By comparison, the two theories are complete opposites of each other. Free enterprise as a concept refers to a market system where private businesses have the freedom to compete with minimum government regulations. In such a system, the only regulations imposed by the government are those aimed at protecting the interests of the public and maintaining a balance in the national economy. On the other hand, a command economy is one characterized by the control of the central government of the respective county. Therefore, in a command economy, the economic decisions are made by the government, as opposed to the case of a free enterprise where the government plays no role in the economy apart from what is necessary.
Characteristics of Free Enterprise
Further differences between the two can be found in their characteristics. For example, for the case of a free enterprise, the factors of production are controlled by private entities. The private ownership of these production factors consequently enables the private companies to generate their income. Also, the fact the companies themselves own these production factors, makes it much more convenient for them to carry out their operations, enabling them to produce high quality products, in the process generating good profit margins (Boardman, Anthony & Vining). As the name suggests, the market in this economic system is free. In that, the only factor influencing the prices of commodities are the laws of supply and demand. Therefore, using these laws, the businesses competing under this market system fight for market share, in an effort to achieve favorable profitability. To do this, goods and service are made available to the consumer in the highest price possible, while trying to maintain the cost of producing these goods and services at a minimum. With regards to the government, its main role in free enterprise is to level the playing field, to ensure that competitors compete in a manner that is fair. Another major characteristic of the free enterprise is embedded in the ownership of companies. Here, corporations are owned by shareholders whose control of the corporation is directly determined by the number of shares they hold. Usually, corporations have many shareholders such that they cannot all have a say in the business. For this reason, they elect representatives in the form of board of directors.
Characteristics of a Command Economy
As established in the definition, this type of economy is characterized by heavy government control. In other words, the government creates the economic plan for the given country, in some instances laying out plans that govern the economy for more than five years. The plans affect every sector of the economy and are tied to the general societal needs. For the plans spanning five years and more, such plans are further broken down into short-term objectives that every economic sector must achieve over the course of the given time. In addition to having a central plan, the government subsequently uses this plan as a blue print for the distribution of the resources available in that country. Therefore, it is the government that is in control of the factors of production in the given country, including labor, capital and the natural resources that the country may be endowed with. For this reason, such a government tries to ensure that the resources are used in the most efficient of ways, including employing the different qualifications of each citizen in the different relative sectors, in the process eliminating unemployment. The government control of the factors of production in turn leads to control of the products and services that will be produced in that economy. As a result, the prices of these goods and services will consequently be determined by the government. This is achieved through the use of direct price controls and quotas, to regulate the prices of goods and services in the country. The purpose for controlling prices in this economy is to enable the government to provide the citizens with sufficient basic commodities, including proper housing and food. Also, as opposed to the free enterprise where businesses are privately owned, in a command economy, the government completely owns the large monopolies operating in the given country. Such governments view certain industries as strategic to their goals, for this reason, they establish and control single companies that will solely operate in those industries. Example of industries viewed as strategic by governments with command economies include the finance industry, automotive industries and in other utility industries. Lastly, the central economic plans laid out by governments in the accompanied by government directives, regulations or laws in some cases that will ensure their implementation. This ensures that businesses in the country comply with the requirements provided by the central plan so as to guarantee the achievement of the goals intended by that central plan.
Advantages and Disadvantages
Free Enterprise
The main advantage of this economic system is the fact that in a free enterprise, the goods and services that will be produced will be the ones desired by the public and will consequently be made available to them at a price that they will accept. The price will be acceptable, in that, the consumer be willing to pay highly for the goods and services they desire. Therefore, the most profits here can only be obtained if the business produces the goods and services desired most by the consumer. Also, to maximize their profits, businesses tend to minimize their production costs. That is, low costs translate to high profits. The need to produce goods and services that uniquely satisfy the needs of the consumer creates and fosters innovation in free enterprise. Consequently, the fact that consumers pay well for the goods and services they desire ensures proper reward for innovation (Friedman).
The disadvantages associated with free enterprise include the low probability of survival for business lacking a competitive edge. Therefore, the plights of the old, children, those who have any forms of developmental challenges as well as their caretakers will be too unequipped to survive in such an environment. Equal opportunities are therefore not available in free markets as the system favors the individuals or business with a competitive advantage over their rivals. Lastly, free enterprise lacks the necessary regulations that control negative implications of doing business such a pollution as a result of the production process.
Command economy
The advantages of a command economy include the ability of the government to effectively mobilize the required economic resources for the attainment of their central goal. For example, governments are better positioned to implement huge projects due to their access of the necessary production factors when compared to private corporations (Carney). Moreover, the end goal of the central plans laid out by governments in command economies usually have direct benefits on the society at large, as opposed to free enterprise where the main objective is to generate profits. Specifically, among the societal benefits that can be enjoyed from central planning include reduced unemployment rates, better housing and infrastructure and affordable prices for the basic needs.
Despite these clear benefits that a command economy has on the society and country at large, the system is also not short of disadvantages. For instance, the fact that the governments in such economies have the ability to rapidly mobilize the required resources in most cases means that this mobilization of resources will be at the expense of the society. The society feels the weight of this mobilization as citizens are denied movement since they are required to perform certain tasks in specific regions as outlined in the central plan. Also, the goods and services produced, unlike in free enterprise, do not cater to the needs of the consumer. Instead, they are produced out of the directive by the government. For this reason, the need by the citizens to fulfill their desires leads to the formation of black markets within the command economy. The black markets therefore provide the goods and services needed by the consumer but not produced by the economy controller, the government. The fact that prices are predetermined as opposed to being dictated by the demand, product rationing becomes essential in such economies. In addition, a command economy discourages innovation, as straying from the central plan is punished while adhering to it is rewarded. Lastly, the inability of command economies to meet the domestic needs of its consumers further creates a challenge when attempting to meet the needs of the international market.