A centrally planned economy is one where all major economic decisions are under the control of the government. This type of economy is typically associated with socialist and communist ideals, and was first attempted in the Soviet Union in the early 20th century. In contrast to a free market or capitalist economy, a centrally planned economy does not allow the supply and demand of the market to define prices, wages, or the production of goods.
The theory behind a centrally planned economy begins with the idea that the market is not a measure of what is best for the country. Subject to whim, trend, and a myriad of opinions, the free market can slow or even impede the goals of a central government. By having the state run the economy, the government is totally able to enact the programs, schemes, and plans deemed as best for the country by the leaders.
Most modern economies include a mix of centrally planned and free market behavior. While the government may control certain areas of the economy, much of the market runs at the whim of the people. In such an economy, a person has the right to start a private business, thanks to the free market, but may have to pay business taxes and charge a sales tax based on the centrally planned aspects.
A centrally planned economy first sprang up in the Soviet Union around 1917 under Vladimir Lenin. By 1928, the economy adopted a system of five year plans, where the needs of the country were reviewed and policies altered to fit every five years. Under this system, the government seized almost all private businesses and set wage levels throughout the region. People were encouraged to sacrifice personal career goals and plans to go into industries deemed desirable by the state, and the price of goods and services was fixed by the government rather than altered by the open market.
One of the side effects of a centrally planned economy is a marked upswing in secondary economies, also called black markets. Since choices are limited to what the government chooses to offer, many people find it profitable and often necessary to secretly obtain or make goods illegally and trade them under the table. The high prices of a black market often mean that wealthy people are able to obtain items that poorer people cannot, leading to large amounts of corruption and a sense of injustice among the poorer citizens.
Historically speaking, centrally planned governments have not fared well in the modern world. Although many countries have some centrally planned programs, the global free market has made it generally more profitable to allow the market to dictate economic policy. Nevertheless, this innovative form of government altered the world economy extensively, and the principle of state-run enterprises still plays a large part in many modern regimes.