How does a centrally-planned economy work?

What happens when the government calls the shots

Both capitalist and communist systems have flaws.
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The United States and the Soviet Union differed on many things during the Cold War, and one of them was food.

At face value, food might seem much more trivial than the global fear of mutually assured destruction at the time. However, it proves an important symbol for one of the key struggles in this feud: whether a capitalist or communist economy is best for citizens of any given country. 

First, let’s explicitly outline the features of the capitalist economy, as we have in Canada. Most of the world uses this economic system to some degree. At its core, a capitalist or “market” economy means the market determines the production of goods and services based on supply and demand. Demand higher than supply means prices will rise, and the opposite means prices will fall.

So, if the demand for a product like Air Jordan sneakers is high, sellers can charge customers a lot more than it costs to make the shoes, because everyone wants them.

Another aspect of the market economy is that the factors of production—computers, land, factories, labour—are owned by private entities. Workers will sell their labour to employers, who own the means of production. As such, the right to private property is often extremely important in these economies, because making money can depend on having an exclusive right to your capital.

The benefits of this system are mainly that individuals can get what they want, if they’re willing to pay for it. Supply will match what buyers want, fluctuating along with business cycles and consumer preferences so there’s never too much or too little of a good or service.

Most countries don’t have “pure” capitalism, meaning the government may impose some regulations. For example, in Canada, we control the price at which labour can be bought so it doesn’t dip too low by using a minimum wage. Either way, the idea remains that market forces of supply and demand determine what is produced.

On the other hand, the “centrally-planned” economy system used in communist countries doesn’t operate this way. Instead, it’s based around the idea that capital and the means of production are controlled by the state, which in turn plans production, as the name suggests. Given this set-up, private property doesn’t really exist.

Production occurs based on a plan, or a set allocation of specific goods to be produced in a given time frame. Unlike the market economy, a planned economy’s output won’t fluctuate based on changing consumer preferences.

All members of the society are considered in this planning, and an upside to the design of a planned economy is that it’s meant to ensure everyone has the goods they need, like food. As a result, the communist economy in theory matches up to its political ideology that all individuals ought to be treated equally.

We can likely see benefits to both systems based on their descriptions, but as is often the case, the reality doesn’t match the theory for both market and planned economies.

In the real world, capitalism’s biggest critiques are that those who don’t own the means of production are at risk of not having their needs met, whether that be food, health care, or shelter. This ties into another issue of inequality, which communism seeks to solve: in 2017 in Canada, the top 10 per cent of earners had more after-tax income than the bottom 40 per cent, and 9.5 per cent of the population was living below the poverty line.

This doesn’t mean a planned economy has no problems, though. Under this system, incentives are a big problem. If the economy doesn’t offer citizens the promise of acquiring capital, which can make the most money, workers don’t really have any reason to innovate, or to be their most productive.

However, the biggest and often fatal flaw of this type of economy is its inability to give citizens what they want (fancy shoes, televisions) or what they need (more food), because supply is predetermined by a plan, not based on fluctuating consumer demand and other forces.

For example, if a drought took out a month’s worth of crops, the result would be a shortage that couldn’t be mitigated by a responsive market.

A tragic example of the planned economy’s rigidity in action was seen in China in the late 1950s under the rule of Mao Zedong. Wanting to catch up to other countries in terms of industrialization, Mao followed the lead of the Soviet Union by attempting to produce an agricultural surplus—more than is needed—to export that would infuse his country with capital, to start this process.

When implemented, farmers reported falsely high crop yields in order to match the plan set by the regime. However, this meant the amount collected by the government didn’t leave enough for them to survive. As a result, many Chinese, particularly those in rural areas, starved. Millions died.

These issues prove that both systems have flaws. A market economy provides consumers with more options and freedom, but can be extremely unequal and keep those with the most power entrenched in their positions at the top, because they control the means of production. 

Meanwhile, a planned economy offers to fulfill every citizen’s basic needs, and ensures no individual has an upper hand from owning the means of production. But if the plan doesn’t predict the future well enough, everyone in society is vulnerable, and there’s no way to go to the market for recourse. 

As such, it’s up to a country’s government to decide which flaws are more acceptable—or to come up with something new.

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