- When capital outlay for products/services is large, e.g. infrastructure, the government may have more money available than private enterprise
- Low Unemployment
- The government control eliminates any waste resulting from competition between firms, for example when 2 competitive companies produce the same good a decrease of profit might be needed in order to compete, but in the planned economy case the government only supplies goods.
- The needs of the population are met; but there is little production of luxury goods for the wealthy. Most of the population have their essential needs (e.g.: shelter, food, etc...) but luxury goods will not be produced for richer people simply because no body will buy them.
- There is no Monopoly
- Economy is controlled; therefore there are less uncontrolled booms or Recessions
- Some goods/services are provided by the government freely (e.g. education, medical care)
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Lack of competition and profit motive may result in inefficiency (when Mobilecom was established the competition between the 2 companies eventually lowered the costs and increased their efficiency so they can keep current customers and also keep getting new customers)
- People have no choice about the goods and services they consume because only the government produces them
- Distribution of goods can be very difficult, this can occur because there is only one place for distribution. (e.g.: in Russia people use to wait in queues in order to get simple stuff like bread or fruits.
- Bureaucracy or "red tape" is common in this type of economic system
- There is no incentive to be enterprising
- There is less incentive to work as the government fixes wages and private property is not allowed. This can lower the productivity of workers, since all wages are fixed (e.g.: a worker produces 10 items a day and another produces 2 items a day, both will get the same amount of money)
The Bolshevik Revolution established a socialist state based on Marxist doctrine, which prescribes government ownership of all means of production which is called a planned economy, with each individual producing according to ability and remunerated according to the amount and quality of work. The country's land and banks were immediately nationalized, as was much industry. During the period known as war communism (1917-21), civil war raged in the country, and the central government functioned by combining fundamental Marxism with ad hoc emergency measures. By 1922 the country had been politically consolidated, and a new economic policy (NEP) was launched.
The Soviet economy grew rapidly during the 1930s, but because of the great destruction inflicted during the years of World War II (1941-45) many of the gains were eliminated. The economy was largely rehabilitated by 1948, and again growth was rapid through the 1950s and '60s. In subsequent decades, however, the growth rate slowed, and by the late 1980s serious economic weaknesses had become evident: low productivity, shoddy workmanship, inefficient distribution networks, and severe environmental pollution. In October 1990 the Soviet legislature approved a plan to move the country gradually toward a free market system, but the national economy continued to deteriorate. Meanwhile, Soviet efforts to attract massive aid and investment from the industrialized world were hampered by investors' concerns over the slow pace of economic reform and uncertainty about the nation's political future.
Problems with a planned economy
People are divided into those who have power (planners) and those who do not (workers). In a command economy, the nation resembles an extended family or a company holding a monopoly. There is no competition among producers and consumers and no negotiation between supply and demand; therefore, the price signals are distorted leading to a misallocation of resources and terrible waste. The "iron bowl" fosters a pervasive air of laziness among cadres and workers. Egalitarianism depresses activity.
In the planned economy, the state is like a big monopoly company with no rival.
In China, ministries are really companies without rivals, such as the Ministry of Coal, the Ministry of Electric Power, and the Ministry of Railways. They set the price, determine the investment, purchase the raw material and market the product. In these companies there is a division of labor but without real price, which is a necessary signal to allocate resources efficiently. Therefore, a planned economy is an economy with low efficiency.
There are no real transactions in public ownership because everything is owned by the State. How could the ownership change hands? Since there is no real transaction, no price can be generated. Price is used only for accounting, not for comparing economic efficiency. High price or low price makes no difference in resource allocation.
A planned economy is a rigid economy that is unable to adjust itself, especially in the industrial sector. In the agricultural sector, reform started with the household responsibility system, but the ownership of land is still pending. The success of China’s reform is basically because of the establishment of a market with private ownership alongside the old planned economy. In other words, the planned economy has not changed much, but it is becoming smaller and smaller compared to the growing market economy. China introduced the dual price system and allowed the private sector to grow. China deregulated the factor market (labor, capital, land and other natural resources) gradually, allowing them to flow and reorganize.
Problems troubling the Chinese economy
1- Broadening income gap;
2- Corruption;
3- Huge economic losses caused by the State-owned enterprises (SOEs);
4- Unemployment because of reform in SOEs;
5- Weak social security system.
1- http://members.aol.com/kwiersma/ussr_econ.html
2- http://www.lead.org/lead/training/international/china/1998/papers/reforms.htm