Command economy

In a command economy economic decisions are made on behalf of the public by planners who determine what sorts of goods and services and how they are to be allocated. Although a command economy may include exchanges of money, these exchanges are less important in allocating resources than the central plan. Command economies are usually contrasted with market economies; a palace economy may be regarded as a command economy floating on top of and supported by a subsistence economy.

A command economy is also different from socialism. It is possible, for example, to advocate large amounts of government intervention in the economy but within the context of a market economy.

Support for command economies

Supporters of planned economies cast them as a practical measure to ensure the production of necessary goods - one which would not rely on the vagaries of free markets.

Some advocates of a centrally planned economy (CPE) or an administrative command system (ACS) of the Soviet-type consider this form to have important advantages. First, the government can harness land, labor, and capital to serve the political and economic objectives of the leadership. Consumer demand, for example, can be restrained in favor of greater investment in capital investment for economic development channeled into desired pattern. For example, many modern societies fail to develop certain medicines and vaccines which are seen by medical companies as being unprofitable, but by social activists as being necessary for public health. The state can begin building a heavy industry at once in an underdeveloped economy without waiting years for capital to accumulate through the expansion of light industry, and without reliance on external forces of finance. Second, CPEs can maximize the continuous utilization of all available resources. Under CPEs, neither unemployment nor idle plants should exist beyond minimal levels, and the economy should develop in a stable manner, unimpeded by inflation or recession. Third, CPEs can serve social rather than individual ends; under such as system, the leadership can distribute rewards, whether wages or perquisites, according to the social value of the service performed. A planned economy, proponents argue, eliminates the dependence of production on individual profit motives, which may not in themselves provide all society's needs.

Objections to command economies

Critics of command economies argue that planners cannot detect demand with sufficient accuracy unless they take into account price signals. For example, in the Soviet Union, shortages were so common that anecdotes abound of citizens joining a queue and waiting hours to buy such as shoes. These shortages were due in part to commands given by the central planners to build, say, tractors instead of shoes, because the commands were not given to supply the shoe factory with the right amount of leather, because there was no real incentive for the shoe factory to obey what commands were given, and because that there was no real incentive to produce good shoes.

Critics of command economies also argue that is it possible to create unprofitable but socially useful goods within the context of a market economy. For example, one could produce a new drug by having the government collect tax and then spend the money for the social good. Furthermore, opponents of a command economy argue that market economies in fact allow society to evaluate the cost of social goods and choose rationally between different alternatives.

Finally, critics of a command economy point out that a command economy requires a state which intervenes highly in people's personal lives. For example, if the state directs all employment then one's career is determined by the state. If goods are allocated by the state rather than by a market economy, then one cannot for example, move to another location without state permission because one would not be able to acquire food or housing in the new location. This creates enormous opportunities for corruption and favoritism.

Some have used criticism of command economies as a means of objecting to socialism. However, many socialists have pointed out that socialism in Western Europe occurs in a context of a market economy and not a command economy. Indeed the People's Republic of China terms its own economy a socialist market economy.

In the late-1970s and early-1980s, it became obvious to the leadership of both the Soviet Union and China that the command economy was not producing higher standards of living and there were efforts in both countries to shift to a market economy. However the shift from a command to a market economy proved to be difficult especially since there were no theoretical guides for how to do so. It is generally believed that China largely succeeded in converting to a market economy by first creating a pricing system and encouraging people to enter the market and start new businesses and carefully structuring the transition so that no one would be worse off under a market economy than a command economy and that some people would be much better off. By contrast, the Soviet Union's transition was much more problematic and Russia has yet to generate the high rate of sustained economic growth that China has.

See also gift economy, palace economy and subsistence economy.