A managed economy is an economic system in which the government directs economic activities. The government controls the production, distribution, prices, and allocation of resources. Socialist economics and communism are special forms of this economic system.
This term is also known as a planned economy.
A managed economy is the opposite of the capitalist economic system. The latter depends on market forces to direct economic activity.
Characteristics of a managed economy
- The government makes most or all economic decisions, both related to production, distribution, and price.
- Private ownership is unrecognized
- The government controls the resources and allocates them based on the central plan
- The government controls the business sector
North Korea, Cuba, North Korea, and the former Soviet Union are examples.
Advantages and disadvantages
The managed economy allows for low levels of economic inequality and unemployment. Individuals do not compete with each other to get rich because private ownership is unrecognized. Public benefits replace profit as the main incentive for production.
Furthermore, the government can quickly mobilize economic resources on a large scale to carry out large-scale projects. That allows higher utilization of labor, thus allowing low unemployment.
However, due to low competition, the economy allocates resource allocation less efficiently than in the free market economy. The low competition also impedes innovation. Individuals can’t take risks needed to create new solutions.