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Economies can be divided into various forms depending on their authorities. In most common examples of economies - the capitalist and the socialist economies, the matters of the economy are mainly controlled by private players and governments, respectively. However, there is still another type of government-controlled economy that is known as a command economy.
What is a Command Economy?
In a command economy, there is a central authority that has complete command over the economy. Such central authorities are often the government bodies that dictate the terms of running the economy. The government is responsible for planning and dictating the economic terms in a command economy. In command economies, the levels of production are dictated by governments, and so demand and supply play a secondary role in dictating the market sentiments. The prices of goods in a command economy are set by the government, so private players cannot decide their own profits from servicing and marketing activities in the planned economy markets.
In a command economy, the amount of production is planned by central authorities. The total amount of needed production is planned by the authorities which assort the total quantities in quotas to central enterprises in accordance with the government rules. In a command economy, the consumers do not impact production directly. However, they may influence the planners' decision if the planner takes into consideration the total demand in the market. Furthermore, consumers do have control over products that have been already produced in a command economy.
As mentioned, the prices of goods and services are also determined by the central authority in a command economy. However, the prices do not act as a pointer to price changes. Instead, they act as signals to the authorities to reconcile the demands with available supplies in the market. It also offers an idea of the revenue the authority will receive from the sale of the products in the market.
Examples of Command Economy
There are many countries that currently have command economies. Here are a few examples.
North Korea is one of the most stringent countries when it comes to commanding the economy. The head of the state commands all factors of social control, market management, and other rules of the state. It has been revealed by many governments, such as the US, that the state is extremely mismanaged and there are all types of corruption in the country where even freedom of speech and activities are barred.
The Union of Societ Socialist Republic (USSR) was established by Vladimir Lenin in 1917. It was considered a winning example of a command economy for a long time until the late 1980s when it fell. Since then, the control of the largest companies has been transferred to oligarchs.
The country was adorned with communism and a planned economy after Fidel Castro’s revolution in 1959. The USSR had subsidized Cuba till 1990. However, the fall of the USSR resulted in economic hardship and mismanagement in the once hardly communist country.
Advantages of Command Economy
Most prominent advantages of command economies are as stated below –
Aligned toward social welfare
It is often argued that command economies are better than capitalist or free-market economies because they address the social well-being of all members of the economy. There are fewer gaps between the rich and the poor in a command economy and it is easy to establish social good in the command economy as and when needed.
Speed of taking decisions
Command economies can take quick actions and mobilize the necessary organs of the economy as and when needed. While market economies need to organize the parts before taking a decision, the command economies are considered more efficient during needs of emergencies.
The command economies have better unity among their citizens. As the economies are run by authorities, the latter can reinstate unity as soon as possible. The authorities may enact laws and enforce them with greater efficiency and speed which leads to better unity among citizens when it is needed by the governments.
Command economies have the freedom to create new jobs even when there is no such need. This helps citizens of the economy be content and hence social well-being is justified in a command economy.
Disadvantages of Command Economy
Some of the disadvantages of a command economy are as follows:
Lack of progressive ideology
Command economies lack the impetus required to improve the economy. Unlike market-based economies, there is no competition to move ahead and improve the output. As there is no incentive for excellence, the economies often lack freedom and so, command economies suffer from progressive ideologies.
There is a lack of depth in policymaking in command economies. Policymakers are often found to be corrupt because the markets are often directed by the plans of the policymakers rather than market sentiments.
As the resources are owned by authorities, there is a sense of irresponsibility among the owners of the properties that belong largely to the economy. Unlike the capitalist economies, command economies tend to be more aging than the former.
Lack of Co-ordination
Command economies are not run by consumer demand and supply information. The policymakers do not take account of consumer preferences. So, there is no effective counting of the resources required. This lack of coordination creates an information vacuum.
The policymakers being unaware of the exact market needs lets the producers produce too much of one item and too less of the other. Thus, resources get wasted and the society is impoverished.
Lack of innovation
Command economies do not encourage innovation. As there is no competition, the industries are discouraged from bettering their offers. This leads to inefficiency and lack of product improvement in the long run.
Creation of Black Market
As the command economies restrict the use of some goods, the consumers prefer to buy them via illegal means. This creates a black or shadow market where goods are sold without legal or legitimate sanctions.
Command economies are very static forms of economies where freedom to better the economy is restricted by authoritarian rule. As the markets do not follow demand and supply, the production of goods does not match demands. Hence, wastage of resources occurs in command economies. It si also believed that the lifestyle and general wellbeing of citizens are also compromised in command economies. Therefore, modern economists believe that command economies are inferior to capitalist or free-market economies.
1. Why are purely command economies transforming into mixed economies?
Ans. Command economies are often found inefficient and they thwart innovation. This is what leads to general mobility of the economy in terms of growth and well-being of the members of the economy. That is why countries like China and Russia are embracing a mixed economy by relaxing the tight grip over their economies.
2. What are the main characteristics of a command economy?
Ans. The major characteristics of a command economy are:
Major industries are owned by the public sector.
Production and distribution quotas are government-controlled
Government-controlled pricing and salaries
3. What is the link between a command economy and socialism?
Ans. Socialism is an integral part of the command economy system. The socialist concept is like branches of a tree while the command economy can be considered as the tree trunk.
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