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Command and market economies

Learn about about two types of economies: command and market. In a command economy, the government controls everything, like factories and farms. In a market economy, businesses and people decide what to make and buy. Most countries have a mix of both, called a mixed economy.

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  • blobby green style avatar for user ciszek
    This is the first video in the Khan Academy series that annoyed me somehow so far. It is because it pretends to be fairly objective and not-biased but somehow manages to transport some false and unfair images of what both of those markets are. And even if I agree that extreme version of command economy is an utopian one, the narrator of this lesson failed to mention what are the dangers of, his words, "perfect market economy".

    I find it quite problemaric to present "inequality" as a rather small problem and additionally presenting a situation: "I'd rather have a blue car, I will simply work harder". It is such a biased BS I can't even. I hope I won't come across any other moments like this because I grew to like KA videos and, like I had mentioned, this one was the first one to present such an unfair perspective on the topic.
    I think I'm right about this since the comments here contsin mostly a question - why do command economies still exist if they are so bad and this question is raised only because the teacher failed to draw a real situation, a fair balance of pros and cons on both sides.
    (24 votes)
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    • blobby green style avatar for user David Gonzalez Quintana
      I can answer that, command economies still exist because their governments are historical dictatorships, and I know it because I came from one of those countries, nobody there wants a communist economy because as it was mentioned in this video, the perfect command economy, that one without inequality, and super fair with the people, that kind of economy is an utopian one, only possible in books, there will be always inequality
      (6 votes)
  • male robot hal style avatar for user Mudit Sharma
    If things such as inequality, poverty, etc occur in a market economy, why don't all of us shift towards a command economy?
    (7 votes)
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    • duskpin ultimate style avatar for user Chartokai
      This was the line of thought for many but such things also occur in command economies. Despite being advertised as equal and fair, the reality ends up being anything but. They tend to get more inequality (a class structure on how pro-government you are) and worse poverty (often mocked for not being able to feed people while market economies are getting obese). Even the big names in command economies got better results by copying market economies. Like China's huge recent success in giving people some land ownership and Russia's Stakhanovite movement rewarding the best workers.
      (4 votes)
  • blobby green style avatar for user Aldi
    okay so we're know that command economy aren't really good, so why are they still exist?
    (7 votes)
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    • starky tree style avatar for user melanie
      It depends on what you mean by "good", because that depends on the objective of a society.
      Also, "good" is a normative statement. We try as best we can to stick to positive analysis rather than normative analysis in economics. So, a different question that might be asked is, "given the historical experience of many command economies, why do some societies choose command economies rather than market economies?"

