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Study the introduction above. What are you expected to learn from this assignment? Explain your answers.
Also, study the vocabulary words and look for them as you work through this lesson. You will be tested on these words later on.
Centrally planned economies operate in
direct contrast to free market systems.
Centrally planned economies oppose
private property, free market pricing,
competition, and consumer choice.

How Is a Centrally Planned
Economy Organized?
In a centrally planned economy, the central
government, rather than individual
producers and consumers in markets,
answers the key economic questions of
production and consumption. A central
bureaucracy makes all the decisions about
what items to produce, how to produce
them, and who gets them. After collecting
information, bureaucrats tell each firm
what and how much to produce. It is up to
the bureaucrats to ensure that each firm has
enough raw materials and workers to meet
its production goals.

Government Control
of Factor Resources and Production
In a centrally planned economy, the
government owns both land and capital. In
a sense it owns labor, too, by controlling where individuals work and what wages
they are paid. The government decides
what to produce, how much to produce,
and how much to charge. Each year, it
directs workers to produce a certain
number of trucks, so many yards of cotton
fabric, a certain amount of glass, and so on.
Farmers are told what to plant, how to
plant, and where to send their crops. The
free market forces of self-interest and
competition are absent from the system.

For example, let’s follow the decisionmaking
process for the production of
military uniforms and a consumer

The top planners decide that more
military uniforms than sweaters will be
made. They send this decision to the
materials committee.

Knowing how much cotton is available,
the materials committee decides how
many sweaters and how many military
uniforms will be made. They send their
decision to the cotton makers, the button
makers, and the elastic makers.

The cotton, the buttons, and the elastic
arrive at sweater factories and uniform
factories where they are manufactured
into sweaters and uniforms.

As you can see, decisions on what to
produce and how much to produce are not
determined by consumers. Chances are that
many citizens living under this economy
would still need new sweaters. This lack of
consumer voice in production and distribution
shows that under centrally planned
economies, consumers do not have
consumer sovereignty.


Which statement below is incorrect?
Centrally planned economies believe it is a waste of resources to produce more than one model of an item
Centrally planned economies want everyone to have the same private property
Centrally planned economies want to distribute income evenly amoung the workers
Centrally planned economies believe that choices whould be made by central planners rather than individual consumers


In a centrally planned economy, who makes the decisions about what items to produce, how to produce them, and who gets them?
individuals operating in the fre market
communist consumers
socialist consumers


In a centrally planed economy, who controls factor resources and production?
sales people who sell the products
the central government
poor people


You own a hundred head of cattle. It costs you $100,000 to feed ths cattle so they are ready for markt. You find that the price of beef has fallen dramatically and you will most likely loose lots of money this year. Which economic system are you living under?
free market
centrally planned


What is consumer sovereignty?
consumers are taken care of by the government
consumers make all of the decisions about production and consumption
consumers make choices based on government planning
consumers are free to choose which government products they will consume
Socialism and Communism
The words most often associated with
centrally planned economies are socialism
and communism. They are often used interchangeably,
but we need to make a distinction
between the two terms.

is a social and political philosophy
based on the belief that democratic
means should be used to distribute wealth
evenly throughout a society. Real equality,
socialists argue, can only exist when
political equality is coupled with economic
equality. Economic equality is possible only
if the public controls the centers of
economic power. Although socialist
nations may be democracies, socialism
requires a high degree of central planning
to achieve economic equality.

In socialist countries the government
often owns major industries, such as utilities.
Socialism, as you will see in Section 4,
exists to varying degrees in different
nations throughout the world.


Communism is a form of socialism. It is characterized by a centrally planned economy with all economic and political power resting in the hands of the central government.

Unlike socialists, however, communists
believed that a socialist society can only
come about after a violent revolution.
While socialist economies can still allow
for democracy, communist governments
are authoritarian. Authoritarian governments
exact strict obedience from their
citizens and do not allow individuals
freedom of judgment and action.
Throughout history, communist nations
have been dominated by a single political party or dictator. The former Soviet Union
was a communist nation that provides us
with a good case study of how a centrally
planned economy works? —and doesn’t

There are other forms of socialism. For example, the Nazi’s were socialists. Hitler believed that capitalism was a conspiracy by the Jews to control the world. They subscribed to all of the ideals of socialism but like the communists were authoritarian. Some political philosophers believe that socialism almost always degenerates into authoritarianism because of the economic power of the government over the lives of its citizens. 


