Market Economies & Command Economies
An economic system is a set of institutions and beliefs about how economic decisions should be made in a
particular society. The economic system of the United States is a modified market economy. In a market economic
system, most decisions about what goods and services to produce, how to produce them, and who will get to use
them are made by private individuals and business firms. In the United States, some economic decisions are made
by our federal, state and local governments; that’s why we call our system a modified market economy.
In a command economy, economic decisions are made by some authority rather than by individuals. Until
recently, the communist economy of the Union of Soviet Socialist Republics (the U.S.S.R., or Soviet Union) was the
best known example of a command economic system. Almost all economic decisions were made by the central
government planning agency, Gosplan. All factories, farms, shops and stores, transportation and communication
systems and power sources were owned by the government. All workers were government employees.
But in the late 1980’s the USSR began to move away from a command system, introducing market
institutions such as private ownership of some farmland and small businesses. What caused this dramatic shift away
from government planning? Most economists believe that a system such as the communist economy of the former
USSR does not provide incentives that encourage people to work hard and to produce high quality goods and
services the consumers what to buy at reasonable prices.
1. What kind of economic system does the United States have?
2. In a free market economy, who makes the economic decisions?
3. Why is the United States’ economy considered a modified market economy?
4. In the former Soviet Union, who made the economic decisions?
5. What is the probable reason for the failure of the Soviet economic system?
6. How did the Soviet economy in 1987 differ fundamentally from the US economy?
7. What incentives do US business firms and workers have to work hard that were not present in the USSR?
8. If you were an economic adviser to the government of the USSR in 1987, what suggestions would you make
to improve the efficiency of its economy?