the government will provide all the necessary resources in order for people to have a good education.
17. Greater Role of women
In a centrally planned economy, women are given more responsibilities and equal rights to men. It is because in this case, women are paid the same as men. Also, it will be easier for women to obtain employment and all kinds of jobs. It is because of a centrally planned economy, there is no discrimination between men and women.
18. Increases Social Mobility
There is no difference between workers and employees. Everyone gets paid the same salary irrespective of how good they are. This means that a person from a lower class can advance and become a top person, for example, an engineer.
19. Everyone gets the same chance to pursue their Goals
In a centrally planned economy, everyone has an opportunity to do whatever they want to do. This is because he or she will get the same salary and the same employment opportunities in whichever field they choose.
20. Allocation of Resources to Maximize Social Welfare
It is possible to allocate resources in a planned economy to maximize social welfare. This is because it will be possible to determine the needs of each person while giving people what they can afford.
Disadvantages of Centrally Planned Economy
The disadvantages of a centrally planned economy are many and some of them will be discussed here:
1. Private industries are not Allowed
Because many businesses compete in a free market, the government will not allow any private industry. This is because the government is in control of every aspect of private industry. The same things will be done in each business and at the same rate.
2. Lack of competition and associated efficiency
There is no competition in a centrally planned economy. This is because the government does not allow businesses to compete. As a result, efficiency will be lost and this will affect the economy negatively. It is because the lack of competition will mean that businesses do not have to compete with each other.
3. Uncertainty
The economy is uncertain due to the fact that the government has complete control over everything. As a result, prices are not based on the market because it is not possible for the government to adjust them. This means that there will be no guarantee as to how much certain goods are going to cost in the future.
4. Lack of Freedom
There will be no freedom in a centrally planned economy. This is because citizens will have to abide by the government’s rules. This means that people will not be able to do anything their way. It is because the government owns everything. They are the only ones who can decide what everything should be used for.
5. Lack of Innovation
There is no innovation in a centrally planned economy because the government will decide on everything and this means that the society cannot grow. The lack of innovation in that will result in an endless loop in the economy. It is because the resources will be used to make the same kind of things and not new things.
6. No Private Business
Since there is no private business in a centrally planned economy, there will be no small businesses or large businesses. This means that small businesses will not be able to give employment. As a result, the economy will be affected negatively. It is because there will be no competition and this will affect the economy negatively.
7. Lack of Incentive for Hard Work
The incentive for hard work is a must in an economy. This is because hard work is the only way to success. If there is no incentive, then people will not work but play and people will stop working just to live without working. There are no rewards for working hard. It is because the government does not pay people for good work and this will affect the market negatively.
Under a centrally planned economy, there is no incentive to perform better. For example, if people are not able to earn enough money to live their life the way they want, then it may not be good to work hard. People may find it easier to rely on the government; if people do not do anything, there will be shortages and a problem in the economy.
8. Increased chance of corruption
There is a higher risk of corruption in a centrally planned economy. This is because the government will be in control of everything and if there are some people who are corrupt, then they will cause disruption of the economy.
9. A lot of time and money are wasted
There is a lot of time and money wasted in a centrally planned economy because there is much effort put into nothing. For example, many resources are used to make something that will not be consumed.
10. You cannot oppose the decisions made by a centrally planned economy
There is no opposition to the decisions made in a centrally planned economy. This is because it is impossible to oppose. For example, if the government decides to spend money on something that will not be used, then there is no opposition and the resources will go towards nothing.
11. Inefficiency
In a centrally planned economy, there will be a lot of inefficiencies. This is because the government does not know what the people want and what they will buy. As a result, there will be chaos in production and it will affect society negatively.
12. Sometimes the poor Quality of Goods and Shortages
There will be poor quality of goods in some cases in a centrally planned economy because the government does not know what kind of goods need to be produced. As a result, there will be a shortage. The government will have to decide what needs to be produced and if they make choices in the wrong way, then there will be shortages.
13. The Government does not openly communicate with its people
The government does not openly communicate with its people in a centrally planned economy. This is because the government will decide what it wants to do and it will be common knowledge to people. As a result, there will be chaos in the economy.
14. IGnorance of Customer Preferences
There is no knowledge of customer preferences in a centrally planned economy. This is because the government does not know what people want. As a result, there will be chaos in production and this will affect the market negatively.
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Conclusion
A centrally planned economy may not be the best for society. It is because there are negatives to it and it cannot give rise to a developed country. This is because the government has complete control over everything and this will have an effect on the people of that country.