Monday, May 30, 2011

Command Economy Definition

Command economy definition can be explained in simple terms. It is a form of economy where the government or central authority takes total control of the allocation of resources and the production of goods. It also determines the type of goods that are manufactured and the price at which they are sold. This is a common practice in socialist and communist states. It is also seen in countries with emergency military regimes. The government completely dominates and decides the direction of all economic activity. The market forces of demand and supply are not permitted to operate. The government makes decisions about what to produce then gives instructions to the enterprises to do so. Production is done according to the perceived social and national objectives.

As a direct contrast, in an unplanned market economy these same decisions are made by the private sector. The private manufacturers make investment, production, pricing and distribution decisions. This is usually based on the prevalent forces of demand and supply. Wages are determined by the ability of the worker to contribute to the success of the business. The command economy definition is similar to that of a planned economy although they are not the same. In the latter, there is a large level of government regulation of privately owned enterprises but there is less public ownership. In the command type of government, the enterprises are owned to a large extent by the state authority.

Over the last few decades, a lot of countries that previously adopted this system have transformed into more liberal economies. The private sector is now allowed to make production, pricing and distribution decisions. Some have made the complete transition to a free market system. A lot however have a mixed system where major industrial decisions are still controlled by the authorities. In a mixed system macro-economic planning is handled by the government while the micro-economic activity is left to the private sector.

An important aspect of the command economy definition is the benefits it provides where it is practiced. It encourages the development of industries that do not have much immediate economic values. An example is the development of nuclear technology. The aim of research and development is not private profit but the development of the nation. The government can easily and quickly harness all necessary resources to move the country in the most appropriate direction. It makes available certain goods that the private manufacturers have no incentive to produce.

On the other hand, command economies have some disadvantages. The first is that consumer preferences cannot be decided by a group of people in power. This generally leads to cases of surpluses or shortages of certain goods. This can only be adequately handled by allowing the forces of demand and supply to operate freely. Another disadvantage is that it can suppress worker creativity. This leads to the lack of development of new technologies. Supporters of this type of economic practice have advocated its use with the combination of the free market system. There is a lot to be gained if it is properly applied in a democratic environment. The advantages it offers in the speedy harnessing of resources can be used by the government to speed up economic progress in certain vital areas.

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