Everything about Command Economy totally explained
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This article refers to an economy controlled by the state. For the proposed economic system that employs "participatory planning", see participatory economics.
A
planned economy or
directed economy is an
economic system in which the
state or
government manages the
economy. Its most extensive form is referred to as a
command economy,
centrally planned economy, or
command and control economy. In such economies, the
state or
government controls all major sectors of the economy and formulates all decisions about their use and about the distribution of income. The planners decide what should be produced and direct enterprises to produce those goods. Planned economies are in contrast to
unplanned economies, such as a
market economy, where production, distribution, pricing, and investment decisions are made by the private owners of the factors of production based upon their own and their customers' interests rather than upon furthering some overarching
macroeconomic plan. Less extensive forms of planned economies include those that use
indicative planning, in which the state employs "influence, subsidies, grants, and taxes, but doesn't compel." This latter is sometimes referred to as a "planned market economy."
A planned economy may consist of state-owned enterprises, private enterprises directed by the state, or a combination of both. Though "planned economy" and "command economy" are often used as synonyms, some make the distinction that under a command economy, the means of production are publicly owned. That is, a planned economy is "an economic system in which the government controls and regulates production, distribution, prices, etc." but a command economy, while also having this type of regulation, necessarily has substantial public ownership of industry. Therefore, command economies are planned economies, but not necessarily the reverse (example:
USA economy during
World War II or
Nazi Germany's private ownership yet use of the
Four Year Plan could construe them as a planned economy in the wide sense, but not necessarily a command economy, while the
Soviet Union with public ownership would be a command economy).
Important planned economies that existed in the past include the
economy of the Soviet Union, which was for a time the world's second-largest economy,
China during its
Great Leap Forward, and
India, prior to its economic reforms in
1991 . Beginning in the 1980s and 1990s, many governments presiding over planned economies began deregulating (or as in the Soviet Union, the system collapsed) and moving toward market-based economies by allowing the private sector to make the pricing, production, and distribution decisions. Although most economies today are
market economies or
mixed economies (which are partially planned), planned economies exist in some countries such as
Cuba,
North Korea, and
Burma.
Advantages of economic planning
Supporters of planned economies cast them as a practical measure to ensure the production of necessary goods—one which doesn't rely on the vagaries of
free markets.
Stability
A planned economy can ensure the continuous utilization of all available resources. If isolated and unresponsive to consumer demand, a planned economy doesn't suffer from a
business cycle. Under an ideally administered planned economy, neither unemployment nor idle production facilities should exist beyond minimal levels, and the economy should develop in a stable manner, unimpeded by inflation or recession.
Long-term infrastructure investment can be made without fear of a market downturn (or loss of confidence) leading to abandonment of the project. This is especially where returns are risky (
for example fusion reactor technology) or where the return is diffuse (
for example immunization programs or
public education).
Conformance to a grand design
While a market economy maximizes wealth by
evolution, a planned economy favors design. While evolution tends to lead to a
local maximum in aggregate wealth, design is in theory capable of achieving a
global maximum. For example, a
planned city can be designed for efficient transport, while organically grown cities tend to suffer from traffic congestion. Critics would point out that planned cities will suffer from the same problems as unplanned cities, unless reproduction and population growth is subject to strict control, as in a
closed city.
Meeting collective objectives by individual sacrifice
A planned economy serves
collective rather than
individual needs: under such a system, rewards, whether wages or perquisites, are to be distributed according to the value that the state ascribes to the service performed. A planned economy eliminates the individual profit motives as the driving force of production and places it in the hands of the state planners to determine what is the appropriate production of different sets of goods.
The government can harness land, labor, and capital to serve the economic objectives of the state. Consumer demand can be restrained in favor of greater capital investment for economic development in a desired pattern. 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 financing. This is what happened in the Soviet Union during the 1930s when the government forced the share of GNP dedicated to private consumption from 80 percent to 50 percent. While there was a significant decline in individual living standards, the state was able to meet some of its "economic objectives."
Comparison with capitalist corporations
Taken as a whole, a centrally planned economy would attempt to substitute a number of firms with a single firm for an entire economy. As such, the stability of a planned economy has implications with the
Theory of the firm. After all, most corporations are essentially 'centrally planned economies', aside from some token intra-corporate pricing (not to mention that the politics in some corporations resemble that of the Soviet
Politburo). That is, corporations are essentially miniature centrally planned economies and seem to do just fine in a free market. As pointed out by
Kenneth Arrow and others, the existence of firms in free markets shows that there's a need for firms in free markets; opponents of planned economies would simply argue that there's no need for a sole firm for the entire economy.
Disadvantages of economic planning
Inefficient resource distribution — surplus and shortage
Critics of planned economies argue that planners can't detect consumer preferences, shortages, and surpluses with sufficient accuracy and therefore can't efficiently co-ordinate production (in a market economy, a
free price system is intended to serve this purpose). For example, during certain periods in the history of the
Soviet Union, shortages were so common that one could wait hours in a queue to buy basic consumer products such as shoes or bread. These shortages were due in part to the central planners deciding, for example, that making tractors was more important than making shoes at that time, or because the commands were not given to supply the shoe factory with the right amount of leather, or because the central planners hadn't given the shoe factories the incentive to produce the required quantity of shoes of the required quality. This difficulty was first noted by economist
Ludwig von Mises, who called it the "
economic calculation problem". Economist
János Kornai developed this into a
shortage economy theory (advocates could claim that shortages were not primarily caused by lack of supply).
