Feb 11 2008
From the Help Desk - business cycles in command economies?
Published by Jason Welker at 9:58 pm under
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WikipediaJessica Ng asks,
Hi Mr. Welker,
I was just wondering whether the business cycle pertains to ALL economies, including both market and command economies?
Great question, Jessica. I thought I’d put this one out there for everyone to discuss. What do you think, readers? Based on what we’ve learned about the business cycle, would you think that this pattern of economic expansion, contraction, recession and recovery would be likely to happen in a command economy, where all economic decisions are made by a central planning agency? In other words, are business cycles unique to market economies, or can an economy run by the government also experience these patterns of instability? Post your thoughts in a comment below.
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About the author: Jason Welker is a teacher at Zurich International School in Switzerland, where he teaches Advanced Placement and International Baccalaureate Economics. Jason was an international school student in Malaysia before studying economics at Seattle University then earning his Masters in Education. He calls Seattle and Northern Idaho home. In addition to maintaining an economics wiki and this blog for economics student and educators, Jason also gives presentations on using Web 2.0 tools in education at workshops and conferences around the world. His economics wiki won the 2007 "Best Educational Wiki" award from the "EduBlog Awards". 
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Since business cycles are the levels of fluctuations in employment, output and income, I think that command economies should not go through the business cycle because all economic activity is controlled by the government. There shouldn’t be a fluctuation in economic activity, as the government allocates resources as they figure, as opposed to responding to consumer-demands like market economies.
I found this on wikipedia, “A planned economy can ensure the continuous utilization of all available resources. If isolated and unresponsive to consumer demand, a planned economy does not suffer from a business cycle. Under an ideally administered planned economy, neither unemployment nor idle production facilities should exist beyond minimal levels, and the economy should develop in a stable manner, unimpeded by inflation or recession.” So I guess command economies will not suffer from business cycles.
Interesting, Chan… so do you think that’s accurate? Seems a bit optimistic to me…
I think the business cycle of a command economy would have little to no fluctuation. But even if they do not have a business cycle, I’m sure they have problems of their own. And Chan, just an FYI, a planned economy and command economy aren’t exactly the same. A planned economy is an economy where the government controls and regulates production while a command economy is an economy where goods are publicly owned. So a command economy may be a planned economy but the reverse isn’t true.
Since our AP Econ class has been defined to focus mainly on market economies, I would say that the textbook-definition business cycle we’ve learned about applies only to market economies. However, that definitely does not mean that command economies are thus perfect economies that “develop in a stable manner, unimpeded by inflation or recession.” In fact, our study of microeconomics as well as our historical knowledge of nations like China should be more than enough to assure us that command economies are market failures and probably more susceptible to inflation/recession. Governments that plan their economies may be able to maintain full employment and production by forcing citizens to take the jobs they are assigned and directing markets to produce respective goods. However, this does not mean that they are producing goods at levels of allocative or productive efficiency, and that means an inevitable outcome of surplus/shortage. Surplus or shortage are factors that will strongly impact the level of consumer spending, which has been identified in our textbook as a main cause of fluctuations in the business cycle. Thus, even though command economies don’t go through a “business cycle” per se in the way that market economies do, they still experience great stages of economic fluctuation and instability that are probably even worse than those of market economies’ business cycles.
I don’t think the business cycle crops up in command economies, because there is almost no opportunity for it to occur in the sense that we know of it. Nearly everything is controlled by the government. However, even though command economies don’t suffer the exact effects of the business cycle, they are nowhere near perfect and do suffer.
So uh, I think that the business cycle does not exist in an ideal (as envisioned by Marx or Mao) command economy. Now, as economics goes, ideal models and whatnot are only estimations of real markets. From Chan’s comment:
“A planned economy can ensure the continuous utilization of all available resources.”
We’re not going to be able to perfectly allocate resources, produce at the edge of the frontier, etc. To sum it up, it exists in the real command economy, rather than the ideal theoretical.
I also agree with some of the previous/above posts how the Business Cycle does not necessarily pertain to all economies in this case the command economy. Although Chan’s comment needs more credibility regardless I see he has a point with his quote on, “a planned economy does not suffer from a business cycle”.
I also think that business cycle does pertain to command economy, because if the command economy is same as the usual eoconomy than why is it called command and the reason it is called command is because it has different system of business cycle.
I haven’t read the comments above but my two cents:
Market economy is pretty much inevitable. Command economies simply provide a greater degree of public services and functions including the ownership of all national land.
I believe even radical countries such as the country north of South Korea have a market economy within the government.
Therefore, regardless whether the supply of goods and services is provided by the “market” or estimated by the government, the phenomenons of inflation and unemployment still apply.
Like many of the people above have already stated, I don’t think that business cycles exist in command economies as the government controls and directs the economy. However, this doesn’t mean that command economies are perfect.
I think that the ideal command economy would have an increasingly productive GDP growing at a constant rate. Since everything is planned out by a central board, there should be no reason for an ideal command economy to not have full employment.
Since the world has not yet seen an ideal command economy, obviously we don’t know what would really happen. However, if we look at history, the USSR had some explosive growth followed by a peak, and then a rapid crash in 1989 (if I remember what I learned in 9th grade correctly at least), so we do know that it went through at least one iteration of the business cycle.
Dang, I find this a truly stumping question. I mean do the command economies have these fluctuations and I’ve seen points for both sides of the stories. I believe that they do. Regardless of the level of control, there will be good and bad times, and these will consist throughout time because of the nature of economies in general, everything is intertwined. Plus many economies even if command still rely on each other so other economies could affect the command economies thus causing them to fluctuate.
Logically thinking, it should not experience the business cycle since government controls all the resources. However, nothing usually goes as planned. So on paper it should not experience business cycles, but in reality it does experience business cycles.
I would think the command economy would experience fluctuations since consumers still has the power to choose what to buy. And even though it is regulated, the government still needs money to run everything, so of course consumer demands matter!
I did not read any of the above comments so pardon me if i repeat anyone’s opinion:
Since I have little right to speak on the matter of Command Economies as I have not studied them extensively, It would be good to look from a historical perspective. It can be said that these cycles would certainly be present in even a highly planned economy by looking at the various economic events of the former USSR and Mao’s China, both of which experienced growth and a final crash that caused the dissolve of the USSR.
In my opinion, i think that yes a government runned economic would also experience a business cycle, i think its a way for the investigators, in this case the government, to learn from their mistakes and reallocation the resources in a more efficient way.
I don’t think command economies experience business cycles that are even close to the extent to which market economies do. Of course, no type of market is perfect, so even though command markets are controlled by the government, they must experience some type of business cycle.