Difference Between Market Economy and Command Economy
Adam Smith is often referred to as the market economy’s father. His theory about the “invisible hand” is central to market’s economic principles. It means that if market forces will prevail freely without state intervention, the market will regulate itself so that the supply and demand will always be in equilibrium. It will create optimal economic growth, and the lowest possible prices for consumers. According to Smith, the state’s role in market economy is only to determine the framework of market forces to operate.
In a pure market economy price mechanism are the only communicating factors. Through the deal, and only through prices, the producer gets information about consumer needs and consumers get information about manufacturers’ production facilities. There is reason to believe that this is an effective way to convey information. In markets where demand is greater than supply, the item’s rarity pushes prices upward. This is a signal to producers that it pays to increase the production of the product. Then this is where the greatest profit potential lies.
Command economy is where the government owns all means of production and often all or large parts of the distribution network where no marketing occurs. This is because it’s the government and not the market forces that determine the development of society. The only form of marketing that occurs in a command economy is what we call “propaganda”. The system is the opposite of market economy.
Command Economy is a system that is often associated with communist countries like Soviet Union, Cuba and North Korea but under the World War II the command economy was used by other countries as well, because of the scarcity of most goods.
Command economy plan has proven to be a very effective economic policy in crisis situations that are characterized by a shortage of materials, such as during the world wars. By placing the economy under a policy of detailed control to almost all the economic activities is an effective war effort.
But the command economy can also be an extremely inefficient economic system. To get the real benefit it is necessary to anticipate what people need in the future.