18. Market vs. Command Economy

The Concise Guide To Economics

by Jim Cox

18. Market vs. Command Economy

There are two polar opposite approaches to an economy's operation.  The command economy is the top-down, centrally-planned economy of socialism.  The market economy is the decentralized economy of the free market.  The most fundamental distinction between the two is the existence of private property in the free market and the absence of private property in the command economy.

The alleged virtue of the command economy is that it is planned in contrast to the unplanned market economy.  The error in this view is that the market economy is actually very rationally planned by means of consumer demand through the price system.  Additionally, for four reasons the command economy will be deficient.

First, an attempt to plan an entire economy by a central committee is bound to be inefficient just because the task is so large. There is no way that a committee of say, 300 planners can know the needs, conditions of resource availability, and localized knowledge spread throughout an economy.

Second, the command economy ultimately rests on coercion as its means of motivation.  Socialists will typically claim that the resort to coercion (the Berlin Wall, Russian gulags, etc.) is not part of their system, but only an unfortunate bad choice in political leaders and that socialism only attempts to control the economy, not people's individual liberties.  But, of course the main element in an economic system is in fact people; therefore controlling an economy is first and foremost control of people--the Berlin Wall was no peculiar misfortune.  Suffice it to say further that human motivation is diminished when coerced.

Third, the command economy is a collectivized system.  All work for the benefit of their quotal share of total production. Individual incentives are absent.  As an example, with 100 workers in an economy each will receive 1/100 of total production.  If one worker shirks, his loss is only 1/100 of the production he otherwise would have generated.  (Imagine the incentives when this system is broadened to a nation of 200 million!)  Each ends up attempting to live at the expense of others and total production plummets.

And fourth, the incentive of production is to please the political authorities who have life and death control over the workers.  In contrast to the market, where production is predicated on consumer demand, the consumer is the forgotten being in a command economy.

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