Command economy, economic system in which the means of production are publicly owned and economic activity is controlled by a central authority that assigns quantitative production goals and allots raw materials to productive enterprises. In such a system, determining the proportion of total product used for investment rather than consumption becomes a centrally made political decision. After this decision has been made, the central planners work out the assortment of goods to be produced and the quotas for each enterprise. Consumers may influence the planners’ decisions indirectly if the planners take into consideration the surpluses and shortages that have developed in the market. The only direct choice made by consumers, however, is among the commodities already produced.

Prices are also set by the central planners, by they do not serve, as in a market economy, as signals to producers of goods to increase or decrease production. Instead, they are used mainly as instruments of the central planners in their efforts to reconcile the total demand for consumer goods with the supply available, allowing also for revenues to the state.

The central authority in a command economy assigns production goals in terms of physical units and allocates physical quantities of raw materials to enterprises. The process for a large economy with millions of products is extremely complex and has encountered a number of difficulties in practice.

Central planning of this kind is not without apparent advantages, however, since it enables a government to mobilize resources quickly on a national scale during wartime or some other national emergency. But the costs of centralized policies are real and quite high. Moreover, it is often the case that much of the burden of these costs is shifted away from the government. One example is the military draft, which largely shifts the cost of mobilizing troops from the government to the draftees, who could be employed at a higher rate of pay elsewhere.

The only way by which you can effectively redistribute wealth, is by destroying the incentives to have wealth.

The most fateful results of inflation derive from the fact that the rise of prices and wages which it causes occurs that different times and in a different measures for various kinds of commodities and labor. Some classes of prices and wages rise more quickly and rise higher than others. Not merely inflation itself, but its unevenness, works havoc.

While inflation is under way, some people enjoy the benefit of higher prices for the goods or services they sell, while the prices for goods and services they buy have not yet risen or have not risen to the same extent. These people profit from their fortunate position. Inflation seems to them “good business,” a “boom.” But their gains are always derived from the losses of other sections of the population. The losers are those in the unhappy situation of selling services or commodities whose prices have not yet risen to the same degree as have prices of the things they buy for daily consumption.

People sometimes call inflation a special way of “taxing” a country’s citizens. This is a dangerous opinion. And it is wholly untrue. Inflation is not a method of taxation, but an alternative for taxation. When a government imposes taxes, it has full control. It can tax and distribute the burden any way it consider fair and desirable, allotting a larger share of the tax burden to those who are better to carry it, reducing the burden on the less fortunate. But in the case of inflation, it sets in motion a mechanism that is beyond its control. It is not the government, but the operation of the price system, that decides how much this or that group will suffer.

And there is another important difference. All taxes collected flow into the vaults of the public treasury. But with inflation, the public treasury’s gain is less than what it costs the individual citizen, since a considerable part of that cost is drained off by the profiteers, the minority that benefits from the inflation.

Trade is simply the transfer of ownership of goods and services. On the other hand, commerce includes all the activities necessary to facilitate trade, which means to deliver goods or services from manufacturers to consumers. Such activities include arranging transportation, providing banking and insurance services, promoting the products via advertising and storing the product in warehouses, etc. to complete this entire process successfully.

You think that mathematicians and computer engineers or mechanical engineers or doctors are first. They’re very important, but they’re not first. They’re second.

There was a country that had the best mathematicians, the best physicists, the best metallurgists in the world. But that country was very poor. It’s called the Soviet Union.

What comes first is markets. This was the main thing that I tried to bring to the Israeli economy, in my own way.

Capitalism 1.0 during the 19th century entailed largely unregulated markets with a minimal role for the state (aside from national defense, and protecting property rights).

Capitalism 2.0 during the post-WW2 years entailed Keynesianism, a substantial role for the state in regulating markets, and strong welfare states.

Capitalism 2.1 entailed a combination of unregulated markets, globalization, and various national obligations by states.

He argued that the market mechanism is the only way of deciding what to produce and how to distribute the items without using coercion.

Stated differently, the reason for a business’s existence is to turn a profit. The profit motive functions according to rational choice theory, or the theory that individuals tend to pursue what is in their own best interests.

Competition is widespread throughout the market process. It is a condition where “buyers tend to compete with other buyers, and sellers tend to compete with other sellers.” Competition results from scarcity, as it is not possible to satisfy all conceivable human wants, and occurs as people try to meet the criteria being used to determine allocation.

Mercantilism is a nationalist economic policy that is designed to maximize the exports and minimize the imports for an economy. In other words, it seeks to maximize the accumulation of resources within the country and use those resources for one-sided trade. It promotes imperialism, colonialism, protectionism, currency manipulation, and tariffs and subsidies on traded goods to achieve that goal.

Tenets of mercantilism:

  • Every little bit of a country’s soil be utilized for agriculture, mining or manufacturing.
  • All raws materials found in a country be used in domestic manufacture, since finished goods have a higher value than raw materials.
  • A large, working population be encouraged.
  • All exports of gold and silver be prohibited and all domestic money be kept in circulation.
  • All imports of foreign goods be discouraged as much as possible.
  • Where certain imports are indispensable they be obtained at first hand, in exchange for other domestic goods instead of gold and silver.
  • As much as possible, imports be confined to raw materials that can be finished in the home country.
  • Opportunities be constantly sought for selling a country’s surplus manufactures to foreigners, so far as necessary, for gold and silver.
  • No importation be allowed if such goods are sufficiently and suitably supplied at home.

The policies have included:

  • High tariffs, especially on manufactured goods.
  • Forbidding colonies to trade with other nations.
  • Monopolizing markets with staple ports.
  • Banning the export of gold and silver, even for payments.
  • Forbidding trade to be carried in foreign ships.
  • Subsidies on exports.
  • Promoting manufacturing and industry through research or direct subsidies.
  • Limiting wages.
  • Maximizing the use of domestic resources.
  • Restricting domestic consumption through non-tariff barriers to trade.

The Nobel laureate Herbert Simon, who rejected the assumption of perfect rationality in mainstream economics, proposed the theory of bounded rationality instead. This theory says that people are not always able to obtain all the information they would need to make the best possible decision. Simon argued that knowledge of all alternatives, or all consequences that follow from each alternative, is realistically impossible for most decisions that humans make.