The social economy — planned economy
The key feature of the planned economy is that the means of production are government property. Managers of farms, factories, banks, stores and other economic enterprises are government employees subject to directives from above. The economy is managed, in effect, as a single giant corporation.
One method of allocating resources is for the government to issue directives to firms indicating what they should produce, the quantities that should be produced and so on. In some cases, this might be accompanied by rationing among consumers, but it is more unusual to allow consumers a large degree of choice over the items they purchase.
While production is controlled, consumers and workers are left relatively free. Workers can move from job to job in pursuit of economic advantage; and enterprises must compete for labour by offering attractive wages and other conditions. Consumers are free to spend their incomes as they wish, but they can choose only among the goods, which the planning authorities have decided to produce.
The planners may decide to produce less of some goods, or a different array of styles and qualities, than consumers would really prefer. One obvious problem for this kind of system is to ensure that the demands of consumers match the output of firms. In a market economy, price mechanism performs this function. In a planned economy, producers follow the instructions they are given. In this type of system, the mechanism that signals shortages of some commodities is often the existence of long queues and empty shelves.
The signal for surpluses of other commodities is often the accumulation of stocks. Such systems may some times induce illegal markets.
The planners are also faced with the problem of ensuring that the target levels of output assigned to various industries are compatible with each other. For example, in giving the steel industry a target level of output, planners must take into consideration the target levels of output assigned to other industries that use steel, such as car manufacturing. On the other hand, in assigning a target to the steel industry, the planners must ensure a sufficient supply of coal. Planners therefore face an extremely difficult task.