Economy Definition of a Centralized Economic System, Characteristics & Adhering Countries

Economy Definition of a Centralized Economic System, Characteristics & Adhering Countries – For business people, of course, you are already familiar with the word economic system, right? The economic system is a rule and procedure that is made to regulate people’s behavior to carry out an economic activity. Business people are required to understand the economic system in Indonesia.

Because by knowing it, then you can easily find out the effect of business decisions taken at a certain time. Therefore, business people must have knowledge of the economic system that is understood and known.

In Indonesia, the economic system has various types. Such as traditional economic systems, centralized or command economic systems, liberal or capitalist economic systems, and mixed economic systems.

However, in this article, we will discuss a centralized or command economy system. A centralized economic system is a platform for the government to make economic decisions. Gramedia will discuss Starting from understanding, history, to its characteristics. Let’s look at the following explanation of the centralized economic system.

Definition of a Centralized Economic System

Economy Definition of a Centralized Economic System, Characteristics & Adhering Countries

One type of economic system in Indonesia is the Centralized Economic System. A centralized economic system is a platform for the government to make economic decisions. The government has the power to influence economic activity.

This system was created so that the government could more easily collect the means of production that did not depend on the law of supply or demand that worked in a market economy. This centralized economic system is usually neglected in guiding traditional economies.

This centralized economic system is also carried out by means of restrictions on economic activities carried out for members of the community. There are several countries that use a centralized economic system such as the PRC, Russia, and other countries located in Eastern Europe or the former Soviet Union. To better understand the existing economic system, can read the Introduction to Economics book which is below.

History of Centralized Economic System

The history of this centralized economic system originated from the idea of Karl who argued that the centralized economic system had an understanding, namely social communism which was a manifestation of his thinking. According to Karl Mark, a centralized economic system is very effective because it has several advantages, including:

  1. Control of the country’s economic activities that can be easier to do.
  2. All economic activities are the responsibility of the government.
  3. Can address the gap between the poor and the rich.

In addition, Karl Marx also informed that if private property was abolished, there would be no class in society so that it would be useful for all parties. It is this idea that underlies a centralized economic system. However, before Karl Marx stated that, the Dutch East India Company or VOC had used this economic system.

Characteristics of a Centralized Economic System

Because there are various kinds of economic systems, of course there are several things that distinguish one economic system from another. One of the differences is the characteristics possessed by each economic system. The following are the characteristics of a centralized economic system that you need to recognize, and understand, such as:

  1. The supreme power of a centralized economic system is held by the government.
  2. The private sector does not have a large influence on the market or existing resources.
  3. Individual rights are not recognized because everything is regulated by the government
  4. Economic resources in the form of capital, means of production, and land belong to the government.
  5. Individuals do not have the freedom to own or produce a resource.
  6. The products that are circulated in several markets are based on the wishes of the government, not the creations of the people. So there will be gaps in meeting the needs. Because it will be a product that is not produced but is needed by the community.
  7. The private sector has no right to carry out economic activities freely.
  8. The government has full responsibility for the decisions of economic activity which consists of production, distribution, and consumption.
  9. All citizens and society are employees for the state.
  10. Citizens cannot be free to determine what they want
    Communities involved in economic activity in this economic system need to follow the rules that have been set by the government.
  11. The type of work and the division of labor are held directly by the government
  12. Individual freedom in doing business does not exist or is not recognized
  13. Prices and interest rates are set by the authorities, namely the government

In Indonesia itself, there is a system that applies in the form of partial thinking that focuses on the meaning of normative words that should be attached to the Indonesian Economic System. Learn more in the book The Indonesian Economic System Interpretation of Pancasila and the 1945 Constitution.

An Example of a Centralized Economy

The economic system has various types, business people are required to be able to understand the science of each economic system. In order to make it easier for business people to understand, examples of each economic system are provided. One of them is an example of a centralized economy. There are several examples of centralized economic systems. What are some examples? Let’s see the explanation below:

1. Primitive Communism

The first example of a centralized economic system is called primitive communism. An example of this is a system that has existed among all people and still persists in many uncivilized countries. All production processes contain the level of society which is under the direction of the head or council of elders. So the individual has no responsibility.

One example of the case is the economy and politics of Russia during Communism where before the collapse of the Soviet Union which is currently separated from this, which is discussed in the book Politics & Economics of Russia After Communism, where the rise of the country to organize the political-economy both at home and abroad. .

2. Feudal System

The next example of a centralized economic system is called the feudal system. In the feudal system, land is the only means of production that is very important. Usually the land was worked under some form of communal control under the direction of bodies such as the royal court. Individual responsibility is the most basic thing.

3. Collective States

The next example of a centralized economic system is called collective states. These include fascist Italy and Nazi Germany. Here the hierarchy of control is fully evident, but even though all production is directed and all capital is controlled by the state, legal ownership of the property remains legally in the hands of the private who receives a share of the proceeds from its sale, generally useful as a process which Lord Keynes described as “euthanasia.” from the renter.”

In understanding more deeply about the history of Nazi Germany, which was originally one of the countries with industrial and cultural progress in the world, it became a crime in history.  can learn this in the book Nazi Germany and the Jews below.

During the last two forms of the centralized economic system, the direction of production will still be left in the hands of a ruler who appoints planners to manage an economy that is subject to his control in which political considerations play a decisive role.

Centralized economic systems have considerable appeal to many societies. This can free society from responsibility for the behavior of each individual’s life as long as all adhere to the prevailing collective ideas and emotions.

Countries that Implement a Centralized Economic System

Countries that implement a centralized economic system usually have a communist system of government. Here are 3 examples of countries that implement a centralized economic system.

