Command versus Market Determination

For over a century a great debate engaged on the relative merits of the command principle versus the market principle for coordinating economic decision in practice. The former USSR, the countries of Eastern Europe, and China were command economies for much of this century. The US and most of the countries of Western Europe were, and are, primarily market economies. The successes of the USSR and China in the early stages of industrialization suggested to many observers earlier in this century that the command principle was at least as good for organizing economic behaviour as the market principle, if not better. In the long haul, however, the failure of planned economies pointed out that there were some managing problems of the centralized economy. For some commentators, this

shows the superiority of decentralized markets over centrally planned ones as coordinating and signaling devices. It would be wise to say that the failure of centralized economies allows us to remark the more flexible coordination pattern of mixed economies with substantial elements of market determination over fully planned economies. However, it does not demonstrate, as some have asserted, the superiority of completely free market economies over mixed economies because of some

basic problems of the functioning of the market economy, as the imperfect and/or incomplete information and other asymmetry problems among individuals. As Lipsey et al. (1993, p. 9) remark it, there is no guarantee that free markets will handle, on their own, such urgent matters as controlling pollution and producing sustainable growth. Mixed economies, with significant degrees of government intervention, are needed to do these jobs. Furthermore, acceptance of the free market over central planning does not provide an excuse to ignore a country’s pressing social issues. Acceptance of the benefits of the free market still leaves plenty of scope to debate the kinds,

amounts, and directions of government interventions into the workings of our market-based economy that will help to achieve socials goals. It follows that there is still room for disagreement about the degree of the mix of market and government determination in any modern mixed economy-room

enough to accommodate such divergent views as could be expressed by conservative and social democratic parties in parliamentary regimes. People can accept the free market as an efficient way of organizing economic affaires and still disagree about many things. A partial list includes the optimal amount and types of government regulation of, and assistance to, the functioning of the economy; the

types of measures needed to protect the environment; whether health care should be provided by the public or private sector; and the optimal amount, and design, of social services and other policies intended to redistribute income from more to less fortunate citizens.