Market Economy Vs. Command Economy Intorduction: Within the overall umbrella of the word economy, one speaks today of the market economy, the formal economy, the informal economy, the underground economy, the productive economy and perhaps even the reproductive economy, the post-industrial or post-modern economy and the global economy. Thus while the concept of an economy is not fixed but arbitrary, and may have strayed rather far from the management of household resources, it is nonetheless spoken of in official circles as if there were genuine agreement (sometimes almost as if it were tangible, as we must get the economy back on track). The official economic paradigm operative in Canada is that of the market economy — or the formal economy. This is what is being measured, analysed and reported on.
An economy is said to work within a framework reflecting the values of the society in which it is embedded. Traditionally, three models of an economy have been used: the traditional or feudal, the command economy (where the state determines resource decisions) and the market economy which is the model in use in USA and in most industrialized Western countries. Indeed, even within the market economy, there are different models; for example, the Scandinavian model of social democracy, the Asian corporatist mode, and the capitalist model of North America. Each model has been seen and judged both from inside and outside its parameters. Individual freedom is one of the hallmarks of the market economy — each person is free to choose how they wish to put their income to use. Adam Smith, hailed as the founder of classical economics, suggested that the sum of individual’s self-interest would produce results that corresponded to the overall good of society. The Economic systems: There are three types of economies: traditional (also known as subsistence), command (also known as planned) and market (commercial).
Traditional Economy In a traditional economy, goods and services are produced by a family for their personal consumption. There is little surplus and little exchange of goods. There is only a limited need for markets (places to buy and sell goods and services). This is the type of economy found in less developed nations of the world, usually in rural areas. Most less developed nations today are a mix of traditional and either market or command economies.
Command Economy There are three types of economies: traditional (also known as subsistence), command (also known as planned) and market (commercial). In a command economy, decisions about what and how much to produce, where to locate economic activities, and what prices to charge for goods and services are made by a single, central government agency or authority. These economic decisions are often made to further social goals. Communism is one example of a command economy; socialism is another. In a command economy, the government, not market forces, controls the price of goods including agricultural products.
Production costs are not reflected in prices. For example, it may cost $1.00 to produce a loaf of bread, but the price may be set at $.25 to ensure consumers are able to afford adequate supplies. Market Economy There are three types of economies: traditional (also known as subsistence), command (also known as planned) and market (commercial). In a market economy (elements of which may be considered a free enterprise economic system), decisions about what and how much to produce, where to locate economic activities, and what prices to charge for goods and services are determined by laws of supply and demand and the market. Profit drives decisions in a market economy.
USSR, The command economy: From 1928 onwards the Soviet economy course was charted at the centre and directives issued outwards from the centre passing downwards and outwards through a massive hierarchical bureaucracy. Stalin’s emphasis on centralization, state ownership of the means of production, and centrally planned production and distribution set the tone for the development of the Soviet economy for the next sixty years. State socialism is, by definition, a centrally planned, command economy. When one refers to the Soviet version of state socialism one is referring to the highly centralized, command economy that was established under Stalin. On certain levels this economic program met with considerable success. In the 1940s the Soviet state withstood the German onslaught and emerged from the Second World War as a global power.
Also, in the ensuing years the Soviet Union was able to maintain a military industrial complex that allowed it to contend with the United States on a global basis. The means of production were entirely owned by the state and all economic activity was centrally planned through the State Planning Commission (GOSPLAN). On the on hand, this permitted the coordination of economic activity and when, necessary, facilitated rapid advancement of particular policies or specific sectors of the economy. During the first Five – Year plan collectivisation of agriculture proceeded at a phenomenal rate (aided by coercion) and in 1929 a 49 per cent increase in state procurement of grain over the previous year was recorded. ( Nove, 1992, P161).
In similar fashion, in the five years after the Second World War the Soviet economy demonstrated amazing recuperative powers. Between 1945 and 1950 the national income index doubled to a level that exceeded pre-war levels by 63 per cent. Coal, electric power and steel production all also doubled between 1945 and 1950. (Nove, 1992, P298) However, these gains were obtained at the expense of consumer goods. Production of cotton and wool fabric in 1950 only matched 1940 levels and grain production remained below 1940 levels. The Soviet economy rapidly rebuilt its heavy industries those necessary to maintenance of a military industrial complex but choose to do little to meet the needs of its citizens.
Simply put, the production figures that the economy generated did little to benefit the populace. Needless to add, in a society with a reasonable degree of political freedoms, specifically a democratic system, it can be assumed that the population would have pressed for reordering of priorities. Moreover, in a centralized economy production directives and their results may bear little relationship to reality. In Restructuring the Soviet Economy, David Dyker cites an example of production figures being met at the cost of quality control. During the 1960s extensive efforts were undertaken to improve irrigation and, consequently, agricultural production in the North Caucasus.
GOSPLAN established production targets that outlined the length of pipe to be laid during set periods of time. However, meeting these centrally ordained targets proved impossible. On site engineers determined that the pipe be laid only 15 centimetres below the surface, rather than the 70 centimetres specified in order to insure that they could report having met their targets. (Dyker, 1992, P33-35) The piping was laid according to the centrally established objectives. However, it proved to be inoperable in practice as it repeatedly ruptured and flooded the adjacent fields.
(Dyker, 1992, P35) While central planning permits the concentration of resources it also often neglects local conditions and results in production goals becoming overly important. Similar, problems emerged in the agricultural sector where excessive intervention by central authorities actually acted to undermine agricultural production. Until the collapse of the Soviet Union, and indeed up to the present, the Soviet Union has been a net importer of grain: Unable to produce enough grain to satisfy its domestic needs despite millions of acres of some of the best agricultural land in the World. (Belozertsev and Markham, 1992, P134) Central planning also had a deleterious impact on management. Soviet managers developed a management style that David Dyker refers to as the ratchet principle. Managers of state operated enterprises (SOEs) had no interest in significantly improving output or in considerably surpassing their centrally assigned objectives. Soviet managers endeavoured to increase production …