Command economy

From Economypedia.com

Command economy refers to a planned economic system in which government supervises allocation of resources to the factories through central planning. Decisions regarding production and allocation are taken by the state. This system does not give any regard to sudden changes in conditions or to needs of the consumers.

Command economies are most known as those of communist countries.

Contents 1 Advantages 2 Disadvantages 2.1 Lack of entrepreneurship 2.2 Production standards 3 Market forces 4 Examples 4.1 USSR 4.2 North Korea 5 See also 6 Further reading 7 References

Advantages

Theoretically, the command economy appears to be superior to the free market system as the funds allocated for advertising and marketing in free market economic system can be used for other purposes. However, results of the the implementation of command economy in the 20th century show that the practical application of this economic system is not as fruitful as that of the free market or mixed economic systems.

In a free market economy, time and money both are spent on advertising and marketing while in a command economy time and money both are used in producing something useful.

If any problem arises in the market, the government introduces supplementary market regulations to control it. Any such regulation is rarely removed and acts as a restraint for the mechanism of the free market. There exist no monopoly and trade unions have very limited power. ^[1] However, it could easily be argued that the government itself holds a monopoly.

Another purported advantage is that resources are distributed [more] evenly, creating less socio-economic inequality.

Disadvantages

Perhaps history speaks loudest. There are very few command economies left in the world. Perhaps the only true command economy remaining is North Korea's.

Lack of entrepreneurship

There is little incentive for entrepreneurship. Individuals do not benefit from innovation or product development. All work is done for the good of society; not for individual personal ambition and gain.

Because the government has full ownership and control over all resources and factors of production (capital, land, labor) the government is responsible for the people's existence and livelihood.

There is no opportunity for personal profit motives for any producer or consumer. This economy is characterized by distribution of rewards, wages, and perks done by keeping in mind, social value of the service performed.

Production standards

This absence of profit motives acts as a deterrent to individual contribution. Countries with such economies (most notably former communist countries of the past) were notorious for their low-quality products. This ranges from small consumables up to cars, ships, military equipment, and even spacecraft.

Market forces

Prevailing prices and supply of goods in a command economy are controlled by government rather than by market forces. Resources in a command economy are allocated by the government. One major drawback is that it is indifferent to the wants and whims of traders and to unexpected alterations in circumstances like price fluctuations. ^[2]

Examples

USSR

An eminent example is the former Soviet economy, which was ruled by a command economy. The government of USSR once controlled production of the economy and was responsible for allocation of raw materials, labors, and other factors. Strict instructions were given to factories as how much production is to be done with resources. After completion of production, they were given instructions regarding where the products were to be sent.

North Korea

Today, North Korea adheres to the command economy structure, with dismal results. The country's food production is insufficient, and exports are essentially non-existent. North Korea relies on South Korea, China, and the US for food aid. In fact, North Korea's economy is in such shambles they have to resort to printing counterfeit US dollars as one of their sources of income.

See also

• Closed economy
• Planned economy
• Market economy
• Free market economy
• Open economy
• Mixed economy
• Black economy
• Gray economy
• Knowledge economy

Further reading

• Noko Process - the story of Swedish entrepreneurs attempting to set up a business in North Korea [1]
• Article in Econ.la.psu.edu
• Article in EconomyWatch

References

1. ↑ http://www.tiscali.co.uk/reference/encyclopaedia/hutchinson/m0037989.html
2. ↑ http://www.investorglossary.com/command-economy.htm