A command economy is associated with a socialist or communist economic system where resources – land and capital- are collectively owned. The state plans the allocation of resources at three important levels. It plans the allocation of resources between current consumption and investment for the future. By sacrificing some present consumption and diverting resources into investment, it could increase the economy’s growth rate. The amount of resources it chooses to devote to investment will depend on its broad macroeconomic strategy: the importance it attaches to growth as opposed to current consumption.
At the micro-economic level the command economy plans the output of every business and firm, the techniques that may be used, and the labor and the different resources required by every business and firm. To conform that the desired inputs are obtainable, the state would perhaps conduct some style form of input-output analysis. All industries are viewed as users of inputs from other industries and as producers of output for consumers or different industries. Such as, the steel industry uses inputs from the coal and iron-ore industries and produces output for the vehicle and construction industries. Input-output analysis indicates, for every business, the sources of all its inputs and the end point of all its output. The state makes an attempt to match up the inputs and outputs of every business so that the planned demand for each industry’s product is equal to its planned offer.
The command economy plans the distribution of output between shoppers. This can depend on the government’s objectives. It is going to distribute goods consistent with its judgment of people’s needs; or it is going offer more to people who produce a lot of, thereby providing an incentive for those to work harder; or more likely it will try to find some compromise between the two. It is going to distribute goods and services directly; or it may decide the distribution of money incomes and allow people to determine how to pay them. If it does the latter, it going still request to influence the pattern of expenditure by setting applicable prices; low prices to encourage consumption, and high prices to discourage consumption.
Strengths of Command Economy:
1. Ownership: The government owns nearly all of the country's factors of production. Labor is only factor over which the government does not have total control, they certainly have indirect control over the workers.
2. Objectives- The command economy is the complete opposite of the pure self-interest of the free market system. No one (in theory) thinks of himself (or herself). The government workers and consumers are all assumed to be working for the 'common good'. This system is often associated with communist Soviet Union (as it was before 1989), but the fascist Hitler ran a 'planned' economy, although dictatorially. However, that system ended up being for the common good! Democratic countries also often attempt a less severe form of planned economy via socialism.
3. Secures Equitable Distribution of National Income: A planned economy is a classless society. Therefore, there is no place for rich or poor or permit the existence of class distinctions in such a society. Since the state owns the means of production there is no question of private profits, which increases and perpetuates the inequalities in the distribution of national income
4. Secures Coordinated Development
4. Secures Coordinated Development
The command economy being essentially a planned economy, secures balanced and coordinated development of the various sectors of national economy. The central planning authority has a complete control over the various aspects of economic life and has a thorough knowledge of position regarding demand and supply as against the sketchy knowledge possessed by millions of isolated entrepreneurs under capitalism. Therefore, through the process of economic planning a socialist economy can secure a coordinated and more rapid economic development.
5. The pricing system: There is no competition, so there is no price mechanism. The prices are fixed by the government authorities. It is because they set prices at low levels to ensure that everyone can afford the goods that excess demand occurs causing long queues for goods outside shops and therefore, the creation of black markets.
5. The pricing system: There is no competition, so there is no price mechanism. The prices are fixed by the government authorities. It is because they set prices at low levels to ensure that everyone can afford the goods that excess demand occurs causing long queues for goods outside shops and therefore, the creation of black markets.
6. The planning system: The planning system is another feature of the command economy. As the government runs the system, they plan the way how all the resources ought to be used, what should be produced and in what quantities. They must decide how the goods are to be made and what human resources should be used and where? They decide the techniques of production to be used and the manner the finished goods are to be divided between the workers (or consumers). They directly set the output levels and price levels.
7. Eliminates cyclical up and down and unemployment: Business cycles are an inherent feature of capitalism. Cyclical fluctuations in economic activity are a direct outcome of the uncoordinated nature of the capitalist economy. Under command economy the trade cycles are completely absent. When there is no cyclical fluctuation, the planned economy assures a job to each one in the society who is able to do work. The economic resources of the community are being fully utilized and each person is provided with a job according to his capacity, taste and suitability.
8. Eliminates labor disputes: A capitalist economy is marked by constant labor disputes. Strikes and lockouts keep on occurring every now and then that result in tremendous wastage of man-hours. This is harmful to the labor, capitalist and the society at large in the form of loss of production and higher prices. Labour disputes do not occur in a command economy where no clash of interest between the labor and the management exists.
9. Provides Social Security: A command economy makes proper arrangements for giving social security benefits to the nationals. Immediate aid is provided to the people at times of sickness or accidents. Excellent medical care is promised to those who are subjected to such evils. Old-age pensions are given to all who become unfit for work due to old age. In case of premature death, the state bears the full expenses of the dependents of the deceased workers.
8. Eliminates labor disputes: A capitalist economy is marked by constant labor disputes. Strikes and lockouts keep on occurring every now and then that result in tremendous wastage of man-hours. This is harmful to the labor, capitalist and the society at large in the form of loss of production and higher prices. Labour disputes do not occur in a command economy where no clash of interest between the labor and the management exists.
9. Provides Social Security: A command economy makes proper arrangements for giving social security benefits to the nationals. Immediate aid is provided to the people at times of sickness or accidents. Excellent medical care is promised to those who are subjected to such evils. Old-age pensions are given to all who become unfit for work due to old age. In case of premature death, the state bears the full expenses of the dependents of the deceased workers.
Weaknesses of Command Economy: The command economies suffer from the following evils:
1. Evils of Bureaucracy: A very fundamental weakness of these economies is that bureaucrats manage them. The large number people are engaged in the task of drawing elaborate schemes for economic development. This results in the wastage of financial and human resources. Further, the government officials managing the public enterprises are generally not competent to do so. This results in the expansion of inefficiency in the management of industries.
2. Concentration of Power: The entire economic rise of the people in a command economy is managed by a Central planning authority. Thus, on the one hand power goes on concentrating in the hands of the government on the other the human liberties are drastically reduced. Generally the democratic set up of the government is replaced by a one-man rule. Complete infliction of the economic ad social life of people reduces them to the state of mere wage earners without any individual initiative and enterprise.
1. Evils of Bureaucracy: A very fundamental weakness of these economies is that bureaucrats manage them. The large number people are engaged in the task of drawing elaborate schemes for economic development. This results in the wastage of financial and human resources. Further, the government officials managing the public enterprises are generally not competent to do so. This results in the expansion of inefficiency in the management of industries.
2. Concentration of Power: The entire economic rise of the people in a command economy is managed by a Central planning authority. Thus, on the one hand power goes on concentrating in the hands of the government on the other the human liberties are drastically reduced. Generally the democratic set up of the government is replaced by a one-man rule. Complete infliction of the economic ad social life of people reduces them to the state of mere wage earners without any individual initiative and enterprise.
3. Loss of Consumer’s Sovereignty: Under free-market economy customers decide the goods and services to be produced and consumed. The market forces of demand and supply determine prices and volume of goods and services. However, under planned economy the central planning authority determines prices the price-mechanism does not operate freely.
4. No Freedom of Occupational Choice: The planned economies do not allow people to select or change their occupation consistent with their own will. The workforce and other resources of the community are controlled by a central planning authority that directs them into numerous channels of production consistent with a general plan of the economy. Of course, as far as possible, the workers are placed into different occupations consistent with their capacity, fitness and quality.
4. No Freedom of Occupational Choice: The planned economies do not allow people to select or change their occupation consistent with their own will. The workforce and other resources of the community are controlled by a central planning authority that directs them into numerous channels of production consistent with a general plan of the economy. Of course, as far as possible, the workers are placed into different occupations consistent with their capacity, fitness and quality.
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