There is also the problem of surpluses. Surpluses indicate a waste of labor and materials that could have been applied to more pressing needs of society. Critics of central planning say that a market economy prevents long-term surpluses because the operation of supply and demand causes the price to sink when supply begins exceeding demand, indicating to producers to stop production or face losses. This frees resources to be applied to satisfy short-term shortages of other commodities, as determined by their rising prices as demand begins exceeding supply. It is argued that this "
invisible hand" prevents long-term shortages and surpluses and allows maximum efficiency in satisfying the wants of consumers. Critics argue that since in a planned economy prices are not allowed to float freely, there's no accurate mechanism to determine what is being produced in unnecessarily large amounts and what is being produced in insufficient amounts. They argue that efficiency is best achieved through a market economy where individual producers each make their own production decisions based on their own profit motive.
Cannot determine and prioritize social goods better than the market can
Some who oppose comprehensive planned economies argue that some central planning is justified. In particular, it's 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 taxes and then spend the money for the social good. On the other hand, opponents of such central planning say that "absent the data about priorities conveyed through price signals created by freely acting individuals, [itis questionable] whether determinations about what is socially important can even be made at all." Opponents don't dispute that something useful can be produced if money is expropriated from private businesses and individuals, but their complaint is that "it’s far from certain that those monies couldn't have been spent better"
The Road to Serfdom is a book written by
Friedrich Hayek and critical of
collectivism, presenting the argument that a central planned economy must ultimately result in tyranny. An idea similar to this is the idea of the
iron cage presented even earlier by
Max Weber in
The Protestant Ethic and the Spirit of Capitalism.
Suppression of Economic Democracy and Self-Management
Centrally planning is also criticized by elements of the radical left. Libertarian socialist economist
Robin Hahnel notes that even if central planning overcame its inherent inhibitions of incentives and innovation it would nevertheless be unable to maximize economic democracy and self-management, which he believes are concepts that are more intellectually coherent, consistent and just than mainstream notions of economic freedom. As Hahnel explains, “Combined with a more democratic political system, and redone to closer approximate a best case version, centrally planned economies no doubt would have performed better. But they could never have delivered economic self-management, they'd always have been slow to innovate as apathy and frustration took their inevitable toll, and they'd always have been susceptible to growing inequities and inefficiencies as the effects of differential economic power grew. Under central planning neither planners, managers, nor workers had incentives to promote the social economic interest. Nor did impending markets for final goods to the planning system enfranchise consumers in meaningful ways. But central planning would have been incompatible with economic democracy even if it had overcome its information and incentive liabilities. And the truth is that it survived as long as it did only because it was propped up by unprecedented totalitarian political power.”
Corruption
A planned economy creates social conditions favoring
political corruption. Particularly, command economies have been notoriously corrupt. First, centralized decision-making predisposes planners to abuses of power. Second, the inherent inefficiency of plans drawn with insufficient information creates a need for bypassing or subverting the official decision-making process. For example, the Soviet Gosplan couldn't create plans that were feasible, and other means were used to meet the quotas. A
gift economy featuring corruption,
blat, developed. The Chinese
guanxi is somewhat similar.
Planned economies and socialism
In the 20th century, most planned economies were implemented by states that called themselves
socialist. Also, the greatest support for planned economics comes from socialist authors. For these reasons, the notion of a planned economy is often directly associated with socialism. However, they don't entirely overlap. There are branches of socialism such as
libertarian socialism, that reject a centralized state, and all of these tendencies reject economic planning as well and instead favor decentrialised collective ownership of the economy and property.
Furthermore, planned economies are not unique to
Communist states. There is a
Trotskyist theory of
permanent arms economy, put forward by
Michael Kidron, which leads on from the contention that war and accompanying
industrialisation is a continuing feature of capitalist states and that central planning and other features of the
war economy are ever present.
Transition from a planned economy to a market economy
The shift from a command economy to a market economy has proven to be difficult; in particular, there were no theoretical guides for doing so before the 1990s. One transition from a command economy to a market economy that a few consider successful is that of the
People's Republic of China, in which there was a period of some years lasting roughly until the early 1990s during which both the command economy and the market economy coexisted, so that nobody would be much worse off under a mixed economy than a command economy, while some people would be much better off. Gradually, the parts of the economy under the command economy decreased until the mid-1990s when resource allocation was almost completely determined by market mechanisms.
By contrast, the
Soviet Union's transition was much more problematic and its
successor republics faced a sharp decline in
GDP during the early 1990s. While the transition to a market economy proved difficult, many of the post-Soviet states have been experiencing strong, resource-based economic growth in recent years, though the levels vary substantially. However, a majority of the former Soviet Republics have not yet reached pre-collapse levels of economic development.
Transition from a market economy to a planned economy
Government market regulation
Central governments are tempted to solve problems quickly by introducing additional
market regulation. Once such regulation is introduced, it's rarely removed, ratcheting towards a gradual increase in government power and a constraint on the mechanism of the
free market. Usually,
big business has an advantage over
small business in a strongly regulated market, because
big business can cope with the bureaucracy and
small business can't take advantage of adaptivity.
Franklin D. Roosevelt’s
New Deal was an example of
market regulation used by the American government in an attempt to escape the
Great Depression of the 1930s.
The process of
wealth condensation results in a small number of people controlling large sections of the economy.
The
British East India Company is an example of
government-granted monopoly.
American Telephone & Telegraph (formerly Bell Telephone Company), was regarded as a
natural monopoly until
it was broken up by the
U.S. Department of Justice in 1974. This is an example of
United States antitrust law being used to discourage centralization of corporate power.
Small
trade unions have limited power, especially against larger international corporations. Amalgamation of
trade unions leads to an industry-wide group with more bargaining power but less individual interest in any particular worker. Such a union will bargain directly with government on an industry-wide basis and thus create a form of central planning that's distinct from typical (Laissez-faire) capitalism.
Similar economic models
A
palace economy may be considered as a
subsistence economy augmented with elements of a command economy.
Further Information
Get more info on 'Command Economy'.
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