Command economy

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Advertisment from the German Democratic Republic, telling people to eat carp on New Year's Eve
A German poster from World War I, telling people to use less soap, because it is made from the scarce oils and fats. Ideas include to not hold the soap under water, and to not throw away small pieces of soap

A command economy, or a planned economy, is where the big decisions are made at the centre by the government.[1]

In an economic system the main decisions are, for example, allocating resources like labour, capital and oil. Prices, too, are controlled. In a command economy, these decisions are taken by a central body, usually the government. This system contrasts that of a market economy where all the economic actors involved take decisions. The benefit of a planned economy is that the planning body has (supposedly) perfect information, and can make a better decision than in the market economy.

Friedrick von Hayek, a 20th century economist, pointed out that it is not possible for the planning body to have perfect information.[2] For this reason, the decisions taken by this body will be wrong, as it is not possible to foresee all possible events. Once the decision has been taken there is only a small margin to vary the production; this means that a planned economy cannot adapt to a change as rapidly as a market economy. According to Ludwig von Mises, there is no competition, and there are no reasons to innovate or to look for different solutions to a problem, in a planned economy.[3]

Communism is a type of government system that would use a command economy.[4] Countries with command economies include Burma, Cuba, Iran, Liberia, and North Korea. Formerly, the Soviet Union and China were command economies, and are now mixed economies where the government still has a major influence.

References[change | change source]

  1. Gregory Grossman 1987. Command economy. In The New Palgrave: a dictionary of economics, v. 1, pp. 494–95.
  2. Hayek, Friedrick 1944. The road to serfdom. ISBN 978-0-226-32055-7
  3. Mises, Ludwig von 1936. Socialism. (1922; 1936 in English) Jonathan Cape, London; 1951 Yale, New Haven. ISBN 0913966622
  4. Ellman, Michael 2014. Socialist planning. 3rd ed, Cambridge University Press. ISBN 1107427320