Economic Systems: Centralized Economies

Economic Systems and Basic Decisions

An economic system is the way individuals organize a society to solve their basic economic problems: What, how, and for whom to produce?

Economic Doctrines and Economic Systems

A doctrine is the set of economic ideas and opinions of a group of leading economists. They are:

• Liberalism: Rests on market performance. According to Adam Smith, every citizen is the best judge of their own interest and should be given the freedom to satisfy it, as well as advance the common good.
• Marxism: Relies on state intervention and centralized planning. (Karl Marx)

Centralized Economy

A centralized or authoritarian economy is a mode of economic organization in which key economic functions are performed primarily by the state. In centrally planned economies, the means of production are owned by the state, and key decisions correspond to the planning agency or central authority. The central government distributes the means of production and jobs. The planning center determines how to allocate production to different factories and ensures that each plant has the production factors needed to obtain the required amount.

The Operation of Companies

Companies base their operations on the finalized plan, adhering to compliance directives.

Growth of Bureaucracy

The flow of information between companies goes through a bureaucratic system that has to be broad and complicated. It is essential to control and influence businesses, so the result is a growing bureaucracy. The so-called "bureaucratic hell" was one of the events that determined the impossibility of central planning.

The Failure of the Centralized Economy

The negative elements of central planning became evident in the 1970s. The central agencies were wrong in their forecasts and did not take into account the real needs of society. The tremendous growth of bureaucracy, lack of good information, and the absence of effective incentives that guide the system towards economic efficiency, leading to the waste of resources, were the reasons for the failure of central planning.