Centrally Planned Economic System

A centrally planned economy is an economy where decisions on what to produce, how to

produce and for whom are taken by the government. These economies are also known as
command economies. Centrally planned economies are usually occur in communist or
authoritarian states, the theory is that the government will overcome market failure and
achieve equality of distribution. This type of planning can make sure that everyone's needs
are fulfilled and everything needed is produced. In the 1980s, almost one third of the
population of the world lived in centrally planned economies, mainly in the Soviet Union and
North Korea. (SparkNotes: Political Economy: Types of Economies. 2014.)
In centrally planned economy system, some or all of firms producing goods will own by the
governments. The pricing and the production is determined by government agencies, who
decide to produce the most efficient goods. Sometimes, the consumers rations will be given
directly or the prices of goods will be set by the government agencies. In a command
economy, the government will have over-riding macroeconomic objectives such as
unemployment and what to produce. "Every government interference in the economy consists
of giving an unearned benefit, extorted by force, to some men at the expense of others. "
Ayn Rand. (Quotes About Economy (205 quotes). 2014.) Some centrally planned
economies may not just consist of state owned enterprises, but also some privately owned
firms who are nearly directed by state management. People in the country will get their goods
and supplies by the allocation of government under the ratio of work, needs but not the
capital. (Command Economy | Economics Help. 2014.)
Centrally planned economies have several advantages. First of all, both surplus production
and unemployment rates remain at a reasonable level in a centrally planned economic
system. Needs of the people will never go unfulfilled and can be produced enough for all
because the government knows how much food, medicine, and other goods are needed.
Therefore, market failure can be prevented. Centrally planned economies goods which
benefit the society could be produced and the acquirement of basic necessities of the people
can be ensured with the centrally planned economies. (Differences Between Centrally
Planned and Market Economies - Basic Economic Questions. 2014.) However, there is no
price system in this system. Arbitrary decisions will not be able to make the best use of
resources and become inefficiently. In this system, incentives tend to be distorted. Workers
with guaranteed employment and managers who gain no share of profits are difficult to
motivate. Output and quality will suffer. The dominance of government may also lead to a
loss of personal liberty and freedom of choice. For example, many people had suffered in the
North Korea Famine from 1994 to 1998. They have no choice to eat the human themselves
because of hunger. This case has showed the collapse of the centrally planned economies.
(Asia Times: North Korea's Kim-made famine. 2014.)

In 21st century, there are very few countries that rely on centrally planned economy system.
The Soviet Union has made the transition to a mixed economy. (Socialism Today - The
Soviet Union's place in history. 2014.) This involved a process of privatization and price
deregulation. China has also made the transition from a command economy to a mixed
economy though politically the country still remains communist. (China - The Economy.
2014.) Realistically, these systems tend to suffer from large inefficiencies and are overall not
as successful as other types of economic systems.

Market Based Economic System

A market based economy is an economy based on the power of division of labor in which
the prices of goods and services are determined in a free price system set by supply and
demand. This economic system is just opposite to the concept of centrally planned economic
system. These economies are also known as capitalist economic system or free economic
system. Individuals are free to make independent decisions about what to produce, who to
work for, and how to get the things they need. Market based economies are usually occur in
democratic states such as the United States. People can change along with the shifting market
conditions to maximize their profits in this economy system. (SparkNotes: Political
Economy: Types of Economies, 2014.)
In market based economic system, all the resources are privately owned by people and firms
and can be legally protected. Government did not interference in the business activities. The
government only involved in the development and implementation of legal system to
maintain the social order and to defend the country's security. This kind of private ownership
will encourage people to participate more in the economic production. The private interests
that people pursue are the best profit of a society. By pursuing his own interest he
frequently promotes that of the society more effectually than when he really intends to
promote it. I have never known much good done by those who affected to trade for the public
good.Adam Smith, The Wealth of Nations (Quotes About Economy (205 quotes),2014.)
Economists assumes that everyone is rational to pursue the objectives of the greatest personal
interests. When everyone has achieved the maximum benefits, social benefits will be
maximized. Thus, all the economic behavior is based on the self-interest. "It is not from the
benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their
regard to their own interest." Adam Smith (The Wealth of Nations, Books 1-3)

In this economic system, people have the freedom of employment, entrepreneurship and
consumption. Prices are decided by the price mechanism in the market based economic
system. Adam Smith, the Founding Fathers of economics described the invisible hand of the
price mechanism in which the hidden-hand of the market operating in a competitive market
through the pursuit of self-interest allocated resources in societys best interest. For example,

the types of goods, the quantity of goods, allocation of resources and consumer choice are
determined by the price. (Market economic system - features, advantages and disadvantages.
2014.)
However, the freedom of consumption may leads to the disparity of wealth and poor, the rich
people begin to think of themselves to be a better kind of human while the poor feel a
mixture of envy. "Wherever there is great property there is great inequality. For one very
rich man there must be at least five hundred poor, and the affluence of the few supposes the
indigence of the many. The affluence of the rich excites the indignation of the poor, who are
often both driven by want, and prompted by envy, to invade his possessions." Adam
Smith (The Wealth of Nations: An Inquiry into the Nature & Causes of the Wealth of
Nations.) (Quotes About Economy (205 quotes). 2014.)People will be facing the
unemployment problem because machines and raw materials are available. The inequality of
social and economic will be occur and also other social economic issues. Beside, the
consumption of harmful goods maybe encouraged in the market based economies. The
bankruptcy of Lehman Brothers and the sale of Merrill Lynch to Bank of America on
September 15, 2008 have showed the failure of market based economies.( Lehman Files for
Bankruptcy; Merrill Is Sold - NYTimes.com. 2014.)

Reference used:
Differences Between Centrally Planned and Market Economies - Basic Economic Questions.
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Command Economy | Economics Help. 2014. [ONLINE] Available at:
http://www.economicshelp.org/blog/glossary/command-economy/. [Accessed 22 June 2014].
SparkNotes: Political Economy: Types of Economies. 2014. [ONLINE] Available
at:http://www.sparknotes.com/us-government-and-politics/political-science/politicaleconomy/section2.rhtml. [Accessed 22 June 2014].
Market economic system - features, advantages and disadvantages. 2014. [ONLINE] Available
at: http://www.dineshbakshi.com/as-a-level-economics/basic-economic-ideas/117-revisionnotes/1350-market-economic-system. [Accessed 22 June 2014].
Lehman Files for Bankruptcy; Merrill Is Sold - NYTimes.com. 2014. [ONLINE] Available
at:http://www.nytimes.com/2008/09/15/business/15lehman.html?pagewanted=all. [Accessed 22
June 2014].

Quotes About Economy (205 quotes). 2014. [ONLINE] Available

at:http://www.goodreads.com/quotes/tag/economy. [Accessed 22 June 2014].
Asia Times: North Korea's Kim-made famine. 2014. [ONLINE] Available
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