      The answer most likely goes back to our very first ideas we learn in economics: tradeoffs. Some decision maker has decided that the benefits to them outweigh the costs of the alternative.
      (15 votes)
  • orange juice squid orange style avatar for user hi
    The video is incoherent: nowhere in the definition of a command economy is stipulated that everyone should be paid the same. Thus, bonuses can exist for innovation in a command economy, so the argument that a market economy provides incentives for innovation whie command economies do not does not follow.
    (10 votes)
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  • male robot hal style avatar for user Mudit Sharma
    Is there any kind of profit in a command economy as all of the products and money is equally distributed amongst the people? I think that there would be no growth of the country as a whole.
    (10 votes)
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  • duskpin seed style avatar for user Anna Hudak
    So, it's my understanding that communism is an anarchist ideology, as in, communists want no government. I could be mistaken, but that's what I remember from "The Communist Manifesto," and "The Conquest For Bread," and what most communists I know and listen to advocate for. So, how could communism be a command economy if it's government run? Or, is he just not explaining command economies very well?
    (6 votes)
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    • male robot donald style avatar for user Jt Sibok
      Interesting question. The only examples we've had thus far of a communist governments or nations working towards it all involve the utilization of resources being decided by the collective. Whereas primitivism involves extreme self-sufficiency, communism involves extreme group-reliance. This necessitates that private ownership of resources be outlawed but that also certain uses of resources be examined so as to determine whether such a use is beneficial towards the group. But then at this point, if someone were to deviate from the communist practice, then how could such a society be enforced? The point is, government would still exist in a communist society even if the use of resources were to be extremely democratized. I hope I didn't make that sound political, but from what I understand about your question, an anarchist society where the ownership is collectivized is something like an oxymoron. How do enforce a system without a government? Even when sovereignty lies only with the people, an individual who would deviate would have to be held accountable.
      (5 votes)
  • male robot hal style avatar for user BrianWillott
    Do you think that the inequality in a market economy is easier to accept when the inequality comes from differences in productivity? Let's think of Steve Jobs. He was very rich but he made great products. On the other end of the spectrum would be, hypothetically, a banker who made bad mistakes but then lobbies the government to bail him out. That hypothetical banker ends up very rich and those who have to pay for it end up poorer. The inequality that results wasn't from the market, it was rent seeking. Isn't that the problem more than inequality itself?
    (5 votes)
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    • blobby green style avatar for user Helios
      This is a fairly personal spectrum, yes the government would bail out the banker but not necessarily make him richer. His mistakes aren't an inequality to the market economy as a whole, yes his products or business might have had quite a small ripple. The government bailing him out is a matter of ethos not as in a selfish thought. This bailing out, I assume in your model of country comes from taxpayer money which is of course dedicated to the economy at best but it has been given to bankrupt people. It brings him back up for a certain price the consecutive time.
      Hope this helped!
      (4 votes)
  • blobby green style avatar for user jeremiaspellegrino
    I'm sadly disappointed about how the contents of this video were deliberately misconducted all over the video, while pretending to show unbiased and fair education content. There is basically no explanation at all on the criteria that Command Economies supposedly use to manage and distribute their resources, but that being not enough, the narrator exposes opinions as facts, like "If you are manager here and you get a better way of doing this you get no reward nor promotion", or just by displaying and reducing the seriousness of the market economies problems and its implications as mere and superficial inequalities. I'm not saying all is a lie, but when you're educating you have to be severe and disciplined on what you say.
    I really appreciate and support KA but this content isn't correct at all. This video should be remade.
    (5 votes)
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    • leafers ultimate style avatar for user lukasjack
      To counter your point of him expressing opinions as fact, when he says "If you are manager here and you get a better way of doing this you get no reward nor promotion," I'd like to bring up a few points. First, without watching the video to find where this quote is from, it sounds like a command economy. Why? Because the people in charge largely don't care what happens in the economy as long as enough money/power is left over for them. Ever read Anthem by Ayn Rand? The main character invents a lightbulb from scraps and decides to bring it to his superiors. Instead of promoting him and showing him respect, they denounce him, saying he's disrespecting all those who found candles were a good source of lighting. Instead of promoted, he was punished. Not saying it's that extreme all the time, but to think there's plenty of growth in a command economy where, by definition, you're told what to do, is bordering lunacy. Follow orders well? Love the state? Good job, you're a good citizen. Now back to work. You can rise to a point above your peers, but you're competing with all of them to do so. Secondly, he doesn't need explanations of the criteria that command economies use to manage resources, we have proof. Examples. History, and facts. It's what happens. Again and again and every time. Thirdly, there are different types of command and market economies. True, command economies have different forms, but many, if not all, lead to at least a steady decline in freedom and money for the common man. Different market economies though, can vary enormously. The difference between crony capitalism and free market capitalism is enormous, and it's important to have context for both. I imagine he doesn't get into those in this video, though I haven't finished watching the video. I'm going to end here, but when accusing a reputable academy of disfiguring the truth and not learning the rules, I feel I should stand up for them, and for freedom in the economy. As a rule, market economies are always better than command economies. There are exceptions, but command economies are unequivocally worse. Don't do it. If I've completely mistook your comment, then I apologize.
      (3 votes)
  • piceratops ultimate style avatar for user ANB
    I have two questions

    1. What is the difference between a market economy and capitaism?

    2. What is the difference between a command economy and socialism/communism?
    (5 votes)
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  • leafers tree style avatar for user 武卿
    So What is China"s Economy.It seems both not Command Economy and not Market Economy
    (3 votes)
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    • blobby green style avatar for user MrLenin
      Contemporary China has a capitalist mode of production. Under Mao it was considered Marxist-Leninist but as Melanie pointed out it is more market oriented following the reforms, however i disagree with their last statement. As far as I'm concerned an economy is either dominated by Market logic or economic planning.
      (5 votes)

