Outline the positive and negative features of the command economy.

Capital spending, such as in the infrastructure, e.g.: airports, housing, roads and rails, education, telecommunication, is made by the government and therefore the society receive all these for free as well.

Moreover there is enough provision of essential services, law and order, cultural affairs, international relations and social issues.

Factors of production are not just mobile because of governments help or plans, they are also used effectively, that means that unemployment and inflation do not exist.

This is because the prices are constant, they are controlled by the government, not by constantly changing/insecure market forces:

The government shifts the demand by prices and advertising from goods with negative and positive externalities-

constant high prices on harmful goods like cars and alcohol to reduce their consumption

and constant low prices on basic commodities like food, housing, health care, public transport (to ensure that consumers are able to afford adequate supplies).

Likewise the value of the currency is constant and there is no lack of essential goods.

As a result of all these features the command economy there is no abuse of any power and it is equally advantageous for all people.

But these positive features exist just measured with inside parameters, that means just in the theory, because the reality is also measured with outside parameters, negative features do exist:

Negative features

In a command economy there is no private property, no self interest in profit, no competition, no freedom of choice and all of the government’s targets are quantitative not qualitative. Because they are just quantitative, growth occurs, but without development.

A good real world example are the consequences of the cold war (1945-1991): there was an increase in the output of military goods, but no equal increase in the output of civilian goods, therefore no development:

diagram 1: PPF 1

The consumer could only choose to spend income on those things the government decided to produce. Consumer wishes were often a poor third in the plan after investment needs and defence needs were met.

Production costs are not reflected in prices. For example, it may cost more to produce a good or service, than the purchased price is. Since prices act not as signals, the government just suppressed the inflation, because it is not possible to convert prices because of the difference of inside parameters to outside parameters. One of the results is that the economy is when not able respond quickly to new conditions.

And so there is only little economic efficiency, first, because in reality there is unemployment, (it is likely to be hidden or disguised), but many people produced very little, their marginal product is very low, inefficiency is high and secondly, the principles of profit and loss do not exist, as well as the concept of competition, there is just one firm per product and what is why inefficient firms do not close and goods and services are not produced at the lowest possible cost, so resources are wasted and this leads to more or real loss and bad quality – all in all it is not a very effective way resource allocation.

The consequence of this is that the government needs to use also alternative methods like queuing or rationing. Furthermore black markets and corruption are likely to arise.

Conclusion

If all people are equal, that means all people are equally rich or poor, there is absolutely no motivation in development, because the government says that it should be like is. But government’s plans are imperfect because they are made by imperfect human beings who naturally cannot detect demand precisely (they have no signals). Above all governments think that the demand is fixed so the supply needs to be fixed -  the reality shows the contrary:

Planning has been and is the most effective way in simple economies or wartime. 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.

But as economies grow more richer, they grow more complex and then the command idea fails in achieving the optimal resource allocation (see also above: diagram1):

Today all economies are mixed. But those who were or are more centrally planned had or have more problems with poverty, unemployment, development, etc.

Diagram 2: PPF 2

The comparison with a country without command economy shows that the other country is nearer to the PPF and the command with command economy is not close enough to the PPF, that means there is ineffective use of factors of production.

The aim to maximize profits is more important to the human nature than to serve the public interest.

Yet it is not completely useless – the positive features, to produce more public/merit goods, use all combinations of factors of productions and produce for all people, are integrated so that the economy is nearer to the PPF, by using the command concepts of the circular flow of income, transfer payments, commodity agreements, taxes and price controls.

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