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Central administration economy

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Central administration economy understandable & concisely defined

A central administrative economy is an economic system in which all essential economic decisions are made by central authorities. The concept stands in stark contrast to the market economy order, which is characterized by the decentralization of economic decisions. Synonymous terms for central administration economy are planned economy or command economy.

Historical development of the central administration economy

Central administration economies were particularly characteristic of the states of "real existing socialism". The Soviet Union served as a model, in which, after the October Revolution and the civil war, centralized economic management with complete nationalization of companies and collectivization of agriculture was implemented. The central planning and control should primarily serve to catch up with the industrial deficit of the former Russian Empire. In addition, the basic ideas and principles of Marxism were implemented. Following the Soviet model, central administrative economies were also established in the Eastern Bloc countries and in other communist countries (China, North Korea, Vietnam, Albania, Cuba) after the Second World War.

After the end of the Soviet Union and the disintegration of the Eastern Bloc, the central administration economy has de facto become obsolete. Russia and the former Eastern Bloc countries have switched to a market economy. In China and Vietnam, there is still central economic control, but strong market-economy elements have taken hold. Today there are mixed forms of central administration and market economy. The central administration economy is practiced almost "in its pure form" only in North Korea.

Different models of central administration economy

Because of its historical significance, the term central government economy or planned economy is often associated with state property and socialism or communism. However, this is only a specific characteristic. Central administration economies are also conceivable with the preservation of private property or in a non-socialist context. A distinction is made between property-related:
Central administration economies with preservation of private property

Have been of practical importance in connection with war economies. In the war economy, the state takes on a central control and guidance function in order to focus the scarce resources on armaments and war requirements. Private property remains in place, the market economy order is only to be temporarily suspended. A typical example of a war economy is Germany during World War II.

Publicly owned central government economies

In this form of planned economy, the means of production are not owned by the state, but are owned by society and administered by democratically elected councils. A top - also elected - "Economic General Council" develops central planning specifications according to the requests from the decentralized councils. This council model has remained a theory so far, approaches to implementation can be found in former Yugoslavia under Tito.

State-owned central government economies

This is the typical manifestation of the "real socialist" planned economy. A central planning authority is responsible for planning and controlling. Industry and agriculture are state-owned or "publicly owned".

Pros and cons of central administration economics

Advocates of the central administration economy - especially in the real socialist form - have repeatedly argued that it is better possible with central planning and control,

  • to distribute the scarce resources of an economy fairly
  • to guarantee a steady and stable economic development without economic fluctuations
  • To steer investments "in the right direction"
  • promote sustainable growth
In order to achieve these goals, in the central administration economy, the control and coordination of the price is replaced by the plan, which is determined by a state planning authority and broken down to the individual companies with plan target specifications. The price loses its meaning in such a system, in particular it no longer reflects the scarcity of goods. At most it still has a political function.
Disparities in supply and demand

Since planning in the central economy can only take into account economic needs with a delay and incomplete information, there are inevitably disparities in the supply and demand of goods. At politically determined low prices this problem is exacerbated, the demand is then regularly greater than the supply, which leads to typical "deficiency symptoms" with supply gaps. Due to the lack of a private profit incentive, there is no interest in efficient production. Central administrative economies are therefore characterized by lower productivity and weaker innovative strength than market economies. The efficiency of the production processes and the economic dynamism are regularly lower. This explains why the central administration economy ultimately had to be defeated in the "competition of systems".

Summary Central Administration Economy

  • A central administrative economy (planned economy, command economy) is an economic system with central control and guidance of the economy by the state
  • Central administration economies gained historical importance, especially in states of "real existing socialism"
  • The real socialist central administration economy is only one manifestation, other forms are the war economy (preservation of private property) and the council economy (company property)
  • In the central administration economy, the plan is the central control instrument instead of the price. This almost always means a loss of productivity and efficiency with gaps in supply
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