Command economy

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Advertisement 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 is where the big decisions are made and owned at the centre by the government. 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 make 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. Countries at war sometimes command their people to make things the war needs; the major powers in World War II did this.

Friedrick von Hayek, a 20th-century economist, thought 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]

Planned economies contrast with unplanned economies, specifically market economies, where autonomous firms operating in markets make decisions about production, distribution, pricing and investment. Market economies that use indicative planning are variously referred to as planned market economies, mixed economies and mixed market economies. A command economy follows an administrative-command system and uses Soviet-type economic planning which was characteristic of the former Soviet Union and Eastern Bloc before most of these countries converted to market economies. This highlights the central role of hierarchical administration and public ownership of production in guiding the allocation of resources in these economic systems.

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