Text 4. The planned economy
Before you read discuss questions with your partner:
1. You’ve learnt about the free market economy. Can you think of any disadvantages it may have?
2. Is the planned economy different in any way from the market economy? Give your ideas.
In many ways, the planned economy is the direct opposite of the market economy. In the market economy, the forces of supply and demand decide everything: what is produced, how much is produced, the methods of production and the price. In the planned economy, all of this is decided by the government. In every way that the market economy is free, the planned economy is controlled.
Unfortunately, no economic system is perfect. If there was a perfect system, economists wouldn’t have anything to argue about! Market economies have their strengths, but they have their problems, too. Planned economies try to provide solutions to these problems. For example, the free market supplies the things that people want. However, what people want and what they need are not always the same: fast food is always in demand, but it’s bad for us. In a planned economy, the government could decide to stop fast food restaurants operating in the market.
A second problem with free markets is that producers always want the highest price. Often the poor can’t afford things. In a planned economy, the government sets prices. They make sure that everyone can afford basic commodities. This is one way that planned economies try to share things equally. Another is to control how much people get paid.
In a planned economy, workers’ wages depend on the service they provide to society. If people can live without their service, you get paid less. This is very different from the free market. In the free market, someone’s salary mostly depends on the demand for his or her work. If people like what you do, you get paid more.
Before 1900, there were few examples of planned economies. During the 20th century, however, the planned economy became the standard for socialist governments like the USSR and China. These countries experienced amazing economic growth in a very short time. In a market economy, it takes a long time for big industries to grow from small companies. In a planned economy, however, huge industries can grow overnight. The government simply decides to spend money on factories and factories appear. Britain, for example, took centuries to develop her steel industry in a free market economy. China developed hers in a few decades.
But, as we said, no economic system is perfect. The planned economy has many drawbacks. One of these drawbacks is problems with supply. It is difficult for governments of planned economies to know exactly how much to produce to meet demand. In a market economy, when the price of a commodity rises, this indicates a rise in demand. Companies then supply more to the market. This warning system doesn’t work in a planned economy because price is controlled by the government. The result is shortages.
When shortages happen, governments can do two things: ration goods or raise prices. In this situation, people then start to hoard things, and the problem gets even worse. As the population gets bigger, shortages like this become more common. For this reason, China – once the world’s biggest planned economy – is rapidly moving towards another system: the mixed economy.
Task 1. Now read the text again and decide whether these statements are true or false:
1. In a planned economy, the government decides how products are made.
2. In a planned economy, suppliers can sell anything that is in demand.
3. In a planned economy, a doctor should get paid more than a footballer.
4. Planned economies grow more slowly than market economies.
5. In a market economy, greater demand for something makes it cheaper.
6. Planned economies are difficult to run in countries with large populations.
Task 2. Match the words and phrases with the definitions:
1 commodity Awhen the government sets a limit on how much people
can buy of something
2 standard Bwhen there is not enough of something
3 socialist Ca strongly metal made from iron
4 industry Dsomething you can buy or sell
5 steel Ewhat is usual or typical
6 indicate F all the businesses and companies involved in
the production of something
7 warning system G describes someone/something aiming to share
8 shortage H secretly storing and hiding goods for use later
9 rapidly I work
10 ration J show
11 solution K very quickly
12 hoard Lmoney paid regularly for work done
13 operate M answer to a problem
14 wages N a system which tells us that something bad is going to happen