1. North Korea

The economic system of the North Korean state is fully owned and managed by the government. Almost all business fields that are important for the survival of the community are controlled by the state. Here the community only acts as an employee or employee.

Therefore, the people of North Korea are very dependent on the government to meet their needs. Starting from food, housing, as well as education and health. Finance in North Korea is prioritized to finance the nuclear technology they are developing.

2. China

China began to implement a centralized economic system when it was under the rule of Mao Zedong. They imitated the Soviet Union and the communist party. Even though China has started to carry out economic reforms, the influence of the communist party’s politics is still very strong.

However, China has allowed entrepreneurs to seek profit. However, there are certain rules, namely not to interfere with the public interest and government power.

3. Cuba

Cuba is the next country to implement a centralized economic system. This country was influenced by the Spanish state during the occupation of the allied forces. When the Soviet Union collapsed, the country experienced a food crisis. This happens because Cuba is very dependent on supplies of oil, food, and other agricultural materials.

Then after that, Cuba implemented changes in the economic sector. Starting from agriculture, education, and also community empowerment.

Impact of a Centralized Economic System

A centralized economic system has several direct impacts on society and the country. The following are the effects of a centralized economic system:

1. Able to Reduce Unemployment Rates

With the implementation of a centralized economic system in several countries, it is possible to minimize or suppress the unemployment rate in that country. Power is held entirely by the government in all factors of production and resources.

As in North Korea, the employees of the state-owned enterprises come from the original citizens of their own country. So that there are wide job opportunities for North Korean citizens.

2. Responsibilities of the economy to the government

As a result of the government as the holder of full and special control, the government is responsible for all these economic conditions. Therefore, the government must be able to innovate more in economic policies in order to become more stable, develop and advance in order to achieve the welfare of its citizens.

3. There is a Guarantee for the Community

A developed economy must aim for the prosperity of the people. With a centralized economic system, production activities are controlled by the government, and the government can also make the right products and services needed by its citizens.

4. Ease of Price Control and Equity

The centralized economic system is controlled by the government so that the price conditions for products and services will be easy to control. Business actors and the parties concerned cannot lower prices arbitrarily, they can only earn profits.

Therefore, countries that use a centralized economic system need to have a price that leads to stability so that it is easy to achieve economic demands.

5. Inflation is Easy to Control

Inflation in Indonesia was caused by the decline in the rupiah. However, for countries with a centralized economic system, inflation will be easy to control and relatively stable.

6. Domestic Market Conditions Can Run Smoothly

The government, which has full authority, can make regulations for its domestic market more freely. The government can produce goods to be sold to their own country, according to the needs of the community. And will always benefit. Import activities in countries with a centralized economic system can be carried out optimally.

Advantages and Disadvantages of a Centralized Economic System

This economic system turns out to have advantages and disadvantages that have a direct impact on the community and the country. Here are the advantages and disadvantages of a centralized economic system that you need to know:

Advantages of a Centralized Economic System

1. Can Help in Reducing Unemployment

With the existence of a centralized economic system, it can help in reducing the unemployment rate in the country. This is because the government has full control over all factors of production and existing resources.

For example, in North Korea, where SOE employees must be native North Korean citizens. Therefore, job opportunities for citizens themselves are very wide open.

2. Economic Responsibility to the Government

In this system, the government is in full control. Therefore, the government must also be responsible for the economic condition of the country. The government must also be able to provide innovation by making economic policies in order to make it stable, developing, and of course advanced. So that the welfare of the people will be guaranteed.

3. There is a guarantee for its citizens

The economy of a country can be said to be advanced if its economic system aims for the welfare of its people. With the existence of a centralized economic system, the factors of production will also be controlled by the government. So that the government can create products or services that are right and needed by its citizens.

4. Easy to Control Prices

Because this economic system is directly controlled by the government, the condition of product prices on the market can also be controlled easily. Private parties or business owners do not have the freedom to increase or decrease prices arbitrarily.

They can only make profit. Therefore, countries that adopt a centralized economic system usually have prices that tend to be more stable and their economic demands easy to achieve.

5. Inflation is Easy to Control

Inflation conditions that usually occur in our country are generally always a factor that causes the rupiah to decline. However, in countries that implement a command economy system, it will be easier to control inflation and make it more stable.

6. Market Conditions Will Run Smoothly

In this economic system, the government can make market regulations in its country more freely. The government can produce goods for sale in their own country.

However, the products that are marketed are in accordance with the needs of the community and still make a profit. Therefore, import activities in countries that implement a centralized economic system can be carried out optimally.

Disadvantages of a Centralized Economic System

1. Mobilization Runs Fast: Reducing Community Needs

The existence of rapid mobilization makes this economic system able to reduce other needs needed by the community. For example, the government will tell workers about the work they need to fulfill to produce a good that society needs.

2. Produce Products That Are Not Based On Consumer Demand

But on the other hand, there are products that are produced not based on consumer demand. Until in the end, many people are looking for ways to meet their needs, one of which is the existence of the black market.

With the black market, they can buy or sell goods that are not produced by a centralized economic system. The government’s efforts to control the black market will actually weaken their support for the existing system.

Maybe the country does produce a lot of products. However, they often forget about other products that are actually needed by the community. It is difficult for the government to obtain the latest information regarding consumer needs.

In a centralized economic system, market prices are also determined by the central government. Where they no longer measure and control market demand. Therefore, rationing is often a solution used.

3. Stifling Innovation

On the other hand, a centralized economic system severely hinders innovation. Because the government has a full role in regulating all existing economic activities. So it is not possible to create new solutions or innovations.

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