The Command Economy
The command economy is usually associated with a socialist or communist economic system, where land and capital are collectively owned. The state plans the allocation of resources at three important levels:
€ It plans the resources between current consumption and investment for the future. By sacrificing some present consumption and diverting resources into investment, it could increase the economy's growth rate. The amount of resources it chooses to devote to investment will depend on its broad macroeconomic strategy: the importance it attaches to growth as opposed to current consumption.
€ At a micro economic level, it plans the output of each industry and firm, the techniques that will be used, and the labor and other resources required by each industry and firm. In order to ensure that the required inputs are available, the state would probably conduct some form of input - output analysis. All industries are seen as users of inputs from other industries and as producers of output for consumers or other industries. For example, the steel industry uses inputs from the coal and iron-ore industries and produces output for the vehicle and construction industries. Input - output analysis shows, for each industry, the sources of all its inputs and the destination of all its output. By using such analysis the state attempts to match up the inputs and outputs of each industry so that the planned demand for each industry's product is equal to its planned supply.
€ It plans the distribution of output between consumers. This will depend on the government's aims. It may distribute goods according to its judgment of people's needs; or it may give more to those who produce more, thereby providing an incentive for people to work harder.
It may distribute goods and services directly (for example, by a system of rationing); or it may decide the distribution of money incomes and allow individuals to decide how to spend them. If it does the latter, it may still seek to influence the pattern of expenditure by setting appropriate prices: low prices to encourage consumption, and high prices to discourage consumption. With central planning, the government could take an overall view of the economy. It could direct the nation's resources in accordance with specific national goals. High growth rates could be achieved if the government directed large amounts of resources into investment. Unemployment could be largely avoided if the government carefully planned the allocation of labor in accordance with production requirements and labor skills. National income could be distributed more equally or in accordance with needs. The social repercussions of production and consumption (e.g. the effects on the environment) could be taken into account, provided the government was able to predict these effects and chose to take them into account.
€ It plans the resources between current consumption and investment for the future. By sacrificing some present consumption and diverting resources into investment, it could increase the economy's growth rate. The amount of resources it chooses to devote to investment will depend on its broad macroeconomic strategy: the importance it attaches to growth as opposed to current consumption.
€ At a micro economic level, it plans the output of each industry and firm, the techniques that will be used, and the labor and other resources required by each industry and firm. In order to ensure that the required inputs are available, the state would probably conduct some form of input - output analysis. All industries are seen as users of inputs from other industries and as producers of output for consumers or other industries. For example, the steel industry uses inputs from the coal and iron-ore industries and produces output for the vehicle and construction industries. Input - output analysis shows, for each industry, the sources of all its inputs and the destination of all its output. By using such analysis the state attempts to match up the inputs and outputs of each industry so that the planned demand for each industry's product is equal to its planned supply.
€ It plans the distribution of output between consumers. This will depend on the government's aims. It may distribute goods according to its judgment of people's needs; or it may give more to those who produce more, thereby providing an incentive for people to work harder.
It may distribute goods and services directly (for example, by a system of rationing); or it may decide the distribution of money incomes and allow individuals to decide how to spend them. If it does the latter, it may still seek to influence the pattern of expenditure by setting appropriate prices: low prices to encourage consumption, and high prices to discourage consumption. With central planning, the government could take an overall view of the economy. It could direct the nation's resources in accordance with specific national goals. High growth rates could be achieved if the government directed large amounts of resources into investment. Unemployment could be largely avoided if the government carefully planned the allocation of labor in accordance with production requirements and labor skills. National income could be distributed more equally or in accordance with needs. The social repercussions of production and consumption (e.g. the effects on the environment) could be taken into account, provided the government was able to predict these effects and chose to take them into account.
