The majority of economic activity in countries across the world falls somewhere between a pure free-market economy and an extreme command economy. The command economy is a sort of economic system in which the government is in charge of planning and regulating the production of products and services in the country.
The types of goods and services to be produced and given, as well as the amount and prices to be offered in the marketplace, are all determined by the governmental authorities. The majority of industries are held by the government.
Command Economy: An Overview
A free-market economy, in which demand determines output and prices, is the principal alternative to a command economy. A communist political package incorporates a command economy, whereas capitalist societies have a free market economy.
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The following traits characterize modern command economies:
The government creates economic plans for the vast majority, if not all, industries and regions.
The government distributes wealth, labor, and natural resources in the most efficient way possible.
The government controls production and prices.
State governments own and monopoly businesses in the finance, utility, and automotive industries.
The centralized economic plan is carried out through government initiatives.
In communist or socialist nations, such as modern-day North Korea, this type of economic system is a significant element.
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The former Soviet Union, Cuba, and North Korea all have command economies. China had a command economy until 1978 when it began the transition to a mixed economy that incorporated both communist and capitalist features. Its current economic system is referred to as a socialist market economy.
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A nation's central government must own and manage the means of production in a command economy, also known as a planned economy.
Private land and capital ownership are either non-existent or severely restricted. Prices are fixed, production levels are controlled, and competition in the private sector is limited or prohibited by central planners. There is no private sector in a pure command economy because the central government owns or controls all businesses.
Government officials define national economic priorities in a command economy, which include how and when to generate economic growth, how to allocate resources, and how to disperse the result. This is frequently done in the form of a multi-year strategy.
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What are some of the benefits of a command economy?
For a variety of reasons, countries like Russia and China had command economies at one point in time.
To make an attempt at wealth redistribution
Inequality of income can engender anger. In theory, command economies seek to share wealth more evenly.
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Production can be swiftly increased
During emergencies such as natural catastrophes or wars, the government can theoretically employ all of its resources to provide people with the most basic necessities fast.
In a command economy, the government sets prices. Demand, supply, and other factors have no bearing on them. In theory, the government isn't interested in making a profit, therefore everything is usually affordable – however low-quality items (think East German tenements) and continuous shortages (think bread lines) are common outcomes.
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Because the government controls all enterprises, it is able to give work to all citizens. As a result, even if many jobs have no economic value, unemployment levels can be near zero in theory. The central plan of the government usually has a low unemployment aim.
Differences between a Free Market and a Command Economy
Arguments Against Command Economies
Any capitalist would argue that command economies have at least two significant flaws: the first is the incentive problem, and the second is the lack of information among the central planners who make all of the choices.
The problem with incentives begins at the top. Even in a command economy, policymakers are all too human. Because they are not restrained by market-based forms of discipline such as sovereign credit ratings or capital flight, political interest groups and power battles will dominate decisions in a command economy even more than in a capitalist economy.
Wages are determined centrally for workers, and profits as a motivator for management are removed. There appears to be no compelling motive to strive for excellence, increase efficiency, reduce costs, or put up more effort than is required to avoid government censure.
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Rather than maximizing shareholder value or meeting consumer desires, getting ahead in a command economy necessitates pleasing the party bosses and having the appropriate connections. Corruption is a persistent problem.
The incentive problem entails a larger-scale version of the tragedy of the commons than is experienced in capitalist countries. Resources that are owned by a large number of people are functionally unowned. All of their users (or employees) have no motivation to keep them safe. In a command economy, everything like housing projects, factories, and machinery wear out, break down, and fall apart quickly.
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The Information Black Hole
Austrian economists Ludwig von Mises and F. A. Hayek was the first to describe the difficulty of economic calculation in a command economy. Central planners must figure out how much of each product and service should be manufactured and distributed.
This is determined in a decentralized manner in a free market economy by the interaction of supply and demand. The products and services that consumers buy or don't buy determine demand. Producers respond by producing more of the goods and services that customers want.
Furthermore, each of these variables can be measured. Someone is keeping track of how many avocados, pairs of blue denim, and lug wrenches are in demand at every step of the supply chain.
In a command economy, central planners should have a firm handle of the population's basic life-or-death necessities in terms of food, clothes, and shelter, at least at first. They have no rational technique to match the production and distribution of goods with consumer desires and preferences without the forces of supply and demand to guide them.
Over time, a command economy's incentive and economic calculation difficulties waste resources and capital goods, leaving society poor.
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Personal freedom is limited
Your income and the type of job you do are determined by the government. Even if you are permitted to perform non-government work, this privilege may be revoked at any time. This policy restricts one's personal liberty. The North Korean government, for example, prohibits citizens from moving from one city to another, even inside the country.
The government determines what should be produced and in what amounts. However, it is possible that it does not accurately grasp what consumers want. There will be a waste if the government creates an excess of something that is not required. Similarly, if it produces a small amount of something in high demand, there may be a shortage.
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Increase in illegal activity
Because the government regulates practically every financial element of people's lives, they may not always receive what they desire. People are also given a certain amount of money and chances. As a result, they may participate in unlawful activities in order to locate new sources of revenue or to purchase items that the government does not produce in sufficient quantities.
Due to tight government rules, it would be incredibly difficult to use the internet if you lived in North Korea. As a result, you may have to resort to the underground market to obtain smuggled USB devices with Wikipedia-like websites, eBooks, and Hollywood films.
Free Market Economy vs Command Economy
A command economy differs significantly from a free market economy.
In a free-market economy, firms are like unsupervised children who are free to do whatever they please. In a free-market economy, the demand and supply of different items determine their availability and price. Everything in a command economy is decided by the central plan.
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The name says it all: freedom: free-market economy. People have the freedom to pick their occupations and move about their country in it. People in a command economy, on the other hand, have restricted freedom.
People and firms can own enterprises and invest in a free market economy. Because the government owns practically everything in a command economy, you can't invest in anything. Profit is the main motivator in a free market economy, but society's welfare is the key motive in a command economy.
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Summing Up: Key Takeaways
1. In a command economy, the central government planned, organises, and controls all economic activities in order to maximise social welfare.
2. In contrast to free-market economies, command economies do not enable market forces such as supply and demand to decide production or prices.
3. Command economies may hinder innovation and cause inefficiencies, which is why erstwhile strongholds like China and Russia have evolved into mixed economies over time by embracing more free-market forces.