A command economy is a type of economic system in which the government centrally plans, manages, controls and makes all countrys economic decisions. Tom Gorman. (2003).
In this economic system, the central government ensures that economic decisions benefit the welfare of the society. This is done by deciding on the production of goods and services which they believe should be consumed by the people. The government owns and manages all the public services such as: Schools, public utilities (Water, electricity, transport telecom) rail lines, Hospitals, Postal services, Security services (Police and army), with no private sector involvement in the economic activities.
A mixed economy is a type of economic system in which economic activities are conducted both by the government (public sector) and the private sector. The private sector is made of privately owned businesses that aim at making profit from the sales of their products to the consumer. The public sector is made of the central government that owns and manages organisations and State enterprises. Generally, these state owned enterprises are often subsidised to cover their cost of production. To some extent, they do sell their products below production costs. Adam Hill. (2011)
A mixed economy is a mixture of private and public enterprises in which the market and the government decisions determine which goods and services are to be produced and how it will be distributed. Market forces play a major role in a mixed economy since demand and supply is not totally planned nor controlled by the central government. Tom Gorman. (2003)
2.Aims and Objectives
The aim of this assignment is to look at the effectiveness of the command and mixed economic systems, as well as their strengths and weaknesses in respect of their respective productivity and distribution.
To achieve the aim of this assignment, I have used different sources to research information on these economic systems, in view of establishing the effectiveness of their productivity and distribution methods, outlining their strengths and weaknesses as regards to productivity and distribution. To put my assignment into context, I will use the examples of countries who operate these economic systems such as: Cuba (command economy) and China (Mixed economy), outlining their respective characteristics.
4. Characteristics of command and mixed economy
4.1.Characteristics of a command economy
In a command economy, the resources of the country such as: Land, factories, offices and machinery are completely owned by the government and this is known as public ownership. The command economy is somewhat characterised by the fact that goods and properties are viewed as public goods and public properties; and private ownership is very limited or to an extreme case does not exist. Alain Anderton (2000)
In a command economy, the central government sets up committees which assist to manage the resources it owns. These committees are known as Planning Committees. The planning committees role is to gather vital information to ensure that public demands are fulfilled. The information is collected on quantity of services and goods and then passed onto the government to support the decisions on the allocation of resources. On that basis, the government decides what needs to be produced, how it should be produced and also how it should be distributed in the economy. Alain Anderton (2000)
4.2. Characteristics of a mixed economy
In a mixed economy the resources of the country are jointly owned by the government (public sector) and the private businesses (private sector). Public and private ownership in a mixed economy will depend on the country; the private sector usually owns fewer resources than the government in a mixed economy. This is due to the government privatising their resources by selling them to private sector. Alain Anderton (2000)
The role of the government (public sector) in a mixed economic system depends on their involvement in the countrys economic activities. Most generally, outside running of some economic activities, the government plays the role of regulator of the economic systems, to ensure consumers are protected and private sector operators follow the rules which prevent the abuse of the market system, such as tacit monopoly and formation of cartels, and price fixing. Alain Anderton (2000)
5.Comparative Analysis between Command and Mixed economic system
My research looks at a number of countries which operate command and mixed economic systems. Ill focus on two of these in view of conducting my analysis of their strengths and weaknesses in respect of the effectiveness of their productivity and distribution.
From the various researches on command and mixed economy models, I have chosen two typical countries which reflect these two models; Cuba which operates a command economy and china which functions in a mixed economic system.
5.1. Cuba: Command economic system
Cuba is an example of a country which has a command economy. This economic system has allowed Cuba to develop a balanced economy focusing on social equality through investment in public goods and services, and an even distribution of wealth. This has resulted results in no one being in poverty and no one being too wealthier than another. If such social policy is carried out correctly by the government, the majority of the population will not be in poverty but will be on an equal level.
In this type of economic system, the Cuban government has aimed to provide the public goods instead of promoting the individual wealth, with almost no significant gap between the wages of different professions.
Further, as all the countrys economic decisions are made by the central government, the command economy leaves the population with little consumer choice. This affects the countrys ability to efficiently distribute goods and services since the population needs are not effectively captured by the central planners. Supply and demand forces are not taken into account. Tom Gorman. (2003)
5.2.China: Mixed economic system
China is an example of a country which has a mixed economy. In chinas economic structure, economic decisions are made partly by the government and partly by the market. Mixed market economy allows the Chinese population to have a freedom of choice, as there will be many competitors in the private sector producing a variety of goods and services for the consumers. This economic system allows the individuals in China to own and manage their own businesses and to make profit. David Begg (2002) p. (9)
Mixed economy allows entrepreneurs in China to venture into business for their own personal gain, this type of economy also allows business owners to decide and set their own prices for the goods and services which they wish to produce. As the market has a say in what should be produced and supplied, the economy will respond better to supply and demand compared to a command economy.
In addition, the Chinese government and the private sector can work together to the benefit of the Chinese economy. The Private sector in China benefits from this economic
model as their businesses grow, expand with increased revenues and profits. These profits can be reinvested in their businesses for research and development, and innovation so that much improved products can be produced more efficiently.
The public private partnership benefits the Chinese government as the expansion and the growth of the private sector allows the Chinese government to free the resources it was using to subsidize some of its state owned enterprises (now transferred or owned by the private sector through privatization/or PPP), and to then re-allocate these freed resources to its key strategic public services.
Further, some of the resources owned by the Chinese government may not be managed as efficiently as those owned by the private sector. The mismanagement of resources in the public sector may lead to inefficiencies related among others to: increased production cost, poor quality of output and low productivity. In this mixed economy, prices are governed by the market forces such as: supply and demand of goods and services. An increase in demand will see a rise in price for a given quantity of goods or services produced and conversely, a drop in demand will see a fall in price for a given quantity of goods or services produced. This is in sharp contrast to the situation in the command economy were market forces (supply and demand) are rather controlled by the government through central planning. Gale Cengage. (2001)
¢Equal distribution of income.
¢Enables full employment.
¢Focus on public goods rather than individual wealth.
¢Little freedom of choice.
¢Central planning can be inefficient.
¢Productivity can be inefficient.
¢Freedom of choice.
¢Efficiency through competition.
¢Encourages creativity, innovation and entrepreneurship.
¢Uneven distribution of income.
¢Encourages greed through excessive profit.
¢Social benefit overshadowed by individual gain.
From the above analysis it appears that command and mixed economic systems are both used in various countries in the world based on their policies and ideologies as is the case with Cuba command economy and china mixed economy.
However, each of these economic systems presents advantages and disadvantages as well as strengths and weaknesses. The major drawback of the command economy remains the inefficiency in the productivity due to the lack of incentive for innovation and competitiveness because the government ensures equal distribution of income.
Further, the allocation of resources is also inefficient since the real needs of the consumers are not well addressed due to the absence of the demand and supply forces.
In respect of the mixed economy, market forces are a key driver in price determination and allocation and distribution of resources which drive the productivity aimed at maximising profit. In this economic system, productivity is enhanced by cost cutting measures with the aim of maximising profits. However this profit maximising motives could be harmful to the consumer as would require therefore that the government protects the consumer by regulating the economic activities of the private sector.