Socialists argue that two things must exist for true equality to exist. What are they?
political authority and economic equality
income and status
land, labor and capital
political and economic equality


Socialists believe you cannot have economic equality unless
the people control the economy through the economic choices they make
the society has excess supply and limited demand
the people (government) control the economy
the society has excess demand and limited supply


Which statement is true about all socialist governments?
they are always democracies
they are characterized by central planning and control of the economy
they are always dictatorships
they are characterized by central planning and limited control of the economy


Communism is
a form of capitalism
a form of socialism but democratic
a form of socialism with economic freedom
a form of socialism


What did the Nazis and the Communists have in common?
Both were socialist and authoritarian
Both were authoritarian but the Nazis did not believe in central planning
Both were socialist but communists did not believe in central planning
Both were democratic and socialist
Karl Marx wrote “Das Capital,” which is the foundation for Communist philosophy. Karl Marx (left) and Friedrich Engels (center) introduced their socialist philosophy in The Communist Manifesto in 1848. The term communist was adopted by the Bolsheviks who, led by Vladimir Lenin (right), took control of Russia in 1917.
The Former Soviet Union

The Soviet Union arose out of a pair of revolutions in Russia in 1917. In March, imperial rule in Russia came to an end when Czar Nicholas II was forced from the throne. A provisional republican government was set up, but by November it, too, was toppled. It was taken over by the Bolsheviks, revolutionary socialists led by Vladimir Lenin. Once in power, they renamed themselves communists. Under the control of the Communist party, central planning was introduced during the 1920s and continued to operate until the breakup of the Soviet Union in 1991.

Soviet planners were most concerned with building national power and prestige in the international community. As a result, they allocated the best land, labor, and capital to the armed forces, space program, and production of capital goods such as farm equipment and factories. The committees that ran the system were responsible for deciding the quantity, production process, and distribution of 24 million different goods and services.


Karl Marx developed the philosophy of communism in his book, _____
Mein Kampf
the Communist Manifesto
Das Capital
the Socialist Bill of Rights


Who led the revolt against the Czar in Russia establishing a communist governmnet there?
Karl Marx
V. Lenin
Fredrick Engles
Czar Alexander


Throughout its history, the Soviet Union
stressed the production of consumer goods
stressed democracy and the rule of law
cared more about guns than butter
tried to help the individual land owning farmers over the factory workers
Soviet Agriculture
In the Soviet Union, the central government
eliminated privatley owned farms and  created large state-owned farms and ollectives for most of the country’s agricultural production. On state-run farms, the state provided farmers with all equipment, seed, and fertilizer Farmers worked for daily wages set by economic planners. They called this process, “land reform.”

were large farms leased from
the state to groups of peasant farmers.
Farmers managed operation of the collectives, though they still were required to produce what the government instructed them to. Farmers either received a share of what they produced or income from its sale. Agricultural workers were guaranteed employment and income, and the government established quotas and distribution.

Under such a system, individuals had few
incentives to produce more or better crops.
While Russia had been a major exporter of
wheat until 1913, before long the Soviet
Union could not keep its own people fed.
Soviet agriculture bore much of the
opportunity cost of Soviet central planning


Under land reform farmers received many benefits but lost others. Which benefit did farmers have to sacrifice under land reform?
free farm equipment
private property
free planting seed
wages for work


What was the result of Soviet colectivization of Russian agreculture?
a dramatic decline in production
an increase in industrial production because of the increase in farm production
an increase in production
an increase in consumer food items


What is the main idea of the last paragraph above?
Collectivization made agriculture more productive in the Soviet Union
The United States is responsible for the decline in Soviet farm production
The average Soviet citizen had more food and better health under collectivization.
Under collectivization farmers had little motivation to work hard.
Soviet Industry
Soviet factories also were state-owned.
Planners favored the defense industry, the
space program, and heavy industry. (Heavy
industry requires a large capital investment
to produce items used in other industries.
Chemical, steel, and heavy machinery
manufacturing are heavy industries.) The
makers of consumer goods and services
paid the opportunity cost of this concentration
of resources. They were stuck with
leftover, lower-quality resources with
which to create their products.

