In this essay I will discuss the features of command economies such as those which used to exist in Eastern Europe before 1989 and why they wanted to change their command economies into a market economies, and what has the transition delivered.
It is first necessary to make a few general points about this particular economic system. A command economy is one in which the fundamental economic questions-what, how, and for whom to produce, are answered by reference to state determined priorities rather than the interaction of supply and demand in the market place. Such systems were introduced in eastern Europe in the period from the end of the Second World War until 1989, and all of these are in the process of transition to more market orientated systems, with varying degrees of determination and success. Command systems are also to be found in China and other parts of East Asia, Cuba, and some African countries.
In a command economy, the land and capital is owned by the state. Because the central ownership thought they will maximize the collective good use of that land. The output of products is controlled by the state. Production and supposedly consumption are to plan for far into the future. The motive for production is not profit but maximum social welfare. In the East, success meant not the maximization of production but the achievement of the planned target.
The resource is allocated by the state with absence of market forces. All the members should have the same opportunity to share in the wealth and produce of the land. Everyone has the same right to a defined “minimum” standard of living. Since the government allocates the resource, the income of people is not essential. It has a relatively narrow distribution of income. Planners attempt to provide all citizens with a basic standard of living. There is limited choice of goods because the motive for production is maximum social welfare. They just produce the essential goods for living.
Secondly, I will discuss the problem caused by the command economies. Compare with Western Europe, the command economies failed to deliver following:
1. A high standard of living and quality of life
2. Technical progress
3. Quality goods and consumer choice
4. Environmental protection
5. Life expectancy comparable to the west
6. Incentives to efficiency
Because a simple motive of production, government was satisfied with the equality of people’s living. Their quality of life fell behind with West, which grew fast in last 20 years. There is no competition between factories because the target of production is determined by state. They don’t need to improve their productivity such as technology. What they need to do is just to finish the government’s target. Therefore no incentives to efficiency are exist. So the technical progress is stagnant. In command economies, there are no rewards for over-filling the plan, only penalties for under-filling it. Accordingly a manager’s first task was always to get the target reduced. All the people get same wage, so they don’t need to care about the quality of the good. Since the stagnant technical progress, there were limited and rough goods for consumers to choose.
The environmental protection wasn’t taken well. For example, the command economies of the old Soviet bloc inflicted a level of damage on their environment which is unparalleled in human history. 70 years of Soviet socialism created the only industrial society in human history with a declining life expectancy – and environmental damage was a major reason for that.
There were five main failings of the command economy in Eastern Europe. Firstly, there is a lack of investment. The main stimulus to investment is competition; if you do not improve your product or your production process, your rivals will, and they will take your market share. In the East all organizations were state monopolies and the stimulus of competition was absent. For example, competition led West Germany to develop the BMW and the Volkswagen, East Germany had a single car maker – Trabant, producing an antiquated and unreliable vehicle which sold for more second hand than it did new because of its enormous waiting list. The second failing is that there were no incentives to productivity.
No rewards were given to overfilling workers. Therefore no one would do more research such as how to improve the way of production even it was not a difficult process, which can be seen from the last 20 years of Western Europe. The third problem is the wastage of resources. A planned economy needs to divert resources into planning, rather than actually producing. The number of population employed was more than the number the productions really need if they improve their technology. Another problem is the over-regulation and inflexibility. An complex and intricate plan of this detail could not be easily adjusted to take account of changing circumstances, and could not easily find outlets for initiative and ingenuity.
The Soviet Union contrived to keep a planning regime for more than 70 years, but latterly they were failing to meet increasingly modest targets. The fifth failing but not the last failing is black market. To create a control is to create an incentive to evade it (Nicholas Goodhart). This axiom was true of the Soviet Union too. Markets have a way of coming into existence wherever wants are not satisfied, and if you are willing to pay, someone will find a way of supplying what you want. In some parts of Eastern Europe the black markets were fairly open affairs.
Those problems above caused many of these economies to place greater emphasis on market forces as a means of allocation resources.
The market forces have improved the performance of the economies in Eastern Europe. No central planning is needed, which is a great advantage of market economies. The land and capital are owned by private sector. The resources are allocated by price. It is necessary to cut costs and raise output per man in order to compete, and those who can achieve this are rewarded. The consumers can choose more and better quality goods, which gives impetus to the technical progress. All of these raise the incentive to productivity. Then the command economy changes into a mixed economy, which has those features above.
In a mixed economy, the market forces play an important part. The resources are allocated both by the government through the planning mechanism, and by the private sector through the market mechanism. The consumption is determined by consumers. So there are initiatives of investment in every company. Companies compete with each other and the technical is progressed. There are initiatives of investment in every company. People work harder than before since the competition also happens between them. The size of income is determined by how hard a person has worked and his (her) qualification.
The government must exist to supply public goods, maintain a sound currency, provide a legal framework within which markets can operate, and prevent the creation of monopolies in markets.
At the last, I will introduce the performance of the transition of the economies. World Bank and EBRD figures, published in the Financial Times on 30/06/99, suggest that the transitional economies of Eastern Europe have performed better or worse according to the determination with which they have embraced market based reforms, and their willingness to “westernise” their political institutions and economic structures rather than remain under the domination of former communist ‘nomenclature’ who have converted themselves into “businessmen.” As can be seen from the bar chart, Poland, which, under the Balcerowicz Plan, endured all the pain of transition in a short and concentrated spell of time, has returned to a path of economic growth and relative prosperity.
By contrast most of the states of the former USSR have sunk back into decline and stagnation. Russia’s GNP for 1999 was forecast by the World Bank at $167 billion; which would classify it with many Third World countries in terms of output per head. According to the European Commission in April 2001, all the ten eastern European candidates for admission to the EU recorded positive growth in 2000, for the first time since 1989. The average growth rate was 4%. Although Romanian inflation was still 49%, the average for the ten countries was just 12.9% and falling. Much of the growth was attributable to the candidates’ success in reorientation of their trade towards the EU. In the case of Hungary the EU share of exports had reached 70%.
To conclude, I would state that the mixed economy is more adaptable than command economy in the current world. However it is a mistake to assume that the command system never deliver economic success. The command economy will achieve success when the productivity of human is greatly prospered due to the rule of the history although it is hard to imagine. In the current world, the market forces in the economies are very important factors. Because workers and officers, companies, organizations need incentive to work. All of those issues are due to a higher productivity and higher standard of life.