In a free market
economy, economic decision making is decentralised. Millions of economic agent
s individually make decisions about how resources are allocatied. In contrast, in a command economy
(or planned economy
) resources are allocated by government through a planning process. There are a number
of key characteristics of a pure command economy.
The main actors There are three types of actors within a planned economy: the planners (the government), consumers and workers
Motivation Consumers, workers and government are all assumed to be selfless, co-operating together to work for the common good. This is in marked contrast with most economic agents in a market economy who are assumed to be motivated only by their self-interest.
Public ownership All factors of production apart from labour are owned by the state (although labour services can be directed by the state). There is no private property.
Planning Resources are allocated through a planning process. At its most extreme, this means that the state will direct labour into jobs as well as directing consumers what to consume, although it is more likely that they will direct producers what to produce, thus determining the choice of goods available to consumers.
Command economies have come to be associated with communist (or Marxist) regimes. However, there is no reason why other types of political system should not be associated with a planned economy. Many Third World countries have isssued 5 year plans, although they have been to some extent 'indicative' plans because they have relied upon free market forces to deliver much of the output. During the Second World War. the British economy was run very much as a planned economy. Government directed resources and issued output targets to factories. Consumer choice was restricted through a system of rationing.
Moreover, it has been argued that underlying market economies are a complex network of command economies. A firm is a small command economy. With a given number of inputs the firm has to allocate those resources to produce a given quantity of outputs. As in a command economy, firms have to plan how to use those resources and face exactly the same questions of what to produce, how to produce and for whom to produce as a state. The largest firms in the world today, such as General Motors or IBM, have larger outputs than many small countries. So even supposedly 'free markets' have an element of planning.
Because communist regimes have tended to organise their economies under command structures, planned economies have tended to be associated with greater equality than under market systems. But again, this need not be the case. Governments could just as well plan to distribute resources in an extremely unequal fashion if they so wished, as is the case in many Third World countries