Economic Systems

• Economic system – way in which a nation uses its resources to satisfy its people’s needs and wants

Command System Government makes all economic decisions &

owns most of the property Governmental planning groups determine such

things as the prices of goods/services & the wages of workers

This system has not been very successful & more and more countries are abandoning it

Command Economy

• Who decides what to produce?– Government makes all economic decisions

• Who decides how to produce goods and services?– Government decides how to make

goods/services

• Who are the goods and services produced for?– Whoever the government decides to give

them to

Command System

Countries with communist governments have Command economies

Examples: There are no truly pure command economic systems, but close countries are: North Korea, former Soviet Union, Cuba

*Germany and Russia have moved away from having a Command economy since 1991. Now they have a Mixed economy.

Command System

• Command economy – system in which the government controls the factors of production and makes all decisions about their use– Government decides what to produce &

how it will be distributed– Government guides people into certain

jobs– Lack of incentive to work hard, few

choices, limited efficiency or inventiveness

– North Korea & China (changing)

13-14. Command Economy

Critics of market economies claimed that capitalism was a form of “class warfare.” They claimed that capitalism/ market economies resulted in a few people ruling over the masses. In order to end capitalism/ market economies critics claimed that a revolution was needed to redistribute goods equally. This revolution came to be known as communism and its economy was known as a command economy. In a command economy the government controls all aspects of the economy.

Command Economy- Typically begin with revolutions.

Karl Marx was the founder of the communist/ command economy ideology. He claimed that as

long as there existed a business owning class oppression would continue.

Traits of a Command Economy

• The government controls all aspects of the economy• Private property is illegal• Supply and demand are determined by the

government, not by consumers and producers.• Everyone is paid equally no matter what job they do.• Industry and businesses are owned and controlled by

the government, not private individuals.

Examples of a command economy

• In the former Soviet Union the government killed small property owners and redistributed their land to workers.

• In Cuba all residents are given rations of foods. Instead of purchasing food in a market Cubans go to government food supply centers.

Example of Command Economy- Cuba’s Fidel Castro and Che Guevarra established a command economy by expelling

Cuba’s small business and land owners. Many of those who lost their business now live in Miami.

15. Criticism of Command Economies

• Command economies are inefficient and reward unproductive workers. Critics claim that since workers are awarded the same amount of money for doing every job workers aren’t productive.

• Command economies result in shadow/ illegal markets. Because the government controls the distribution of goods, rather than consumers and producers individuals begin to sell things illegally.

• Command economies cease to stay competitive in the world because competition and entrepreneurship is discouraged.

Examples of a Command Economy- In North Korea the former dictator Kim Il Sung controlled the economy

with an iron hand and had statues of himself built to show his people who was in charge of the government

and the economy.

Command or Centrally Planned Economic System

Basic economic questions of what, how and for whom to produce are

answered: by a central planning authority.

Advantages• Central authority is in command of the economy• Capable of dramatic change in a short time• Little uncertainty over choice of career, where to

work, or losing job• Many basic education, public health, and other

public services available at little or no cost

Disadvantages• Does not meet wants and

needs of consumers• Lacks effective incentives

to get people to work• Requires large bureaucracy,

which consumes resources• New and different ideas

discouraged, no room for individuality

Problems of a Centrally Planned Economy

Centrally planned economies face problems of poor-quality goods, shortages, and diminishing production.

Command Economy

In a command economy, all resources are collectively owned and directed by the government.

In a command economy, the government decides what and how much to produce.

In a command economy, the government answers the three basic economic questions:

1. What? A dictator or a central planning committee decides what products are needed.

2. How? Since the government owns all means of production in a command economy,it decides how goods and services will be produced.

3. For whom? The government decides who will get what is produced in a command economy.

Command Economy

In a command economy, the government decides where to locate economic activities.

Command Economy

In a command economy, the government decides what prices to charge for goods, including agricultural goods and services.

Command Economy

In a command economy, economic decisions are often made to further the goals of the government.

Command EconomyIn a command economy, production costs (how much it costs to make an item), are not reflected in the cost of the item.

For example, in a command economy it might cost $2.00 to produce a loaf of bread, but the price might be set at $1.00 in order to ensure that customers are able to afford adequate food.

Command Economy

In a command economy, the price might be set higher than the production costs.

For example, in a command economy it might cost $5,000.00 to produce a car, but the price might be set at $10,000.00 in order to ensure that only the wealthy can buy it.

Command System

• Command economy – system in which the government controls the factors of production and makes all decisions about their use– Government decides what to produce &

how it will be distributed– Government guides people into certain

jobs– Lack of incentive to work hard, few

choices, limited efficiency or inventiveness

– North Korea & China (changing)

Types of Economic Systems cont.• Command Economy

– (centrally planned economy) government makes economic decisions

• determines what to produce; how to produce; who gets products

• determines who is employed, work hours, pay scales

– Wants of individual consumers rarely considered

– Government owns means of production: resources and factories

Government Controls• EXAMPLE: Socialism and

Communism– Karl Marx influenced some societies to

adopt command economies• socialism—government owns some of the

factors of production• communism—no private property; little

political freedom

– Authoritarian system requires total obedience to government

• communism is authoritarian socialism

Karl Marx: Economic Revolutionary

• A New View of Economics– Marx lived during Industrial Revolution– Argued factory owners used workers as

resource• exploited workers by keeping wages low to

increase profits• workers would rebel, establish classless

society

– Wrote The Communist Manifesto (with Friedrich Engels), Das Kapital

Government Controls• Socialism and

Communism– Democratic socialism

established under democratic political process

• government owns basic industries

• other industries private

• central planners make decisions for government-owned industries

• central planners might control other sectors, such as health care

Command Economies TodayNo pure command

economies today• modern

telecommunications bringing about change

– Some economies still have mostly command elements

Command Economies Today• North Korea

– Communist North Korea used resources for military, not necessities

• built large army; nuclear weapons program

• In 1990s and early 2000s, millions died of hunger, malnutrition

• In 1990s, production decreased and economy shrank

• Since 2003, some market activity allowed

Command Economies Today• Impact of Command Economies

– In theory, command systems fair to everyone; In practice, many disadvantages

• central planners do not understand local conditions

• workers have little motivation to be productive or conserve resources

• artificially low prices lead to shortages• people sacrificed to carry out centrally

planned policies