Like agriculture, industry was characterized
by a lack of incentives. Jobs were
guaranteed, and wages were set by the
government. Once a production quota was
met, there was no reason to produce more
goods. Workers had little incentive to work
harder or to innovate. In fact, it was illegal
for workers to exhibit entrepreneurial
behavior and start their own businesses.



What was the opportunity cost for the Soviet Union’s focus on space, military and heavy industry?
steel production
consumer goods
damm building
agricultural products


What is the main idea of the second paragraph above?
Entreprenurial behavior was encouraged in the Soviet system
Industrial workers were more motivated than farm workers
Workers were happy because their jobs were secure and they had a guaranteed income.
In the Soviet system workers lacked motivation so production suffered
Shifting from communism to a free market economy has been a difficult transition. Consumers often waited hours in long lines only to discover nearly empty store shelves
Soviet Consumers
Consumers, too, experienced the opportunity
cost of central planners’ decisions. A popular joke in the Soviet Union went, “We pretend to work, and they pretend to pay us.”A worker’s wages were not worth much because consumer goods were scarce and
usually of poor quality. Manufacturers had
the incentive to focus on quantity, not quality.
For example, a manufacturer assigned to
produce a certain number of suits could
loosely stitch the buttons and mismatch coats
and trousers. Still, the state store had to
accept delivery of the suits. Consumers
would be left with no alternatives
Consumers often had difficulty getting goods, too. They wasted countless hours waiting in line to purchase goods and services. Luxuries such as meat were made affordable by government price setting, but they were rarely available. Housing shortages forced people to live in crowded and poorly constructed apartments. Because of the long waiting list for apartments, it was not unusual to find a family living in just two rooms.


What was responsible for the lack of and poor quality of consumer goods in the Soviet Union?
production costs
United States capitalism
lack of natural resources
central planning


From the reading above, what can we deduce about the attitude of the Soviet Union towards its citizens?
the individual is more important than the group
socialism satisfies the needs of the Soviet consumer
the group is more important than the individual
Soviet citizens are happy
Problems of Centrally
Planned Economies
Central planning can be used to jumpstart
selected industries and guarantee jobs and
income. The other side of the coin, however,
is poor quality, serious shortages of nonpriority
goods and services, and diminishing

In theory, centrally planned economies
can work effectively toward explicitly
stated goals. For example, in 1928, Soviet
leader Joseph Stalin instituted the first of
several five-year plans to boost production.
While a disaster in terms of agriculture,
Stalin had some success in
increasing output in heavy industries.

Perhaps the greatest disadvantage of
centrally planned economies is that
their performance almost always falls
far short of the ideals upon which the
system is built. In addition, such
systems generally cannot meet
consumers’ needs or wants. Since the
government owns all production
factors, workers lack any incentive to

work hard. These systems also do not
reward innovation, actively discouraging
any kind of change. The large,
expensive bureaucracy necessary to
make the thousands of production and
distribution decisions to run the
economy lacks the flexibility to adjust to
consumer demands. Decisions become
overly complicated. Finally, command
economies sacrifice individual freedoms in
order to pursue societal goals.

Many areas of the world, especially less
developed countries, have experimented
with centrally planned economies, but most
of these experiments have failed. Instead,
most of these nations have moved toward
mixed economies over the past twenty
years. In the next section, you will read
about today’s mixed economies.  nar008-1.jpg
Statues of Lenin were toppled after the collapse of communism in the Soviet Union in 1991


What is the main disadvantage of centrally planned economies?
They are slow to respond to the demands of the consumers
Too much butter and not enough guns
They are unable to advance a single area of the economy such as heavy industry
high unemployment


After reading the above passages, what can you deduce about socialism?
The Soviet Union used a moderate form of socialism and that is why it did not work for the Russian people
It looks good on paper but it just doesn’t work
Once a nation tries socialism they become convinced that it is the best economic system.
If planned correctly it works well as an economic system
heavy industry


requiring strict obedience to an authority, such as a dictator


a social and political philosophy based on the belief that democratic means should be used to evenly distribute wealth throughout a society


large farm leased from the state to groups of peasant farmers


a political system characterized by a centrally planned economy with all economic and political power resting in the hands of the central government


industry that requires a large capital investment and that produces items used in other industries

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