5. The Planned Economy

The planned economy is the direct opposite of the market economy. In the market economy, the forces of supply and demand decide everything: what is produced, how much is produced, the methods of production and the price. In the planned economy, all of this is decided by the government.

Like every economy the planned economy has its strengths and problems. The free market supplies the things that people want. However what people want and what they need are not always the same. Fast food is always in demand but it is not good for our health. In a planned economy, the government can decide to stop fast food restaurants.

A second problem with free markets is that producers always want the highest price. Often the poor can’t afford things. In a planned economy, the government sets prices. They make sure that everyone can afford basic commodities. This is one way that planned economies try to share things equally. Another is to control how much people are paid.

In a planned economy workers’ wages depend on the service they provide to society. If people can live without their service, they are paid less.

Before 1900, there were few examples of planned economies. During the 20^th century, however, the planned economy became the standard for socialist governments like the USSR and China.

No economic system is perfect. The planned economy has many drawbacks. One of them is problems with supply. It is difficult for governments of planned economies to know exactly how much to produce to meet demand. In a market economy, when the price of a commodity rises, this indicates a rise in demand. Companies then supply more to the market. This warning system doesn’t work in a planned economy because price is controlled by the government. The result is shortages. (1488)

7 The Mixed Economy

There are no examples in the world today of a completely free or a completely controlled economy. Every country operates a mixture of two systems: in the free economy of the USA there is some government control, and in the strictest planned economy there is some free enterprise.

Economies mix government control and free market values in different ways. One way is to let private business exist alongside state enterprises. The economy becomes divided between the state sector and the private sector. State industries usually include public transport, hospitals, schools and the postal service. The state sector can also include large industries that are important for a country’s economic health, such as oil, steel or agriculture. These state sector industries use money that the government collects in taxes. Often they do not need to compete with other companies because no other company is allowed to provide the same product or service.

Another way in which economies today are mixed is that governments put limits on free enterprise. For example, governments may decide to ban trade in certain goods if they are dangerous. Governments may also create laws to make companies trade honestly or to prevent monopolies. Governments may also regulate methods of production. They do this to guarantee that products are safe for consumers and to protect the environment. (1167)