Invezz is an independent platform with the goal of helping users achieve financial freedom. In order to fund our work, we partner with advertisers who may pay to be displayed in certain positions on certain pages, or may compensate us for referring users to their services. While our reviews and assessments of each product are independent and unbiased, the order in which brands are presented and the placement of offers may be impacted and some of the links on this page may be affiliate links from which we earn a commission. The order in which products and services appear on Invezz does not represent an endorsement from us, and please be aware that there may be other platforms available to you than the products and services that appear on our website. Read more about how we make money >
Central planning
3 key takeaways
Copy link to section- Central planning involves government control over economic decisions, aiming to allocate resources efficiently and achieve specific economic goals.
- It often seeks to eliminate market inefficiencies, reduce inequalities, and ensure the provision of essential services.
- Central planning can lead to challenges such as bureaucratic inefficiencies, lack of innovation, and difficulties in responding to consumer preferences.
What is central planning?
Copy link to sectionCentral planning is an economic system where the state or government makes all major decisions about the production and distribution of goods and services. This system is typically associated with socialist or communist economies, where the government aims to control resources to achieve equitable distribution and meet societal needs.
In centrally planned economies, government agencies develop plans that specify what goods and services should be produced, in what quantities, and at what prices. These plans are then implemented by state-owned enterprises and other government-controlled entities.
Key characteristics of central planning:
Copy link to section- Government Control: The state controls all aspects of economic activity, including production, pricing, and distribution.
- Resource Allocation: Decisions about resource allocation are made based on the government’s assessment of societal needs and priorities.
- Public Ownership: The means of production, such as factories, land, and resources, are typically owned and managed by the government.
- Planning Process: Economic plans are created for specific periods (e.g., five-year plans) and detail production targets, investment priorities, and other economic activities.
Importance of central planning
Copy link to section- Resource Mobilization: Central planning can mobilize resources quickly and direct them toward strategic priorities, such as industrialization or infrastructure development.
- Equitable Distribution: Aims to reduce economic inequalities by ensuring a more equitable distribution of wealth and access to essential services.
- Economic Stability: Can provide economic stability by reducing the uncertainties and fluctuations associated with market economies.
Advantages and disadvantages of central planning
Copy link to sectionAdvantages:
- Coordination: Can effectively coordinate large-scale economic activities and ensure that critical sectors receive necessary resources.
- Social Objectives: Facilitates the achievement of social goals, such as reducing poverty, providing universal healthcare, and ensuring education for all.
- Reduction of Inequality: Can lead to more equitable income distribution and reduce social inequalities.
Disadvantages:
- Bureaucratic Inefficiency: Central planning often involves complex bureaucracies, leading to inefficiencies and delays in decision-making and implementation.
- Lack of Innovation: The absence of competition and profit motives can stifle innovation and reduce incentives for improving productivity and efficiency.
- Consumer Needs: Central planners may struggle to accurately gauge and respond to consumer preferences and changing market conditions, leading to shortages or surpluses of goods.
- Resource Misallocation: Government planners may not have all the information needed to allocate resources efficiently, leading to economic inefficiencies.
Real-world application
Copy link to sectionCentral planning has been implemented in various forms in several countries, most notably in the Soviet Union, China (pre-reform), and Cuba. For example, the Soviet Union’s economy was centrally planned from the 1920s until its collapse in 1991. During this period, the government set production targets and controlled all major economic activities. While this system enabled rapid industrialization and significant achievements in certain areas, it also faced significant challenges, including inefficiencies, lack of consumer goods, and economic stagnation.
In China, central planning was dominant until the economic reforms of the late 20th century, which introduced market mechanisms and reduced the scope of government control. These reforms led to significant economic growth and development, demonstrating the limitations of pure central planning and the potential benefits of incorporating market principles.
Related topics
Copy link to section- Market economy
- Mixed economy
- Command economy
- Economic planning
- Public ownership
- Soviet economic model
Understanding central planning provides insights into different economic systems and the trade-offs involved in government control versus market-based approaches. It highlights the complexities and challenges of managing an economy through centralized decision-making and the potential impacts on innovation, efficiency, and consumer satisfaction.
More definitions
Sources & references

Arti
AI Financial Assistant