1.3.1. The Centrally Planned Economy

In a centrally planned economy, the government or the central authority plans all the important activities in the economy. All important decisions regarding production, exchange and consumption of goods and services are made by the government.

A centrally planned economy, also known as a command economy, is one where the government has full control over the economic decisions. This means that the government decides what goods and services to produce, how to produce them, and who gets them. Unlike in a market economy, where decisions are driven by supply and demand, in a centrally planned economy, these decisions are made through a central authority, which aims to organize the economy to fulfill its goals.

Imagine a school where the principal decides every single detail - what subjects are taught, how teachers spend their time, and what students eat for lunch. The principal believes that this is the best way to ensure all students succeed. This is similar to a centrally planned economy, where the government makes choices with the intention of benefitting society as a whole.

The central authority may try to achieve a particular allocation of resources and a consequent distribution of the final combination of goods and services which is thought to be desirable for society as a whole.

In this type of economy, the central authority not only makes the production decisions but also determines how resources are allocated among different sectors. This centralized control allows the government to attempt to address societal needs, such as ensuring that essential services like education and health care are provided adequately, even if the market does not produce these at sufficient levels.

Think of a community garden where one committee decides what vegetables will be grown based on the preferences and needs of the community. Even if some vegetables aren’t popular, the committee ensures that they are still planted because they provide essential nutrition.

For example, if it is found that a good or service which is very important for the prosperity and well-being of the economy as a whole, e.g. education or health service, is not produced in adequate amount by the individuals on their own, the government might try to induce the individuals to produce adequate amount of such a good or service or, alternatively, the government may itself decide to produce the good or service in question.

When certain crucial goods like education or health care are insufficiently produced in a free market, a centrally planned economy allows the government to step in either by encouraging private producers to increase output or by directly producing these goods. This ensures that critical services are available to everyone in society, especially those who might not be able to afford them otherwise.

Imagine a town where doctors are scarce and cannot meet the healthcare needs of the population. In response, the local government might establish a public hospital and incentivize more doctors to practice there by offering them benefits. This way, everyone has access to health services, reflecting the government's role in ensuring societal welfare.

In a different context, if some people in the economy get so little a share of the final mix of goods and services produced in the economy that their survival is at stake, then the central authority may intervene and try to achieve an equitable distribution of the final mix of goods and services.

Addressing inequality is a key concern in a centrally planned economy. If certain sections of the population aren’t receiving a fair share of goods and services, the central authority may take measures to redistribute resources or wealth. This could involve implementing policies or programs intended to provide basic needs for all, ensuring that everyone has a chance at survival and a decent standard of living.

Consider a small island community where the fish catch is plentiful, but only a few fishermen are taking it all. If everyone is starving while a few thrive, the governing body might decide to enforce limits on how much each fisherman can catch, thereby guaranteeing that fish is available for everyone in the community.

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