Civil Engineering Reference
In-Depth Information
Figure 2.3
The general principles of a centrally planned economy
For such a system to work, the resources need to be centrally owned and controlled.
Stage 1
A state planning committee decides what the
community needs as a whole
Stage 2
It sets production targets for firms at a fixed
price and wage
Stage 3
The economy balances - all have jobs
and basic goods
In today's market driven, global culture, such a system may seem hard to
imagine, but it was used for more than 60 years from 1928 onwards when Stalin
introduced Russia's first Five-Year Plan. For example, the State Planning Committee
(Gosplan) in the former Soviet Union used to make sure that all construction
projects identified the required quantity of labour, plant and materials. Then, all
the plant and material requirements from projects due to come on stream in each
region within a five-year period were added together. This enabled the planning
committee to place the necessary orders with state contractors, material suppliers
and plant production factories. Understandably this system was typified by cost
estimating problems and over-employment, because in a planned economy there is
no competition - no tendering - no risk and little chance of being laid-off work.
A similar system of resource allocation had been adopted by the People's
Republic of China after its revolution in 1949. Following the death of the
revolutionary leader Mao Zedong, the economic reforms of 1978 began the process
of opening up trade links and allowing competition to operate. China is now fast
becoming the workshop of the world and the Chinese clearly embrace the market
system - although they still regard themselves as socialist.
As a consequence, most of the large, previously centrally planned, nation state
economies are now involved in a transition towards market-oriented systems -
and this will be reviewed in the next section on mixed economies. This transition
is not without problems, however, as much is still influenced by the old regime of
the centrally controlled plan. There is a kind of culture shock as a withdrawal of
