Market economies, as well as command economies, have their advantages and disadvantages. It is important to learn more about them. First of all, they occupy two polar extremes in the organization of economic activity. It is worth noting that primary differences lie in the division of labor, or factors of production, and the mechanisms that determine prices. Interestingly, the activity in a market economy is not planned; it is not organized by any central authority but is determined by the supply and demand of goods and services.
On the contrary, a government is in charge of a command economy. It owns most, if not all, businesses and officials direct all the factors of production. North Korea, China as well as the former Soviet Union are all examples of command economies. In fact, all economies blend some combination of both versions.
Market economy and its role
We should mention that the two fundamental aspects of market economies are private ownership of the means of production and voluntary exchanges/contracts.
The most widespread title associated with a market economy is capitalism. Businesses and individuals own the resources. Moreover, they have the right to exchange and contract with each other without a decree from government authority. Notably, the collective term for these uncoordinated exchanges is the “market”.
In the case of a market economy, consumer preferences and resource scarcity play a vital role. The prices in a market economy act as signals to producers and consumers who use these signals to help make decisions. As a reminder, governments play a minor role in the direction of economic activity.
It is up to businesses to regulate their behavior, while consumers are expected to look out for their own interests. Market economies are not concerned with ensuring that less fortunate people have access to basic necessities.
Karl Max believed that a market economy was inherently unequal. He popularized the term capitalism. He was not the only person who criticized capitalism. For example, John Maynard Keynes believed that pure market economies were not able to effectively respond to major recessions and instead advocated for major government intervention to regulate business cycles.
Command economy and people
As part of a command economy, governments own the factors of production such as land, capital, and resources. Authorities are in charge of a command economy.
The most well-known command economy was the former Soviet Union, which operated under a communist system.
The government controls all aspects of a command economy. As a result, prices can not rise naturally like in a market economy. When it comes to a command economy, macroeconomic and political considerations determine resource allocation, whereas, in a market economy, the profits and losses of individuals and companies determine resource allocation. One of the main goals of command economies is to provide basic necessities to everyone.
Ludwig von Mises criticized a command economy. He argued that command economies were untenable and doomed to fail because no rational prices could emerge without competition and private ownership of the means of production.
As of 2022, most market economies and command economies function with elements of both. For example, the United States, switched to a planned economy to mobilize during World War II. The country also has command economy elements, such as medical services provided to seniors.
Historically, the type of economy also determined the political and social landscape of a nation. Command economies have been associated with authoritarian governments while market economies tend to be democracies.