Economy

What is a Command Economy?

BY Jaber Posted August 10, 2023 Update August 14, 2023
What is a Command Economy?

Discover what a command economy is and its implications on national growth and individual freedom. Detailed analysis of its pros and cons.



Table of Contents


Background of Economies

Economies have always been part of human societies, even when we were just hunter-gatherers. The concept has evolved over millennia, giving rise to various types of economies, each with its distinct characteristics and philosophies.

Understanding the Concept of Economy

What is Economy?

An economy, in simplest terms, is the method by which a society or nation manages its resources. It's the blueprint that dictates who gets what, when, and how.

which statement best describes a command economy?

A command economy is best described as an economic system where the government or a central authority exercises significant control over the allocation of resources and the means of production. In this system, the government determines what goods and services are produced, how they are produced, and how they are distributed. It often involves central planning and decision-making, with limited or no involvement of market forces. Private ownership of key resources and means of production is restricted, and individual economic freedoms are limited.

Types of Economies

There are four primary types of economies: traditional, market, mixed, and command. Each has unique characteristics and mechanisms for the allocation and management of resources.

Focus on Command Economy

What is a Command Economy?

A command economy, also known as a centrally planned economy, is one where the government or a central authority makes all the decisions concerning the production and distribution of goods and services. It's an economic system where 'Big Brother' decides what you produce, how much you produce, and at what price you sell it.

How Does a Command Economy Work?

In a command economy, the central authority has a hand in virtually every aspect of economic life. It determines what goods and services to produce, sets prices, and allocates resources. In essence, it's a top-down approach to managing an economy.

Characteristics of a Command Economy

Centralized Control

One of the hallmarks of a command economy is centralized control. The government holds the reins of economic decision-making, reducing the influence of market forces.

Planned Economy

Command economies are often synonymous with planned economies. The central authority devises a comprehensive plan that guides the production and distribution of goods and services.

Limited Private Sector Influence

In a command economy, private enterprises have a limited role to play. Often, major industries are owned and controlled by the state.

Focus on Social Welfare

Command economies often prioritize social welfare over individual profit. The idea is to ensure equitable distribution of wealth and minimize disparities.

Pros and Cons of Command Economy

Pros

Command economies have several benefits. They can mobilize economic resources quickly, ensure job security, and prioritize social welfare. Plus, they can avoid the pitfalls of overproduction and volatile market fluctuations.

Cons

On the downside, command economies often suffer from a lack of efficiency, reduced innovation, and limited consumer choice. Plus, the absence of a competitive market may lead to a lack of motivation to improve.

Examples of Command Economies

Historical Examples

Historically, command economies were prevalent in the Soviet Union and other socialist countries during the 20th century.

Contemporary Examples

Today, countries like North Korea and Cuba are considered to have command economies, though most nations have moved towards mixed economies.

command economy countries

There have been several countries in history that have implemented command economies to varying degrees. However, it's important to note that the extent of command economy practices can vary, and some countries may have transitioned to mixed or market-based economies over time. Here are a few examples of countries that have had elements of a command economy at some point:

  1. Soviet Union: The Soviet Union, officially known as the Union of Soviet Socialist Republics (USSR), had a centrally planned economy from its formation in 1922 until its dissolution in 1991. The state had extensive control over resource allocation, production decisions, and distribution.

  2. China (during the Mao era): Under the leadership of Mao Zedong, China implemented a command economy from the establishment of the People's Republic of China in 1949 until economic reforms were initiated in the late 1970s. During this period, the state exercised significant control over the economy, including collective farming and central planning.

  3. North Korea: North Korea, officially known as the Democratic People's Republic of Korea (DPRK), operates with a centralized command economy. The state controls major industries and sets production targets, with limited market mechanisms and private enterprise.

  4. Cuba: Cuba has maintained a command economy since the Cuban Revolution in 1959. The state controls key sectors such as agriculture, industry, and services, and central planning plays a significant role in resource allocation and economic decision-making.

  5. Former Eastern Bloc countries: Several countries in Eastern Europe, such as East Germany, Poland, Hungary, and Romania, were part of the Eastern Bloc under Soviet influence and operated command economies during the Cold War. These economies were characterized by central planning and state control.

