COMMAND ECONOMY

• Economy directed by the government.

• All means of production (land, labor, capital) are state owned and controlled.

• The government makes all economic choices of what to produce, how to produce, how to distribute.

What is COMMAND ECONOMY ?

• People believed that other economic systems were exploiting the working class.

• Came as a response to the industrial revolution.

• Some people believed that if the government controlled the economy and chose what should be produced, how and for whom; there would be greater economic equality.

Rise of the Command Economy

Problems Created by the Industrial Revolution

• Low wages• Long hours• Urbanization

– Crime– Poverty– Disease– Pollution

• Unfair labor practices• Unsafe working conditions

Elements Of Command Economy

• Cooperation• Public ownership• Equality as incentive• Central planning

COMMAND ECONOMY

• Income & wealth more evenly distributed• Little unemployment• Experiences fewer booms and busts in

economy• Profits used to expand production• Production of goods and services is planned to

meet society’s needs• Consumers receive basic necessities.

Advantages of the Command Economy

Disadvantages of the Command Economy

• Lack of incentive• Lack of technological

progress• Bureaucracies (planning

creates inflexibility)• Black markets• Loss of individuality• Inefficient and widespread

waste of resources.

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.

• The bourgeoisie exploited the workers by forcing them to create goods and services with a greater value than the wages received.

• Capitalism would bring itself to ruin– Economic depression– Imperialism– Wars– Revolution by the proletariat.

• After a series of revolutions capitalism would be eliminated and people would live in a cooperative and voluntary society.

• Production would be distributed by the motto…“from each according to his abilities, to each according to his needs.”

Marx’s Beliefs

The Ideal Marxist Society

• Individual differences would still exist but no one could amass enormous wealth while others lived in poverty.

• Equal opportunity (classless society)• Abolish private property and profit motive (public

ownership)• With the existence of surplus goods crime and greed

would not exist.• Common Good

Lenin’s Additions To Marxism

• Adapted Marx’s ideas to conditions in Russia.• Views referred to “Marxist-Leninist”

Marx

• revolution could only occur in a capitalist and industrialized country

Lenin

• organized a dedicated group of professional revolutionaries (who sought support from peasants and workers) to overthrow Russian autocratic government.

CASE STUDYCentral Planning in the Former USSR

FIVE KEY ELEMENTS OF CENTRAL PLANNING IN THE

FORMER SOVIET UNION

1. NATIONALIZATION

Nationalization– The taking over of ownership of a company by the

government.

• No individual owns capital (mines, mills, machines, railways).

• Government controls them and appoints managers to manage them.

• No one can make a profit from the nation’s resources.

2. COLLECTIVIZATION OF AGRICULTURE

Collectivization– The practice of working together in groups supposedly for the

good of all.• During the 1920’s & 30’s privately owned farms were

seized by the government and made into large state owned farms. (Kulaks)

• 97% of farmland was government owned.• Workers worked on immense government owned farms.

(500-700 workers)• State farms also set up to test new agricultural methods.

(operated by government but workers were paid on a wage basis.

3. CONTROLLED DISTRIBUTION OF WEALTH

• Controlled planners decide how to distribute the goods produced. (Gossnab determined how commodities were distributed.)

• Soviet Union used price controls to influence buying practices based on what was in the best interest of the country.(i.e. low prices on school books, high prices on vodka)

• Standard of living in the USSR lagged behind other major countries because…– Planners believed in economic equality, those who were efficient

producers had their efforts used to provide income for others.– Planners concentrated on needs for the future rather than wants

for the present.

4. COMPREHENSIVE PLANNINGGosplan– The economic planning commission for the

former USSR.• With the best experts, advisors, computers

available it was Gosplan’s task to decide…–What to produce?–How to produce?– For whom to distribute to?

• Major advantage of central planning was it allowed the govt. to determine which goods the country needed/equality in distribution.

Disadvantages to Central Planning

–Slow to respond to changes–Shortages–Absence of initiative/incentive–One bad decision was effected the

whole nation

5. CONTROL BY THE COMMUNIST PARTY

• Gosplan was the economic planning committee for the former Soviet Union.

• Gosplan took orders from the Communist Party.

• The Communist Party established the national goals and it was Gosplan’s task to achieve these goals.

A Little More On…

War Communism: Lenin introduced this right after the Communist Revolution to bring about the perfect Communist Society – occurred during the civil warInvolved nationalization and was a failureActually resulted in DECREASED agricultural and industrial output.

A Little More On…The New Economic Policy• Introduced by Lenin to try and kick-start the

economy• Re-introduced some limited prive ownership of

land and business, allowed farmers to sell surplus for profit

• Obviously this is a step away from “pure” communism, but Lenin saw it as “one step backwards to take two steps forward”

• Only intended to be a temporary policy• Had limited success

JOSEPH STALIN• Transformed the economy

and society of the USSR into the form it would remain until 1991

• Known for his FIVE YEAR PLANS

• This involved setting goals and “quotas” for every industry in the Soviet economy in 5 year chunks of time

The Five Year PlansThe First Plan (1928-32)• Concentrated on heavy industry (oil,

construction, steel, etc)• Citizens asked to make sacrifices in their

standard of living because production was not concentrated on consumer goods

• Stalin promised to concentrate on consumer goods during the second plan

The Five Year Plans• Stalin concentrated on heavy industry for two

reasons:1. Fear of capitalist democracies attacking2. Knew war with Fascist Germany was inevitable

• In order to encourage production, planners used incentives such as bonuses (for meeting quotas) or harsh punishments (for failing to meet quotas)

• For the most part, it was a success in helping the USSR “catch up” with the rest of the world

The Five Year PlansThe Second Plan (1933-38)• Heavy industry (especially communications)• Huge rise in steel production

The Third Plan (1938-42)• Mechanization for the war

The Fourth Plan + Fifth Plan (1946-55)• Reconstruction

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.

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.