Command economy-So what exactly is a command economy?
Command economy-So what exactly is a command economy?
A command economy is an economy in which the government determines which goods must be produced, the quantity that must be produced, the price of goods, and the quantity that must be offered for sale, not the free market. It is the government that determines investments and income. The command economy is the basic feature of any communist society. The North and the former Soviet Union are examples of countries that used a command economy, and while China maintained a command economy for decades, it moved to a mixed economy that mixes communism and capitalism.
Understanding command economy
A command economy is also known as a planned economy. In this economy, the central government is the one that plans and controls the means of production within a society. Private property or land, labor, and capital either do not exist or severe restrictions are placed on them to be used to support the central economic plan.
In contrast to free market economies, the central plan is the one that sets prices, controls production, and limits or completely prohibits competition within the private sector.
Other characteristics of a command economy
In a command economy, government officials determine national economic priorities, including how and when to generate economic growth, how resources are allocated to production, and how domestic output is distributed. This economy often takes the form of a multi-year plan covering aspects of the entire economy.
The government also manages monopolistic companies or entities that it deems necessary to achieve the goals of the national economy, and in this case there is no local competition in these industries. Examples of these entities include financial institutions, utility companies, and the manufacturing sector. Finally, all laws, regulations and other directives are set by the government according to the central plan, and all companies follow this plan and its objectives and do not respond to any force or influence in the free market.
Disadvantages of a command economy
With the consolidation of economic power in the hands of government planners and with the complete or almost complete absence of markets, these economies face two major problems in effective planning of the economy, the first of which is the problem of incentives, and the second is the problem of economic arithmetic or knowledge.
The problem of Incentives works in several ways. For some, the planners in the central economy are, after all, human beings, and this makes them take decisions for their own benefit, and for their own good they impose heavy social costs and losses in a way that clearly harms the national interest.
In a command economy, political interest groups tend to struggle for power among themselves for control of political decision-making, much more than they do in a mixed or market economy, because they are not constrained by market-imposed disciplines such as sovereign credit rating or capital circulation. Therefore, the art of the impact of these policies is significantly harmful.
The problem of Incentives that the command economy faces also includes the problem of the commons, which is that everyone views capital and infrastructure as resources that are not owned by anyone, so everyone seeks to benefit from them and extract the greatest value from them in the fastest way possible, and this makes things such as housing development, factories and equipment Transportation wears out and breaks down quickly, especially since they don’t get the maintenance or reinvestment they need in order to remain useful and in working order.
As for the problem of computation, it was first described by the Austrian economists Ludwig von Mises and F. a. Hayek, and it consists in that the planners in the central economy must somehow calculate the quantity of goods and services that the economy must produce and put on the market, and who will produce these goods and to whom will they go and when and where we will produce them and sell them and in what way and what technology we will use, and how we will mix the elements of production ( labor, land and capital) and how we use them in the productive process. In a market economy, these problems solve themselves in a decentralized way through supply and demand mechanisms that are linked to consumer preferences and the relative scarcity of certain goods and services. In a command economy and without the free exchange of commodities and secure property rights, the mechanism of supply and demand does not work, and the central planners do not leave any rational way to harmonize production and distribution of commodities with consumer preferences and the real scarcity of some commodities and resources.