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