Centrally Planned Economy: Features, Pros & Cons, and Examples

What is a centrally planned economy?

A centrally planned (or command) economy is one in which a central authority—typically the government—makes the major economic decisions: what to produce, how much to produce, how goods are distributed, and often the prices and wages. Production is frequently carried out by state-owned enterprises, and independent companies, if allowed, operate under government direction.

Key takeaways

• Major economic choices are set by a central authority rather than by decentralized market signals.
• Central planning aims to marshal resources for social or strategic goals that markets might undersupply.
• Historically associated with socialist and communist systems; most countries that practiced strict planning have since moved toward mixed models.
• True command economies are rare today; even North Korea has some private-sector activity.

Core characteristics

• Centralized decision-making: A planning body sets production targets, resource allocation, wages, and prices.
• State ownership or strong state control of major industries and distribution.
• Production targets and quotas rather than profit-driven output.
• Bureaucratic planning apparatus that collects data, drafts multi-year plans, and issues directives.
• Limited role for market price signals; private enterprise is often constrained or heavily regulated.

How economic decisions are made

Local administrators report capacities and needs to central planners, who aggregate information into national plans. These plans go through revisions and are implemented via ministries, state enterprises, and allocation systems. In wartime or emergencies, similar central planning methods may be used to prioritize scarce resources and control distribution.

Advantages (why advocates support it)

• Ability to direct large-scale resources toward long-term social or strategic goals (industrialization, infrastructure, defense).
• Potential to eliminate extreme market inequalities and prioritize public welfare over profit.
• Economies of scale for major projects when coordinated centrally.
• Useful in emergencies (e.g., wartime rationing) where rapid, coordinated action is needed.

Disadvantages and criticisms

• Information problem: Without market price signals, planners struggle to match supply to actual consumer demand, producing shortages or surpluses.
• Weak incentives: State enterprises often lack competitive pressure to minimize waste or innovate.
• Bureaucratic inefficiency: Large planning apparatuses can be slow, rigid, and error-prone.
• Political risk: Skilled planners can become a de facto ruling class, concentrating power and reducing accountability.
• Historical record: Many centrally planned systems delivered lower productivity and living standards compared with market-based alternatives.

Historical and contemporary examples

• Soviet Union and Eastern Bloc countries (mid-20th century): Extensive state planning across most sectors.
• China (pre-1980s): Classic centrally planned model that later moved toward market reforms and privatization.
• Cuba, North Korea, Laos, Vietnam: Varied degrees of planning; Vietnam, Laos, and China have incorporated market mechanisms and private enterprise to different extents.
• Modern reality: Most former command economies adopted mixed or market-oriented reforms starting in the 1980s and 1990s. Today, North Korea is the closest example of a near-command economy, though even there private and underground markets exist.

Variations and hybrids

Many countries combine planning with market mechanisms—examples include market socialism, the socialist market economy model, and mixed economies that retain state-owned sectors alongside private enterprise. These hybrids try to capture social objectives of planning while using markets to improve efficiency.

Bottom line

A centrally planned economy concentrates economic decision-making within a government authority to pursue social, strategic, or ideological goals. While planning can mobilize resources for large projects and social priorities, it faces serious information, incentive, and efficiency problems. As a result, relatively few countries maintain pure command economies today; most use mixed systems that blend planning and market signals.