central planning

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The operation of an economy through centralized decision-taking whereby the decisions are taken at the centre and orders issued to enterprises concerning their production and investment plans. While in theory such a system should allow the use of all resources in an economy in the public interest, without wasteful duplication of effort, the amount of information required to achieve efficiency is too great, and the incentives to supply the centre with reliable information are too poor. As a result, centrally planned economies, such as those of the former Soviet Union and other Eastern European countries, were not able to perform as well as a decentralized system based on competition between independent decision-takers, and had to abandon central planning in the late 1980s in favour of the market economy.

Subjects: Economics.

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