In a command economy there is less freedom of choice for consumers and workers as the Government make all the decisions. Workers are allocated certain jobs, whether they want them or not. They are also restricted when it comes to changing jobs. Consumers are controlled in what they buy and what services they use. For example, services such as education and health services are provided by the Government and there are no alternatives. All other products are also controlled so choice is limited. There is also no competition between companies. However in a market economy, the market is run by businesses all trying to make a profit. This leads to companies producing high quality goods at lower prices to try and beat their competition. As all consumers want the most for their money choice is important. This is another reason command economies are moving towards a more market orientated system, to give consumers more choice.
There are few incentives for workers to work hard and this results in low productivity. They cannot change jobs and promotion is difficult. Once you have been given a job it is yours for life. There is also small chance of you losing your job so workers put in little effort. In addition, individuals are taxed more for higher wages so there is no incentive to work hard. Market economies allow people to choose their own jobs and live their life their own way. This leads to high motivation and high productivity. Companies and businesses also have few incentives. For example, if they reach their target production rate their reward would be to be given a higher one next year.
The system is often riddled with abuses of power and privilege meaning wrong decisions are made. As command economies only work with a bureaucracy, there are many people in positions of power. These people decide what is produced and sometimes they choose what they want as there is little choice in the market.
A move to a more market orientated economy means giving the consumer more choice. It would allow competition, better prices and better quality products. Many command economies were in Eastern Europe. In the 1980’s they realised a more market-orientated economy would benefit everyone and began restructuring. However all of the transition economies experienced pain during the transition. Output fell dramatically, inflation rose (hyperinflation in some of the countries) and unemployment levels rose.
During the transition from command to market economies, unemployment becomes a large problem. The businesses are privatised and have to start making a profit and beat their competition. The easiest way to do this is increase efficiency and cut costs. The easiest cost to cut is employees. When the economy was planned everyone who could work, did work. This means unemployment numbers were very low. When the businesses were privatised, the unemployment numbers rose greatly.
Inflation is a general sustained rise in the price level. Countries who are in economic transition often suffer from high inflation. This is because the price of all the products rises, till the supply equals the demand. For example, when Russia was in transition they suffered heavily from inflation. Market prices were five times the state prices.
Transition can also cause poverty amongst some citizens. As the prices rise due to high inflation some citizens can be priced out of the market. Now, the government has less intervention some things they were given by the state they now have to pay for.
Output also suffers during economic transition as it had a negative multiplier effect. Output is the amount of a product a business is producing. Due to the uncertainty of the economic market during transition the new entrepreneurs were cautious in their decisions. Businesses are reluctant to buy new capital and produce as much as they are not sure if they still have a market. This can lead to lower output and sometimes less choice than before. So not only was the quality and quantity of their output low, but this had a knock on effect. Businesses that supplied machinery or the materials required, for the production of the good would suffer too.
Everything in a command economy is owned by the state. This includes all the land and capital. So when an economy is in transition some of the states assets must be sold or privatised. This can be done in three ways. The first option is the state can give the land and capital away to the people currently employing them. This option is a very arbitrary way of sharing the assets; some capital could be more efficient than others. The second option is to sell the capital to the highest bidder. This sometimes caused problems as some of the businesses had to be closed because they were unprofitable. The last option is that they can split it fairly between all the countries citizens. This is quite a successful way of sharing the assets, as shown by the Czech Republic.
The problems of lack of choice, bureaucracy and too high state intervention have prompted command economies to move towards a more market-orientated system. However transition isn’t easy. Inflation may rise greatly, unemployment could also increase and businesses need to be privatised. However I think in the end these times of transition are worth it, it gives freedom of choice and in the end, a more balanced economy.
