Command vs. Market economics in Zimbabwe:
Mugabe’s decree on prices puts Zimbabwe economy in a tailspin – International Herald Tribune
And a blog post commenting on the news:
Managing Globalization » Economics 101 in Zimbabwe
Our first unit in AP Economics (and Friday’s lecture) examined the differences between command economies and market economies. One of the main points of yesterday’s lecture was that markets work because they result in an efficient allocation of resources towards the right products, using least-cost production methods, and putting those products in the hands of the people whose resources command the highest value in the resource market. If too much of one good is being produced and not enough of another, the “invisible hand” of the market will reallocate resources from the over-produced product to the under-produced product.
One of the reasons command economies fail is that central planners who attempt to control output and price, even when their intentions are to help consumers by assuring enough stuff is produced and available at an affordable price, are in essence acting against a basic economic law: that of supply and demand. In Zimbabwe, where inflation has reached nearly 10,000 percent (that means a candy bar that costs $1 today will cost $100 in a year!!) the president recently attempted to place price controls on all products by forcing merchants to slash their prices in half. The result? Food has vanished from the shelves of markets in Zimbabwe:
Essentials like bread, sugar and cornmeal, staples of every Zimbabwean’s diet, have vanished, seized by mobs of bargain-hunters who denuded stores like locusts in wheat fields. Meat is nonexistent. Gasoline is nearly unobtainable. Hospital patients are dying for lack of basic medical supplies. Power blackouts and water cutoffs are endemic.
Manufacturing has slowed to a crawl, because few businesses can produce goods for less than their government-imposed sale prices. Raw materials are drying up because suppliers are being forced to sell to factories at a loss. Businesses are laying off workers or reducing their hours.
As our first AP unit “Basic Economic Concepts” winds down, this article and blog post seem timely to remind us of one of the core principles of Economics: the importance of prices and markets in allocating resources (land, labor, capital and entrepreneurship) towards producing the goods and services society most wants. Later in the year we’ll examine what happens when markets fail, which they often do; but at this point in the course it is important to understand that despite their failures and shortcomings, free markets rarely experience the chaos associated with command economies of the past, and even the present as the Zimbabwe example shows. In the words of Daniel Altman, the blogger linked above:
The Soviets, Chinese and some of their allies kept their tightly controlled economies going for quite a few decades, though not perhaps with unalloyed success (former backyard smelters in China will get the pun). Mugabe’s version hasn’t even lasted through a change of seasons. Now, there are still a few lingering arguments in academia and policy circles about the merits of command economies. But a poorly planned command economy – no one seems to want that. Can anything short of total collapse follow?
Any thoughts? Why did Mugabe’s attempt to help consumers by keeping prices low only make the problem worse? What does this say about markets versus planned economies? Discuss!
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