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11.3 Command Economy - Coggle Diagram
11.3 Command Economy
1. Definition
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In recent years, many centrally planned economies began adding aspects of the market economy. The resultant mixed economy better achieves their goals.
2. Five characters
The government creates a central economic plan. The five-year plan sets economic and societal goals for every sector and region of the country. Shorter-term plans convert the goals into actionable objectives.
The government allocates all resources according to the central plan. It tries to use the nation’s capital, labor, and natural resources in the most efficient way possible. It promises to use each person’s skills and abilities to their highest capacity. It seeks to eliminate unemployment.
The central plan sets the priorities for the production of all goods and services. That includes quotas and price controls. Its goal is to supply enough food, housing, and other basics to meet the needs of everyone in the country. It also sets national priorities. These include mobilizing for war or generating robust economic growth.
The government owns monopoly businesses. These are in industries deemed essential to the goals of the economy. That includes finance, utilities, and automotive. There is no domestic competition in these sectors.
The government creates laws, regulations, and directives to enforce the central plan. Businesses follow the plan’s production and hiring targets. They can’t respond on their own to free market forces.
4. Disadvantages
This rapid mobilization often means command economies mow down other societal needs. For example, the government tells workers what jobs they must fulfill. It discourages them from moving. The goods it produces aren’t always based on consumer demand. But citizens find a way to fulfill their needs. They often develop a shadow economy or black market. It buys and sells the things the command economy isn’t producing. Leaders’ attempts to control this market weaken support for them.
They often produce too much of one thing and not enough of another. It’s difficult for the central planners to get up-to-date information about consumers’ needs. Also, prices are set by the central plan. They no longer measure or control demand. Instead, rationing often becomes necessary.
Command economies discourage innovation. They reward business leaders for following directives. This doesn’t allow for taking the risks required to create new solutions. Command economies struggle to produce the right exports at global market prices. It’s challenging for central planners to meet the needs of the domestic market. Meeting the needs of international markets is even more complex.
3. Advantages
Planned economies can quickly mobilize economic resources on a large scale. They can execute massive projects, create industrial power, and meet social goals. They aren’t slowed down by lawsuits from individuals or environmental impact statements.
Command economies can wholly transform societies to conform to the government’s vision. The new administration nationalizes private companies. Its previous owners attend “re-education” classes. Workers receive new jobs based on the government’s assessment of their skills.