Successes and Shortcomings of Command and Mixed Economies - Literature review Example

Economic Problems Name: Instructor: Course: Date: Economic Problems Introduction Countries employ various economic systems to deal with economic problems. Grant and Vidler (2000) argue that common economic systems include command, market, and mixed economies. In a pure command economy, government regulates all economic processes including ownership of resources, making production decisions, etc. In contrast, individuals in market economies own resources and make economic decisions under the influence of market conditions without any government intervention. As these two kinds of economies are rarely achieved in reality, many nations use mixed economies that borrow some characteristics from command systems and others from market economies. Although command systems sacrifice individual freedoms for the sake of political environment in a nation, they are effective for government to promote national interests and to address social problems in the society. On the other hand, mixed economies are effective in ensuring close relationship between private sector and government for the sake of national economic growth. As such, this research explores effectiveness (in terms of successes and failures) of mixed and command economies in solving economic problems. Command Economies A command economy is one in which the central government decides what will or will not be produced. The government also stipulates how much of each item is to be produced and finally, who is to get how many of the final products. Typical examples of nations using command economi structures include North Korea and Cuba. With quotas and production plans, the Cuban government dictates how much of each good and service will be available. This is no simple task since thousands of items are produced. Moreover, the production levels of the various goods and services must be coordinated so that if more sugar is produced, then more arable land, fertilizer, farm labor, are made available. Successes of Command System In command economies, the government decides the quantity of goods or services each person gets. By setting the prices on almost all goods and services, and by setting the wage rate for almost all citizens, the government can dictate who gets what share of these products. This creates equality among the citizens and reduces the gap between the rich and the poor in terms of access to goods and services. Paul (2006) gives Cuba as a classical example of how this system works. By making education free, the government of Cuba controls access to education by making it available to all citizens whether rich or poor. Another success is that prices can be set to achieve social goals. In command economies, the governments control the prices of essential goods and services in order to achieve social policies. If the government has a goal of ensuring that the literacy levels in the country are high, the government can reduce the price of textbooks in order to achieve this goal. For example, the price of alcohol in most Middle Eastern companies is set so high such that it reduces the number of alcoholics in the country. In Libya, the government has set the price of textbooks low in order to encourage education (Carbaugh 2010). Shortcomings of Command Economies One weakness of the command economies is that setting prices and wages and stipulating how much of each item is to be produced for the whole economy are complex tasks and mistakes occur frequently. Since the government is in control of the economy, the task of assessing the needs of its citizens lies on its hands. This means that many sectors of the economy will not develop because of lapses in the system. The government finds it challenging to resolve all economic problems. The result of this is poverty and persistent shortage of goods in certain areas. This may be one of the reasons for high levels of poverty in countries with command systems such as North Korea and Cuba (Harrison 2005). Command economies also breed unproductivity among citizens. If everyone makes about the same income, incentives to work hard and develop new lines of business are discouraged (Woflson 2007, p.38). The possibility of brain drain is also increased because of the fact that professionals in the country are lured to go to other countries with different economic systems for greener pastures. Many professional have relocated from Cuba to the United States because they are not paid well in Cuba, which negatively affects the economic growth of the country. Another inadequacy is increased tendency of existence of black markets. Since the prices of goods and services set by the government are low, there is a tendency for manufacturers to produce goods and smuggle them to neighboring countries where they can get better prices. Some products and variety of services are provided in the black market resulting to shortage of goods and services in certain parts of the economy. Mixed Economies According to Aswathappa (2008) the most important feature of a mixed economy remains the active interaction between government and individuals. In this economic systems, government controls industries of national interest while private sector controls other industries. In addition, the government can decide on the