A planned economy is an economic system in which economic decisions related to the allocation of resources, production, investment, and pricing are under the control of the government or some other authoritative body. In the 20th century, it was popularly believed that a centrally planned economy would do a better job than an unplanned economy of addressing the needs of the people without suborning those needs to the uncertainties and business cycles of a free market economy. A planned economy is characterized by government control of the means of production, even if actual ownership is private. By contrast, in a command economy, a more coercive type of a planned economy, the means of production are almost exclusively owned by the state.
The decisions necessary in economic planning are difficult to reach in a democratic state due to the many competing interests. Most planned economies, therefore, have generally existed only where the form of government is an oligarchy or a dictatorship, such as the former Soviet Union, and in India prior to 1991. China, another large dictatorship, had a command economy until 1978, when it began to permit private ownership of small businesses with some level of autonomy in decision-making.
There are several advantages to planned economies, chief among them the ability of the state to impose stability on sometimes volatile free markets. In such an economy, manufacturing concerns are relieved of the pressure to earn revenues and profits to continue their operations. They can, therefore, keep their workforces employed and provide a market for the raw materials they consume in their production.
Another advantage of a centrally planned economy is the ability to ensure production of "social goods" — goods and services that are deemed necessary, even if not very profitable. These could include low-income housing and "orphan" drugs. Advocates of central planning argue that in a free market economy, such goods wouldn't receive priority until they could be made to produce a greater profit, usually at the expense of the consumer.
Planned economies are impervious to market forces and business cycles, making major objectives easier to accomplish. Underdeveloped nations, for example, can require levels of investment in modernization and industrialization that wouldn't be sustained in a free market economy.
There are many disadvantages of planned national economies. It is almost impossible to plan for everything, so when something goes wrong that hasn't been taken into account, the entire system begins to malfunction. Historically, planned economies don't efficiently consider breakdowns of machines or equipment, and are thus generally characterized by chronic shortages of spare parts. Planned economies don't handle details well.
Another major drawback of a planned economy is the inability of planners to predict consumer behavior. Economic planning is conducted with the goal of accomplishing some macroeconomic or social goals, but it cannot guarantee that consumers will respond as expected. In essence, not all consumers have committed fully to the goals and objectives of the government.
While planned economies are impervious, at least in theory, to business cycles and the pressures of the free market, they haven't been very successful in terms of promoting long-term economic growth and consumer satisfaction. The large nations that employed economic planning in the 20th century have evolved to economies that permit a significantly greater level of involvement in economic decision-making by components of the economy other than the government. Those nations that still employ economic planning are generally small and struggling.
Although planned economies have not been very successful, no major nation has a completely free market. Instead, they employ a system of government influence of the economy, sometimes called a indicative planning or a mixed economy system. These systems are characterized by the use of government influence, tax policy, grants, and subsidies to affect economic decisions, but generally not coercion. In addition, all governments employ a more or less comprehensive system of regulations to govern the behavior of the different components of the market, even if they don't control the allocation of resources. That is, a government might not dictate auto production or prices, but it will dictate safety standards.
While all governments routinely try to influence their economies for a wide variety of reasons, those attempts have been most successful when they leave the ultimate choices to individual economic actors. The more extensively planned economies imposed by authoritarian governments have sometimes been successful in the short term in accomplishing economic stability, but haven't prevailed in the long term.