Video transcript

- [Instructor] In this video we're gonna talk about different ways of structuring an economy. In particular, who owns what and how does an economy decide what to produce and who gets the output of that production. So on one side, you have what's known as a command economy and good examples of command economies are the communist states, especially during the 20th century, The USSR, the Soviet Union being the best example of that. In a command economy, the government controls what's often known as the factors of production and sometimes, in an extreme case, there might not even be private ownership. So lets say that this right over here is the government. I'll do this with some type of a building with pillars in it. So this is the government. And in a command economy, the government will often own the factories and the farms, so the factors of production. So let me draw a little factory here. So with a little smoke stack... And so the government will tell this factory, "This year, you have to produce exactly 10,000 cars," "No more and no less." and so that factory say, "Okay, you're our boss, you're the government." "We will produce exactly 10,000 cars." Similarly, the government might tell some, let's say that this right over here is a farm, and this is my best drawing of a field really fast, and so it needs to say "Hey, you need to produce", I don't know, "10,000,000 apples," I don't even know if that's a reasonable amount of apples to produce but you need to produce 10,000,000 apples. And so the farmers who essentially work for the government, 'cause the government would own that farm, they would produce those apples. And also in a command economy, there's like well who gets these cars and who gets these apples? Well, in an extreme command economy, they will be directly allocated by the government. The government will say, "Alright, you get a car, you get a car, you get a car." and it might not be based, and in fact it will not likely be based on any type who's willing to pay for the car or who could pay the most for the car. Similarly, for the apples. So they are all gonna be allocated. So there will have to be a lot of planning done on the part of the government to say, "Okay, how much should we produce of one thing" "versus another thing and how do we decide" "who gets the different things?". Now the other side of the spectrum, you have what's known as a market economy. And most economies in the world, especially the United States, are much closer to being a market economy than being a command economy. Rather than having the government owning the factors of production, deciding who produces what and how much and who gets those things, in a market economy, it's all based on the factory right over here, independent of the government for the most part unless you're in certain fields that might have strong influence from the government, let's say you're a military contractor. But if you're not in one of those fields, if you're fairly independent of the government, what they would say is, "Well, what does the market need?" they might say, "Hey look, the market needs 5,000 cars" "That look like this but then it also needs" "another 2,000 trucks that look like that." and how are they basing it? Well, they might have looked in the past or how well is this car selling, how well is the truck selling. They might look at competitors, in fact in a market economy, you'll often have more competition. The command economies, you might have one really ginormous factory that's owned by the government or a few while here you might have competing factories where they're always "Hey make a pretty good car, we're gonna make one" "that's just as good and it comes in yellow." So once again, you have this notion of competition for people to produce things out in the market and they're also making their best judgment of what does the market actually need. Similarly, you could have your farmers here and you say, "Hey, you know what?" "I've been growing a lot of apples" "but that doesn't seem to be in demand anymore" "so I'm going to grow more, I don't know, peaches" "'cause it looks like the sale of peaches" "are in fashion this year." and similarly, who gets these is not dictated by the government, it's determined by the market. And so let's say this is me, let's say this is you, let's say this is someone else. If I might not be interested in getting a truck but I really need to get a new car for my family so I can drive them around and take vacations and things, and so let's say you wanna get a car too but the market will dictate who gets it. So for example, the factory might set a price for this car, they might say it is 10,000 dollars per car and maybe I'm willing to pay it, maybe I'm not. Maybe I'm just like "Well I really like that blue car" "but I'm not willing to pay 10,000 dollars" "and this yellow car is available for 9,000 dollars" "so I'm going to get that." and the prices themselves won't necessarily be fixed. If they're not selling enough of these cars at 10,000 dollars, they might lower the price to compete with the yellow car at 9,000 dollars. Similarly, if there's a ton of people who are willing to pay the price of this truck, they might raise the price on the truck or produce more of it. In this severe competition, if one firm doesn't do this well on a regular basis, they might go out of business. So there's a strong motivation to be able to meet the needs of the market and then the prices adjust accordingly. And so you might say, "well what are the positives and negatives" "that people generally associate" "with command economies or market economies?". Well, the motivation that's often given for a command economy is some notion of fairness or some notion of equality that when you have a market economy, as a byproduct of this mechanism where different people are competing, some people are innovating more or less, some people might be working harder or less, some people might just get luckier or unluckier, you naturally will have some level of inequality. And some of the original ideas behind command economies like communism where hey we don't like this inequality, we wanna see more fairness. And so we wanna see everyone get exactly the same car. We wanna see everyone get exactly the same number of apples. We don't wanna see all of these competing firms, we want one really big, efficient factory to just churn out these cars. Now it turns out in reality, that's a little bit utopian. Even at the peak of some of these communist economies, there were people who had better access to certain things. People who might have carried favor with the leadership, had more power, who had better apartments, better cars, had more access to resources and people who didn't. In a market economy, yes, there will be some inequality, but the best thing going for it, and the reason why most economies in the world, even ones that are nominally communist like the Chinese economy, have transitioned to a market economy because a market economy is also associated with things like innovation and strong incentives for people to innovate or work or do things. Think about the situation in a command economy. Let's say that you're a manager at this factory here. The government told you to produce exactly 10,000 cars and exactly the type of model, maybe you have an idea for how to make this car more efficient, but no one is really gonna reward you for that. If you're not gonna be able to get paid more so that you can buy more things, you might not be as interested in doing it. While in this situation, you have extreme competition where as soon as this factory or this company is outselling this one, everyone here is gonna think "Wow, we need to innovate." "We need to really work harder" "so that we can take more market share" "from the other company." Similarly, at the individual level, different people might say "Hey, I can only afford the yellow car now" "but gee, I really wish I had the blue car" "so maybe I'm gonna work a little bit harder" "or I'm gonna try to innovate" "or I'm gonna try to start a business." most of the world has transitioned to something much closer to a market economy because overall, even though you have this inequality, it has made more productivity, more innovation, more goods and services available to more people. Now the reality is most economies, as I mentioned, they're close to a market economy, but aren't a perfect market economy. You still have the government very involved in certain industries. In many economies, the government might be in control of healthcare. The government in almost every country has significant influence in things like the military. The government, in say the United States which is considered a fairly capitalist, a fairly strong market economy, the government still does offer social safety nets when the inequality gets too extreme. If someone isn't able to feed themselves, they might get food stamps. If someone isn't able to get healthcare because of poverty, they might get Medicaid. And so there's actually a spectrum between a command economy and a market economy. With most economies actually falling in this inbetween state which is sometimes referred to as a mixed economy. For example, as I already mentioned, the United States which is considered a very capitalist country with a market economy, it still does have some public ownership. The government still does control certain aspects of the economy, it still represents a fairly large chunk of the economy. And so a pure command economy government would control everything, pure market economy, you would have very little that's controlled by the government, but the reality in most of the world, things fall in this mixed economy spectrum.