Centrally Planned Economy vs. Mixed Economy

Centrally Planned Economy

This system, inspired by Marxist theory, was born in the Soviet Union after World War I and thereafter expanded into Eastern Europe, eventually sinking in the late twentieth century. In this system, the only relevant operator is the public sector. Its main objective is to achieve an equal distribution of income. The management of economic activity is conducted through a centralized planning body that provides a series of multi-year economic plans.

Factors associated with its fall:

• Errors of forecast. In the absence of real economic signals, planners lacked reliable information on the progress of the economy; thus, they did not always correctly estimate resource allocations.
• Lack of incentives. With prices and wages set by the state, businesses did not strive to be competitive, and the motivation of workers was generally low.
• Excessive bureaucracy. The large administrative apparatus necessary to control the economic system became a giant with feet of clay, characterized by slowness and inefficiency.

The failure of central planning left few alternatives for countries that adopted it.

Mixed Economy

One of the drawbacks of the market economy was that it entered crises periodically. But this effect was not known until the first major crisis occurred in 1929, known as the Great Depression. Henceforth, the market would remain the main "mapper" to appeal to, but the state would intervene more actively to correct imbalances. Today, the critical functions of the state in a mixed economy exceed those assigned in the market economy:

• Establish legal and institutional framework. Without the existence of basic rules and regulations, it would not be possible for families and businesses to develop their activities without anyone being impaired.
• Provide public goods. There are a number of goods that society believes should be enjoyed by all (education, health, roads, etc.), and that private enterprise could not provide, or would provide at too high a price.
• Redistribute income. Since not all people are born with equal opportunities or capabilities, the public sector tries to correct socio-economic differences to achieve a minimum level of welfare for all.
• Smoothing the cyclical instability. Subject to the private sector, the market economy system alternates phases of expansion and recession phases, so it is the responsibility of the state that transitions between the two types of cycles are as smooth as possible.

The mixed economy is situated midway between the systems of market economy and central planning, trying to take advantage of both systems.