Command system

After you have worked through this section of learning unit, you should be able to:

  • describe the main features of a command system and identify strengths and weaknesses of the command system

In a command economy, economic effort is devoted to goals passed down from a leader or ruling class. Ancient Egypt's absolute monarchy is an example of an ancient command system, while a modern example is a communist country like North Korea.

The government decides what goods and services will be produced and what prices will be charged for them. The government decides what methods of production will be used and how much workers will be paid. Some necessities like healthcare and education are provided free of charge.

In an extreme command system, people work where the government tells them, do not get paid but receive what the government thinks they need from them. Because government is answering the "what", "how" and "for whom" questions centrally for the whole society, the command system is also sometimes called a centrally planned system.

In a complex command economy, the answers to the economic problems of production and distribution are provided by a binding central plan comprising the following elements:

  • The decisions on what, where and when to produce are taken by the central planners according to what they consider important.
  • Production methods. The planners decide how to produce and how the production factors are to be rationed. The problem of "how" is also solved by the planners by instituting quotas for all industries. The planners (for the state) also have to act as entrepreneurs.
  • The planners solve the "for whom" problem by rationing consumers according to the priorities they deem important.

This is a tremendous task, the extent of which becomes clear when we consider the typical decisions that have to be taken on behalf of such a community. A decision has to be taken on how, where and for what purpose every labourer, every piece of land and all capital goods are to be applied.

Other examples are the distribution of raw materials, how many houses to build, what consumer goods to produce, how these goods are to be divided among consumers, what proportions of the economic resources should be used to produce capital goods and consumer goods, and so on.

Obviously these decisions cannot all be made by one person or even one committee. In actual fact, economic decisions are based on the advice of numerous subordinate committees appointed on a regional or activity basis. This does not mean that such decisions are implemented efficiently in a centrally controlled community since there is considerable scope for wrong decisions and malpractice on account of the complexity of the economy itself.

To implement this plan successfully, all the natural and human resources have to be in the hands of the authority.

The system of central control differs from traditional systems in one important respect: economic change can be forced on the community by the state. A typical example is the former Soviet Union which underwent radical economic change under state duress.

In reality, no country today is completely centrally planned. Even in the former Soviet Union, a type of market mechanism was present in certain sectors, and today China is moving to a more market-oriented economy.

Watch the following section of the video clip about the command system from 5:03 minutes to 9: 29 minutes before you do the activity:

Activity

Now do the following activity:

Do you agree or disagree with the following statement?

In a pure command economy, all the economic decisions are made by a central authority. It therefore follows that the authority would have the power to force individuals to follow the central plan even if it is against their will.



Correct.  You should agree.

Without the power of coercion (coercion is the use of threats or force to persuade someone to do something), the central authority would not be able to function efficiently and the whole system would soon fall apart.

Think again.

Without the power of coercion (coercion is the use of threats or force to persuade someone to do something), the central authority would not be able to function efficiently and the whole system would soon fall apart.

Do you agree or disagree with the following statement?

In a pure command economy, resources are always allocated and distributed efficiently.



Think again.  You should disagree.

A command economy requires a large amount of incredibly complicated planning in order to efficiently allocate and distribute resources. Unfortunately, in practice, human error or corruption often occurs because of the immense complexity of the economy, leading to misallocation of resources.

Correct.  You should agree.

A command economy requires a large amount of incredibly complicated planning in order to efficiently allocate and distribute resources. Unfortunately, in practice, human error or corruption often occurs because of the immense complexity of the economy, leading to misallocation of resources.

By whom are major economic decisions made in a command economy?





Think again.

In a command economy, major economic decisions are made by officials and bureaucrats. Wholesalers are a type of firm or business, that will also be under the authority of the government in a command economy.

Think again.

In a command economy, major economic decisions are made by officials and bureaucrats. Manufacturers of industrial goods’ are a type of firm or business, that will also be under the authority of the government in a command economy.

Think again.

In a command economy, major economic decisions are made by officials and bureaucrats.

Which one of the following is a strength of a command economy?