What good about the planned economy?

Question

What good about the planned economy?

Answer 1

Under planned economy, the government determines, or at least seeks to influence, the answers to those important economic questions of what should be produced? How it should be produced and for whom? In that system, detailed plans guided the flow of all resources, materials, and finished goods. Moreover, when those plans were finalized they endowed with the force of law, and the economic actors on the production side were required to follow the procedures laid down, and achieve the targets prescribed.

Central planning offers many appealing features. A plan enables tasks to be prioritized rather than relying on what seem at times to be the myopia of the market. A plan can also facilitate the mobilization of resources to achieve specific aims, such as the creation of infrastructure or the creation of a new industrial sector. Centrally planned economies also can avoid extreme bias in the distribution of income. Despite the recent dismal economic history of centrally planned states, planning retains an appeal. It is still considered a rational activity within a firm or household, which lends some justification for planning in the management of the national economy.

Advantage of planned economy (Planning and investing behavior)

It has been argued with some justification that the behavior of investment boards or planners might in some cases be better than the behavior of the market. Markets might be short-sighted in their evaluation of prospects, and deny capital to enterprises that, though worthy, will be slow to pay back principal. Planners or investment boards might be more capable of taking a longer view. It is also possible that planning might facilitate a more comprehensive view of the costs and gains of a project that the market does. Market decisions frequently fail to take into account significant positive and negative externalities and in theory at least, planers can take a more holistic view of the cost-benefit matrix of an investment. Consider, for example, constructing a railway line. A private firm would consider only the costs and revenues of the venture itself. A planning or investment board would want to take into consideration a much broader set of effects: the effect of alleviating road congestion in transport, the impact on the environment, and so forth. With respect to investments with infrastructural and spillover consequences, the board might well arrive at a more socially optimal decision that the market.

Advantage of planned economy (Stability)

A planned economy can ensure the continuous utilization of all available resources. If isolated and unresponsive to consumer demand, a planned economy does not suffer from a business cycle. Under an ideally administered planned economy, neither unemployment nor idle production facilities should exist beyond minimal levels, and the economy should develop in a stable manner, unimpeded by inflation or recession.

Long-term infrastructure investment can be made without fear of a market downturn (or loss of confidence) leading to abandonment of the project. This is especially important where returns are risky or where the return is diffuse.