Command Economies

A Command or Planned economy is one where economic decisions are made by a central body i.e. the government. This type of economy has been seen in communist countries like the former USSR, China, and other East European countries. This system has also been used in Nazi Germany and by Mussolini. Current examples of command economies would include North Korea, Laos, Cuba and China. In such a system, the coordination of economic activity is done through
administrative means such as commands, directives, targets and regulations.

In a planned economy, the state authorities, rather than market forces, directly determine prices, output, and production. Thus all factors of production are controlled by the state. Allocation of resources is done by government-appointed bodies. State planners decide what will be produced, where, and how. In such economies, production targets for different sectors of the economy are set which determine the supply of different commodities. Rationing of certain commodities takes place to determine the necessary demand for them. Price and wage are fixed by state authorities. Usually, there is a conscripted labour market in which jobs are assigned by the state to workers. A typical feature of a planned economy is that profit is not a motivating force and the price mechanism has no role to play. ADVANTAGES OF A PLANNED ECONOMY The basic philosophy behind the planned economy in a socialist political system is to bring out equality in the society. Therefore a fundamental benefit one gets from this sort of economy is that the government can ensure a more equal distribution of wealth and income. Goods that the government considers important will be provided even if they are non-profitable, e.g. defence, health services, etc. Scare resources can be allocated to produce more necessities instead of luxuries. There is no chance of exploitation of consumers by private monopolies. A carefully planned command economy is more stable since there is constant exploitation of resources. Financial downturns and inflations would have minimum effect on this economic system. Wasteful duplication and competition can be avoided as there arent many small firms and producers producing similar goods. Also, since all resources are owned by the government, investment in research and development can increase. DISADVANTAGES OF A PLANNED ECONOMY One of the biggest disadvantages of a planned economy is the lack of profit motive. Workers and managers have no incentive to work hard since earnings are not performance based. There is a general lack of efficiency in the economy due to the absence of the price mechanism in allocating resources and the lack of profit motive. Production may not respond quickly to changing conditions and new ideas. Consumer wants are often ignored since the government decides what is a luxury or a necessity. There is usually no or very little variety in goods and services. This limits the consumers choice and thus reduces the standard of

living. There is a lack of personal freedom since the government does the job allocation among the working population. The government decides what goods and what quantities one can buy. Another major issue with command economies is the problem of setting the optimal price in all markets. Often, the authorities set very low prices causing goods to be rationed by queues. Due to this and the other points mentioned earlier, black markets tend to emerge in a planned economy.

On the whole, a command economy can guarantee to put resources into areas considered important by the government; however, it cannot react easily to changes in the tastes of consumers or in the economic conditions.

Bibliography Command Economy - Richard E. Ericson Economics - Matt McGee Economics - Oxford http://www.economywatch.com/economy-articles/command-economy.html http://en.wikipedia.org/wiki/Planned_economy