In a free market economy, economic decision making is decentralised. Millions of economic agents individually make decisions about how resources are allocatied. In contrast, in a command economy (or planned economy) resources are allocated by government through a planning process. There are a number of key characteristics of a pure command economy.

The main actors There are three types of actors within a planned economy: the planners (the government), consumers and workers

Motivation Consumers, workers and government are all assumed to be selfless, co-operating together to work for the common good. This is in marked contrast with most economic agents in a market economy who are assumed to be motivated only by their self-interest.

Public ownership All factors of production apart from labour are owned by the state (although labour services can be directed by the state). There is no private property.

Planning Resources are allocated through a planning process. At its most extreme, this means that the state will direct labour into jobs as well as directing consumers what to consume, although it is more likely that they will direct producers what to produce, thus determining the choice of goods available to consumers.

Command economies have come to be associated with communist (or Marxist) regimes. However, there is no reason why other types of political system should not be associated with a planned economy. Many Third World countries have isssued 5 year plans, although they have been to some extent 'indicative' plans because they have relied upon free market forces to deliver much of the output. During the Second World War. the British economy was run very much as a planned economy. Government directed resources and issued output targets to factories. Consumer choice was restricted through a system of rationing.

Moreover, it has been argued that underlying market economies are a complex network of command economies. A firm is a small command economy. With a given number of inputs the firm has to allocate those resources to produce a given quantity of outputs. As in a command economy, firms have to plan how to use those resources and face exactly the same questions of what to produce, how to produce and for whom to produce as a state. The largest firms in the world today, such as General Motors or IBM, have larger outputs than many small countries. So even supposedly 'free markets' have an element of planning.

Because communist regimes have tended to organise their economies under command structures, planned economies have tended to be associated with greater equality than under market systems. But again, this need not be the case. Governments could just as well plan to distribute resources in an extremely unequal fashion if they so wished, as is the case in many Third World countries

Whereas in a market economy, economic inputs and outputs are largely determined by the laws of supply and demand, in a command economy, the government attempt to determine production levels, prices, investment, consumption levels, and ratio of goods produced. In theory, this would allow the state to produce goods in quantity on command, but this rarely works in practice because an increasingly complex regulatory superstructure is required to keep production going, capital flowing, and consumers consuming at appropriate levels.

The classic examples of command economies were the USSR under Stalin and the People's Republic of China during Mao's Great Leap Forward. Both of these command economies failed dramatically, and it has since become conventional wisdom that command economies simply don't work. This is not strictly true, however. Command economies can become critical to success in times of war. All the major combatants in World War II for example, including the US and Great Britain, relied on heavily command economies. Command economies can also provide relief in times of deep financial crisis. Thus Roosevelt's New Deal temporarily ameliorated the effects of The Great Depression in 1930s America, and command economics were largely responsible for Japan's dramatic economic recovery following its devastation in World War II.

How, why and for whom in a command economy

What goods? In the command economy the decerntralized decision-making process is replaced by the collective preferences of the central planners.

How? The central planners decide on not only quantities of output but also appropriate methods of production. The have to co-ordinate all aspects of productive activity through an organized system of resource allocation.

For whom? The forces that determine the relative rewards people get from producing are set by the central planners, not by the market. Thus, market forces are not given full expression to determine wage rates.

The growth of the Soviet economy after 1917 showed how economic activity came to be dominated by the state. As regards the three basic economic questions - what goods- the central planners favoured the production of capital goods rather than consumer goods. Thus the answer to this question was not that consumers 'voted' in the market-place but rather that they made do with whatever the central planners made available.

The second question - how will it be produced? - in a command economy. To realize their broad objectives the Soviet central planners had to put in place an effective organizational structure. By this, we mean that decisions concerning output production targets and the necessary inputs to allow those output targets to be achieved were somehow made in a centralized way. Resources of land, labour and capital had to be made available by the central planners at the right time for the planning process to work. Thus, in contrast to the capitalist system where 'uncoordinated' competitive pressures are the mechanism whereby resources are combined, in the command economy this co-ordiantion is explicitly undertaken by a few key persons who have to make literally millions of interrelated planning decisions.

The third question - for whom? - raises the issue of how incomes are distributed. Market forces do not fully determine what people earn from productive employment as in a capitalist system, but instead the planning system imposes wage discipline upon state enterprises.

It should be noted that in the absence of a market on which prices are negotiated, an economic planner has nothing to calculate; he has no way to match supply to demand -- in fact, he has no clues about demand.

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