It's worth noting that the economic systems of these countries have evolved over time, with varying degrees of market-oriented reforms and adjustments to their economic models.

Command Economy vs. Free Market Economy

Key Differences

In contrast to a command economy, a free-market economy is driven by individual motivation and market forces. Prices are determined by supply and demand, and businesses operate for profit.

Choosing Between the Two

Choosing between a command economy and a free-market economy isn't a black-and-white decision. Many countries, including the U.S. and most of Europe, use a mixed economy, blending elements of both systems.

a command economy tends to exist under a

A command economy tends to exist under an authoritarian or totalitarian political system. The concentration of economic power and central planning in a command economy is often closely tied to a strong central government that exercises significant control over various aspects of society, including the economy. In such political systems, decisions regarding resource allocation, production targets, and distribution are made by a centralized authority, typically the government or ruling party. This allows the government to have extensive control over economic activities and shape the direction of the economy according to its goals and priorities. The emphasis on centralized planning and limited individual economic freedoms is a characteristic feature of command economies in conjunction with authoritarian political regimes.

Conclusion

Command economies, with their central control and emphasis on social welfare, represent a distinct approach to economic management. Though they are less prevalent today, understanding them helps us appreciate the spectrum of economic philosophies and systems that exist in the world.

Frequently Asked Questions (FAQs)

What's the main idea behind a command economy?

The main idea behind a command economy, also known as a planned economy, is that a central authority, such as a government or a central planning agency, makes all decisions regarding the production, distribution, and consumption of goods and services. This includes decisions about what to produce, how to produce it, and for whom to produce it. The central authority sets prices and decides on quantities, with the aim of achieving specific economic, social, or political goals.

What are some characteristics of a command economy?

Some characteristics of a command economy include:

    • Central planning: A governmental body makes all decisions regarding the economy.
    • Limited consumer choice: Since the government determines what goods and services are produced, there is typically less variety available to consumers.
    • Ownership of production: The state generally owns all or most enterprises, factories, and resources.
    • Goal-oriented: The economic decisions are made to fulfill social, political, or economic goals, such as full employment, economic equality, or military preparedness.
    • Prices are set by the government: This is done in an attempt to eliminate the volatility often found in free markets.

What are the pros and cons of a command economy?

The pros of a command economy include:

  • Ability to mobilize resources quickly and on a large scale, which can be beneficial in times of war or during major infrastructure projects.
  • Potentially, it can prevent unemployment due to its goal-oriented nature.
  • It can reduce income and wealth inequality by centralizing the distribution of resources.

The cons of a command economy include:

    • It often results in inefficient production because it's hard for a central authority to accurately predict consumer demand.
    • It typically results in less innovation and less entrepreneurial activity because there is little incentive for such behavior.
    • It usually leads to a lack of consumer choice and lower quality goods because of reduced competition.
    • Command economies have historically led to shortages and surpluses of goods due to inaccuracies in central planning

Are there still command economies today?

there were very few examples of command economies remaining. North Korea and Cuba are the most notable examples, although even these countries have introduced some market elements to their economies. Many countries, such as China and Russia, which were historically command economies, have transitioned to mixed economies, incorporating elements of both command and market economies.

How does a command economy differ from a free-market economy?

A command economy differs from a free-market economy in many ways:

    • Decision-making: In a command economy, a central authority makes all decisions regarding production, distribution, and consumption. In a free-market economy, individual producers and consumers make these decisions based on supply, demand, and price signals.
    • Ownership: In a command economy, the state usually owns all the means of production. In a free-market economy, private individuals or businesses own the means of production.
    • Innovation and competition: In a free-market economy, competition and the profit motive drive innovation and efficiency. This dynamic is often absent in a command economy, leading to less innovation and potentially less efficient production.
    • Choice: In a free-market economy, consumers have a wider variety of goods and services to choose from than in a command economy, where the government determines what is produced.

Other topics you may also like:

    1. What is Prohibited in a Command Economy? Check All That Apply.
    2. What is Economic Recession?
    3. Labor Market Trends: Navigating the Changing World of Work