The Price of a Centrally Planned System

Grace Weinberger- Aparicio- HB- afternoon

There are two main types of economic systems being leveraged to drive various country’s economies, one being the price system and the other being the centrally planned system. While each system possesses certain merits, one system fails while the other succeeds. A country that uses a centrally planned system is set up for destruction while the country that chooses the price system is set up for success because people are motivated by incentives.

A centrally planned economy is also known as a command economy where the government maintains full control of production, distribution and prices. A price based system is also described as a free enterprise system where the individuals take control and prices can adjust based on supply and demand.

In a price system there is an incentive to do more because the result of doing more is gaining more. In the book, Naked Economics, it provides a scenario when a rhino is endangered there is a limited supply of rhino horns and thus this drives up the price of rhino horns. A competition occurs due to the scarcity of the horn and the demand for it. It states in Naked Economics, “Indeed, quite the opposite force is at work; as the black rhino becomes more and more imperiled, the black market price for rhino horn rises, providing even more incentive for poachers to hunt down the remaining animals.” [1] Producers want to sell more of an item if they know they can sell that item for a greater price, this explains why poachers started hunting and selling the black rhinos. The government made it illegal to hunt black rhinos due to their scarcity, but the governments in many Asian countries did not create an incentive for people to stop hunting. People will do what it takes to improve themselves so we need an incentive to stop doing something if that something originally made us money. Overall, incentives drive people to perform to the best of their abilities.

On the other hand, a command economy is void of incentives and competition resulting in a lack of self-motivation and initiative. If all people are given the same benefits and the limited goods are the same and cost, the incentive to gain more is lost. Naked Economics gives an example of teachers being paid the same, “Since the most talented teachers are likely to be good at other professions, they have strong incentive to leave education for jobs which pay is more closely linked to productivity.” [2] If people are not rewarded for doing a good job, the result will be a group of people that will not give maximum effort since the results are all the same. This will cause the best quality teachers to pursue careers and leaving our children with below average instruction.  Centrally planned governments end up failing because people stop producing because there is no benefit in doing so. In general, having a government that provides the same benefits to everyone sounds good but, it lacks one key component, incentives.

Both economic systems exist in the world today, but the countries that are successful are those that use the price system. The price system promotes innovation and incentivizing hard work resulting in a stable economy.

 

 

[1] Wheelan, Charles. Naked economics: undressing the dismal science. (New York: W.W. Norton & Company, 2010), 30.

 

[2] Ibid. 36

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