In a previous tutorial, we learned about the types of economic systems, and we mentioned
the concept of a command economy, or centrally-planned economy.
To review, command economies exist when a central authority, usually the government,
guides the factors of production, and there is typically little input from the people.
Command economies operate in direct contrast with market economies, by going against private
property, free market pricing, competition, and consumer choice.
It’s important to recognize that most economists maintain that command economies do more harm
than good.
Because governments usually own all factors of production in a centrally-planned economy,
this often leads to inefficiencies.
For example, since the government fixes wages, workers often lack the incentive to work faster
or produce more.
The enormous and complex bureaucracy needed to make so many economic decisions can also
harm efficiency.
Command economies also sacrifice individual liberties in the name of societal goals.
Historically, this has at times led to extreme brutality, as witnessed in the 1930s when
the government of the Soviet Union murdered millions of peasants while stealing their
land, in the name of collective ownership for those farming lands.
Command economies also don’t tend to reward innovation, as there is no profit incentive
to encourage entrepreneurship.
In summary, centrally-planned economies are inefficient, harm innovation, don’t meet
consumer needs, and limit freedom.
If command economies are so bad, why are they still appealing to some countries?
First, the goal of a command economy is more economic equality.
Theoretically, goods and services would be distributed more equitably.
When the government does not get involved with the economy, some needs of a modern society
would be difficult to meet in a free market.
Big infrastructure projects, national defense, healthcare, and education, are often taken
on by central authorities because no entity in a free market is willing or able to take
these on themselves.
In other words, the incentives that naturally occur in a free market are not guaranteed
for every good or service.
Command economies can also provide jobs for anyone who wants one.
Also, even if workers lack the incentive to work faster or produce more, at least their
wages can be set so that they earn enough to have their needs met.
Command economies can take on massive projects without waiting years to raise money, making
deals with private contractors, or dealing with local regulations.
Finally, command economies can tailor goods and services to benefit the common good, without
regard to profits.
Now, it’s important to recognize that command economies develop because autocratic leaders
simply have an easier time controlling a society when they can completely control the economy.
Today we see this in North Korea, which is arguably the only country in the world that
currently has a fully centrally-planned economy.
However, there is still massive economic inequality there due to government corruption.
North Korea is also considered the poorest country in Asia.
The Soviet Union, a country which existed from 1922 to 1991, also largely possessed
a command economy.
However, its economy failed, and since its collapse, countries around the world that
had previously been more open to command economies have redirected toward free markets.
This is ultimately why nearly every country on the planet has some sort of mixed economy.
Given the prevalence of this model, let’s move forward and learn more about mixed economies
next.