Question

Are market economies necessarily capitalist and are command economies necessarily socialist? Why or why not?

Answer 1

Market economies and command economies occupy two polar extremes in the organization of economic activity. The primary differences lie in the division of labor, or factors of production, and the mechanisms that determine prices.

The activity in a market economy is unplanned; it is not organized by any central authority but is determined by the supply and demand of goods and services. The United States, England, and Japan are all examples of market economies. The most common title associated with a market economy is capitalism. Individuals and businesses own the resources and are free to exchange and contract with each other without a decree from government authority. The collective term for these uncoordinated exchanges is the "market." As prices are determined naturally with the economic forces demand and supply. Consumer preferences and resource scarcity determine which goods are produced and in what quantity; the prices in a market economy act as signals to producers and consumers who use these price signals to help make decisions. As, government plays a minor role, which lets business compete. And with this, Capitalism lets people choose what kind of work they want to do and where they want to work. Capitalism lets people decide what they want to do with their money if they want to put it into a retirement account or in the stock market. But with this there is the disadvantage of Capitalism as well, barriers between people in terms of how much wealth they have or how much money they make. Another is that, as government control is so limited that it lets a few businesses to dominate their industry.

Alternatively, a command economy is organized by a centralized government which owns most, if not all, businesses and whose officials direct all the factors of production. China, North Korea, and the former Soviet Union are all examples of command economies. Under a command economy, governments own the factors of production such as land, capital, and resources, and government officials determine when, where, and how much is produced. This is also sometimes referred to as a planned economy. Since decision-making is centralized in a command economy, the government controls all of the supply and sets all of the demand. Prices cannot arise naturally like in a market economy, so prices in the economy must be set by government officials. In a command economy, macroeconomic and political considerations determine resource allocation, whereas, in a market economy, the profits and losses of individuals and firms determine resource allocation. Command economies are concerned with providing basic necessities and opportunities to all members. The government will ensure more equal distribution of income and wealth. It has the power of decision making. It provides a minimum standard of living for all citizens. To all this, there is little consumer choice and little variety of goods and services. Loss of individual freedom. Productive inefficiency due to a lack of competition and no profit motive. So, a command economy would be made based on the political self-interest of government officials and not to promote economic growth. Thus, we can say that command economies necessarily socialist.

Conclusion: Market economies utilize private ownership of the means of production and voluntary exchanges/contracts. While in a command economy, governments own the factors of production such as land, capital, and resources. In reality, all economies blend aspects of the two.