Compare the Ways in Which Resources are Allocated in Market and Command Economies.(10)
Command Decisions About Clothing
Despite those apparent similarities, if we compare such market economies as those of North America and Europe to the command economies found in states such as the former Soviet Union, Eastern Europe, and parts of Asia, the processes used to determine what products to make, how to make them, what prices to charge for them, and who will consume them are starkly different. To see those differences more clearly, we must consider how production and sales decisions are made in the two kinds of systems for a specific kind of product, say shirts and blouses.
In command economies, government committees of economic planners, production experts, and political officials establish production levels for these goods and designate which factories will produce them. The central planning committees also establish the prices for the shirts and blouses, as well as the wages for the workers who make them. It is this set of central decisions that determines the quantity, variety, and prices of clothing and other products.
Predictably, the products from this limited number of choices sell out quickly. This is because factories failed to meet their production quotas, invariably production slows as there is no real working incentive, or because the central planning group underestimated how many shirts (for example) people want to buy at the prices they set. In either case, unless the planners take steps to increase production, raise prices, or both, the shortages will continue.
As the number of people living in the command economies increases, along with the number and sophistication of new products, it becomes harder and harder for central planners to avoid or eliminate shortages of the many things consumers want -- or surpluses of the products they don't. With more products, more people, and rapidly changing production technologies, the central planners face an explosion in the number of decisions they have to make, and in the number of places and ways where something could go wrong in their overall plan for the national economy.
This doesn't happen in the market economies, because the two economic systems work in very different ways. To begin with, no government ministry decides how many shirts or blouses to manufacture, or what styles and colours. Anyone -- individual or company -- can decide to produce and sell shirts and blouses in a market economy, and many will do just that if they believe they can sell these products at prices high enough to cover their production costs -- and earn more making such clothing than they can doing something else. This leads to direct competition between different firms making and selling these products, and that competition is one of the basic reasons why there are generally so many different styles, fabrics, and brands of clothing for consumers to choose from in market economies.
Of course, if consumers decide to buy just one kind of shirt and blouse month after month and year after year, producers would soon learn that there was no reason to produce any other kind. [next page]