Planned economy

In a command economy economic decisions are made on behalf of the public by planners who determine what sorts of goods of services will be made available and at what price.

Objections to command economies

Critics of command economies argue that planners cannot detect demand with sufficient accuracy, unless they take into account price signals. For example, in the Soviet Union, shortages were so common that anecdotes abound of citizens joining a queue and waiting hours to buy such as shoes. These shortages were due in part to commands given by the central planners to build say tractors instead of shoes, because the commands were not given to supply the shoe factory with the right amount of leather, because there was no real incentive for the shoe factory to obey what commands were given, and because that there was no real incentive to produce good shoes.

Some have used criticism of command economies as a means of objecting to socialism. However, many socialists have pointed out that socialism in Western Europe occurs in a context of a market economy and not a command economy. Indeed the People's Republic of China terms its own economy a socialist market economy.

In the late-1970's and early-1980's, it became obvious to the leadership of both the Soviet Union and China that the command economy was not producing higher standards of living and there were efforts in both countries to shift to a market economy. However the shift from a command to a market economy proved to be difficult especially since there were no theoretical guides for how to do so. It is generally believed that China largely succeeded in converting to a market economy by first creating a pricing system and encouraging people to enter the market and start new businesses and carefully structuring the transition so that no one would be worse off under a market economy than a command economy and that some people would be much better off. By contrast, the Soviet Union's transition was much more problematic and Russia has yet to generate the high rate of sustained economic growth that China has.