A centrally planned economy is an economic system and a specific type of a planned economy in which economic decisions are made by a central government rather than the interaction among market participants such as consumers and producers.
Note that there are key similarities between a command economic system and a centrally planned economic system. Both involve central government control. However, in command economies, public ownership of the means of production is a critical element.
It is also worth mentioning that this economic system directly opposes the principles of market economies, especially a free market economic system. Nevertheless, this article identifies and describes the key characteristics of a centrally planned economy.
The Key Characteristics of a Centrally Planned Economy
• Central Planning: As its name implies, one of the notable characteristics of a centrally planned economy is central planning, which involves a central authority, particularly a central government, developing and implementing a far-reaching economic-wide plan that includes macroeconomic and microeconomic considerations.
• Hierarchical Structure: Central planning is possible through a rigid top-down or hierarchical organizational structure and linear chain-of-command decision-making structure. Macroeconomic and even microeconomic decisions are made at the top of the hierarchy with little to no input from lower levels.
• Authoritarian: The prevailing leadership styles in this economic system are both transactional and authoritarian. It maximizes the advantages of transactional leadership and authoritarian leadership such as faster decision making, simplification of communication and coordination, and process efficiencies.
• Technical Bureaucracy: Another notable characteristic of this economic system is that it requires a highly educated technical bureaucracy because central planning necessitates strong coordination among different producers and resources. In communist and socialist countries, these bureaucrats may represent the de facto ruling class.
• Public Ownership: Similar to a command economy, private property rights are limited. The means of production and all other resources needed for production are theoretically owned by the public. However, in practice, the government or state controls how these resources are allocated. Capitalism is non-existent.
• Large-Scale Industries: A major goal of central planning is to focus on developing heavy industries that the government feels will provide long-term economic development. This is beneficial for undeveloped countries that would need to wait years for capital to accumulate from the expansion of light industries.