Feb 11 2008

From the Help Desk – business cycles in command economies?

Jessica 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 teaches International Baccalaureate and Advanced Placement Economics at Zurich International School in Switzerland. In addition to publishing various online resources for economics students and teachers, Jason developed the online version of the Economics course for the IB and is has authored two Economics textbooks: Pearson Baccalaureate’s Economics for the IB Diploma and REA’s AP Macroeconomics Crash Course. Jason is a native of the Pacific Northwest of the United States, and is a passionate adventurer, who considers himself a skier / mountain biker who teaches Economics in his free time. He and his wife keep a ski chalet in the mountains of Northern Idaho, which now that they live in the Swiss Alps gets far too little use. Read more posts by this author

18 responses so far

18 Responses to “From the Help Desk – business cycles in command economies?”

  1. kevinchiuon 11 Feb 2008 at 11:26 pm

    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.

  2. Chan Min Parkon 12 Feb 2008 at 11:59 am

    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.

  3. Jason Welkeron 12 Feb 2008 at 12:11 pm

    Interesting, Chan… so do you think that's accurate? Seems a bit optimistic to me…

  4. Charlie.Gaoon 12 Feb 2008 at 1:49 pm

    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.

  5. Alice Suon 12 Feb 2008 at 6:19 pm

    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.

  6. Christina Huon 12 Feb 2008 at 6:58 pm

    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.

  7. timothysunon 12 Feb 2008 at 7:22 pm

    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.

  8. MichaelChowon 12 Feb 2008 at 10:40 pm

    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".

  9. mina.songon 13 Feb 2008 at 1:33 am

    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.

  10. andyxuon 13 Feb 2008 at 9:04 am

    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.

  11. Kristie Chungon 13 Feb 2008 at 9:55 am

    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.

  12. Howard Jingon 13 Feb 2008 at 6:15 pm

    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.

  13. Drew Venkatramanon 13 Feb 2008 at 8:20 pm

    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.

  14. Mondon 13 Feb 2008 at 9:38 pm

    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.

  15. Cassy Changon 14 Feb 2008 at 1:23 am

    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!

  16. Chris Seahon 14 Feb 2008 at 2:16 pm

    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.

  17. Howard Linon 14 Feb 2008 at 9:46 pm

    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.

  18. Jonathan Lauon 17 Feb 2008 at 6:07 pm

    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.