2.2 Traditional and Command Economies

Notes

• In a traditional economy, customs and habits passed down through generations answer the three questions. People often do the same work as their parents, as in many historical farming, herding and hunting communities.
• Traditional economies offer stability and clear roles but change slowly and usually have little growth or choice.
• In a command economy (centrally planned economy), the government owns most resources and decides what, how and for whom to produce.
• Examples: the Soviet Union (1922 to 1991) set production targets in five-year plans; North Korea and, to a large degree, Cuba have relied on central planning.
• Strengths claimed: the government can direct resources quickly to big goals and can try to provide basic needs for all.
• Weaknesses observed: planners lack the information prices provide, so command economies often produced shortages of consumer goods and low-quality products; workers had weak incentives; individual freedom was limited.
• Socialism calls for government or public ownership of major industries and more equal sharing of wealth. Communism, as described by Karl Marx and Friedrich Engels in The Communist Manifesto (1848), envisions a classless society with no private ownership of the means of production. In practice, communist states used command economies with one-party rule.