1.1.1 Features of command economy
A command economy is an economy where supply and price are regulated by the government rather than market forces. Government planners decide which goods and services are produced and how they are distributed. The former Soviet Union was an example of a command economy. The command economy is also called a centrally planned economy (investorwords.com 2010).
1.1.2 Advantages of command economy
22.214.171.124 Ensuring the realization of the long term well-defined objectives
One key feature of command economy is a central planning authority. According to A.C. Fernando (2011, p.115) economic development in command economies is carried out through centralized planning. In such economies, the state establishes a central planning authority to carry out plans of five year or seven year durations; and usually the planning commission plans, supervises, executes and evaluates the process of planning. It work out the predetermined and well-defined objectives, fix targets and administers control to realize the overall objectives of the plans which usually include faster economic growth, reduction in inequalities of income and the stability of prices. In particular, the control of inequalities of income has been proven to be more effective among the planned economies compared to those market economies and in market economies, the inequalities of income is usually considered as a market failure.
1.1.3 Disadvantages command economy
126.96.36.199 The failure of co-ordination
In the command economy, a body of planners tries to co-ordinate all the economic decisions about production, investment, trade, and consumption made by the producers and consumers throughout the country. This proved impossible to do with any reasonable degree of efficiency. Bottlenecks in production, shortages of some goods and in particular the mismatch between the provision of the products and the demand of the people and other similar issues could not be solved by a number of planners who are knowledgeably incapable to do so. For example, in Soviet Union, in 1989 there had been a shortage of food storage and transportation facilities while there are ample supply of TV sets (Lipsey & Chrystal 2007, p.3). Similar cases could be found in China before the economic reform when people can not buy the goods that they want freely not because the limitation of the capacity to produce the needed output but because the country had been largely focusing on the development of the heavy industries.
188.8.131.52 Misplaced incentives
Another disadvantage of planned economy is that it would lead to incentives being misplaced. Since in a command economy, supply and price are regulated by the government rather than market forces and government planners decide which goods and services are produced and how they are distributed, therefore one’s hardworking would not necessarily bring in the desired rewards that he or she demand. And according to Maslow’s hierarchy of needs which is considered as one of the most fundamental content motivation theories, Abraham Maslow classified the human needs into five layers and he claimed that only meeting the currently unsatisfied needs will bring positive motivations, or to put it in a simple way, only unsatisfied needs are motivators (Lucey 2005, p75). According to this motivation theory, if people are not getting their desires satisfied through hard working and efforts, they would not be motivated in doing the jobs assigned to them. This is actually the case in many planned economies, the central government reward those hardworking people with honors and fames rather than the cash incentives that most people would desire in the poverty conditions.
184.108.40.206 Delay of action and waste of resources
Delays of action and waste of resources are inevitable in a command economic system where decision about allocation of means of production among different uses, sectors and branches as well as distribution of intermediate and consumption goods are concentrated in a single authority. Moreover the danger of inefficiency increases with the growing diversity of disposable resources consequent upon technical innovation (Prybyla 1969 p.57). Let us set a scenario to observe the differences in term of waste reduction handling in a market economy and a planned economy. In a market economy, companies and producers are pressed to reduce the waste and replace with cleaner material not only because technology innovation tend to reduce cost of production but also because the in a market economy production is customer need oriented and with people becoming more and more environmental friendly in term of having higher environment protection awareness. In another word, the customer demand press the producers to adopt greener technologies. But differently, in a planned economy, the central planning commission control all the demand and production in term of what to be produced and how the goods are to be distributed. As a result, manufacturing entities would sufficient resources without the necessity to consider the cost because the resources are well allocated to the production process as stated in the production plan.