Chapter 2
Section 3: Centrally
Planned Economies
• Oppose private property, free
market pricing, competition, &
consumer choice
How is a centrally planned
economy organized?
• Central government answers the key
economic questions of production &
consumption
• After collecting information,
bureaucrats tell each firm what & how
much to produce
• It’s up to bureaucrats to
ensure that each firm has
enough raw materials &
workers to meet its production
goals
Government control of factor
resources & production
• Government owns both land & capital
• Owns labor by controlling where individuals work & what wages they’re paid
• Lack of consumer voice in production & distribution shows that consumers don’t have consumer sovereignty
Socialism & Communism
• Socialism- social & political
philosophy based on a belief that
democratic means should be
used to distribute wealth evenly
throughout a society
• Real equity can only exist when
political equality is coupled with
economic equality
• Economic equality is possible only if
the public controls the centers of
economic power
• Government often owns major
resources
• Communism- all economic & political
power rests in the hands of the central
government
• Governments are authoritarian- exact
strict obedience from their citizens &
do not allow individual freedom of
judgment & action
• Have been dominated by a single
political party or dictator
The former Soviet Union
• Background
–The Soviet Union arose out of a pair
of revolutions in Russia in 1917
–March- Czar Nicholas II was forced
from the throne, a provincial
government was set up, but was
toppled by November
• Taken over by the Bolsheviks led by
Vladmir Lenin & renamed themselves
Communists
• Central planning was introduced by
the 1920’s & continued until the break
up of the Soviet Union in 1991
• Soviet planners were most concerned
with building national power &
prestige
• Allocated the best land, labor, &
capital to the armed forces, space
program, & production of capital
goods
• The committees that ran the
system were responsible for
deciding the quantity, production
process, & distribution of goods
Soviet Agriculture
• Government created large state
owned farms & collectives for most of
the country’s agricultural production
• State provided farmers with all
equipment, seed, & fertilizer
–Farmers worked for daily wages set
by economic planners
• Collectives were large farms leased
from the state to groups of peasant
farmers
–Farmers managed operation of the
collectives, but were required to
produce what the government
instructed them to
–Farmers either received a share of
what they produced or income from its
sale
• Agricultural workers were guaranteed
employment & income & the government
established quotas & distribution
• Individuals had few incentives to produce
more or better crops
–Couldn’t keep its own people fed
–Soviet agriculture bore much of the
opportunity cost of Soviet central
planning decisions
Soviet Industry
• Factories were also state owned
• Planners favored the defense
industry, space program, & heavy
industries (chemical, steel, & heavy
machinery)
• Makers of consumer goods &
services paid the opportunity cost
of this concentration of resources
–Stuck with left over, lower
quality resources to create their
products
• Lack of incentives
–Jobs were guaranteed & wages set
by the government
–Once production quota was met,
there was no reason to produce
more goods
–Illegal for workers to exhibit
entrepreneurial behavior & start
their own businesses
Soviet Consumers
• A worker’s wages weren’t worth much
because consumer goods were
scarce & usually of poor quality
• Manufacturers had the incentive to
focus on quantity
• Consumers had difficulty getting
goods
• Housing
shortages
forced
people to
live in
crowded &
poorly
constructed
apartments
Problems with Centrally Planned
Economies
• Central planning can be used to jump
start selected industries & guarantee
jobs & income
–Poor quality, serious shortages of
non priority goods & services, &
diminishing production
• Can work efficiently toward explicitly
stated goals
–1928 Josef Stalin introduced 5 year
plans to boost production
•Disaster for agriculture, more
success in heavy industry
• Disadvantages
–Performance almost always falls short
of the ideals upon which the system is
built
–Can’t meet consumers wants or needs
–Workers lack incentives to do hard
work
–Don’t reward innovation & discourage
change
• The bureaucracy necessary to
make the decisions to run the
economy lacks the flexibility to
adjust to consumer demands
• Sacrifice individual freedoms in
order to pursue societal goals