distribution of various goods or services through public policies. Successes of Mixed Economy In mixed economies, there exist economic freedom and capital formation (Ricketts 2002, p.455). There is steady economic development because people have the right to acquire and hold property, which encourages capital formation. Economic freedom encourages people to work hard and in turn, stimulates individuals to set up more business units that contributes to overall economic growth of the country. The level of efficiency is extremely high in mixed economies. Unlike in the command economy where there is no competition, the economic environment in mixed economic systems encourages healthy competition among the producers. This means that workers earn higher wages, which results to increased levels of efficiency. In addition, customers enjoy quality services from both public and private firms, as they have to produce products or provide services that meet expectations of the customers. In the mixed economy, there is sufficient and fair allocation of resources in both the public and private sectors (Lipsey & Harbury 1992). This is because government rarely intervenes in the allocation process meaning that market forces of demand and supply are left to distribute the resources. As a result, market participants have freedom to obtain and provide resources and products for which they can do efficiently and effectively. Long-term benefits derived from such allocation include ordinary citizens in both the public and private sector benefiting from the availability of goods and services. Shortcomings of Mixed Economies One shortcoming is that the operation of price mechanism and price fixing creates confusion. Prices of some goods are determined by the market demand and supply but the government principally fixes some prices, such as rail and bus fares as well as electricity tariffs. This can generate uncertainty, especially when government tries to control prices in areas that had not been controlled before. For example, when the US government introduced the mandatory healthcare scheme in order to control the price of healthcare insurance, many insurance companies and healthcare organizations came up to criticize the government for trying to meddle with economic operations within the sector (Penn 2009). Clarke (2009) asserts that mixed economies experience poor implementation of government plans. This is because a large sector of the economy remains beyond the control of government. The US government, for example, is facing hurdles in the implementation of healthcare reform because it does not have control over all parts of the economy. Mixed economies limit growth and development of the private economic sector. Government measures aimed at controlling monopolistic tendencies of some private companies serves to deter the companies from expanding their businesses for fear of incurring economic risks in the future. Other measure that exposes private sector into future economic fears involves nationalization, a situation where the government seeks to make public some private firms. For instance, in Venezuela, the government decided to nationalize everything from oil companies to supermarkets, which resulted in huge losses for various companies. Conclusion Command economies create equality among the citizens because the government decides the quantity of goods or services each person gets. However, since the government controls all economic problems, it becomes challenging to resolve all economic problems, and as a result, this causes poverty and persistent shortage of goods in certain areas. Since the government may set low prices for basic commodities to ensure affordability by all citizens, command economies encourages development of black markets where businesses smuggle products and services to neighboring countries for better prices. In mixed economies, there exist economic freedom and capital creation as well as sufficient allocation of resources. However, operation of price mechanism and price fixing creates confusion about market operations and limits growth and development of the private economic sector. References Aswathappa 2008, International business, 3rd edn., Tata McGraw-Hill, New Delhi. Carbaugh, RJ 2010, Contemporary economics: An applications approach, 6th edn., M.E. Sharpe, Armonk, NY. Clarke, H 2009, The end of free market fundamentalism not of the mixed economy, Economic Papers, vol. 28, no. 4, pp. 376-382. Grant, S, & Vidler, C 2000, Economics in context, Heinemann, London. Harrison, M 2005, The fundamental problem of command: Plan and compliance in a partially centralized economy, Comaprative Economic Studies, vol.47, no., pp.296-314. Lipsey, RG & Harbury, C 1992, First principles of economics, 2nd edn., Oxford University Press, Oxford. Paul 2006, Business environment, Tata McGraw-Hill, New Delhi. Penn, H 2009, International perspectives on quality in mixed economies of childcare, National Institute Economic Review, vol.207, no.1, pp.83-89. Rickets, MJ 2002, The economics of business enterprise: an introduction to economic organization and the theory of the firm, 3rd edn., Edward Elgar Publishing, Cheltenham. Wolfson, Murray 2007, Transition for a command economy: rational expectations and cold Turkey, Contemporary Economic Policy, vol.10, no.2, pp.35-43. Read More