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Command Economy

Updated on April 19, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Command Economy Definition

A command economy is a system where the government decides goods production, process, quantity, and price in a country. In this system, the government also manages income and investments. Communist nations like the former Soviet Union, Cuba, and North Korea work according to this system. It has worked to their advantage with a few setbacks, too.  

Command Economy Definition

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A command economy system, where the government centrally plans and controls economic activities, plays a significant role in resource allocation and socio-economic development. It can foster stability, address income inequality, and prioritize strategic sectors, but it may stifle innovation and individual freedom. Balancing its advantages and disadvantages is crucial for policymakers and citizens alike.

Key Takeaways

  1. Command economy is when the government of a country decides production, prices, investments, process, and quantity of goods. 
  2. This type of economic structure features government control, no competition, authority, budget allocation, prioritization, mobilization of resources, and a unique vision by the country’s governing body.
  3. Countries like Cuba, China, the Soviet Union, North Korea, etc., follow command economic structures. 
  4. Some disadvantages of a command economy are government dominance, black market (corruption), lack of understanding, decreases innovation, etc.

Command Economy Explained

A command economy works with centralized control, which does not allow important factors like demand and supply to decide on production, process, quantity, and price of goods and services produced in a country. It also discourages competition and innovation, which are important aspects of today’s world economy.

Although the government focuses on allocating resources to achieve economic and social welfare over time, many countries showing command economy traits have failed to match that objective. However, there are certain advantages of the command economy where the government can make rapid decisions as per the requirement of the market to achieve its economic goals.

As time passes in a new age, especially after the collapse of the Soviet Union in 1991, many economies in the world include capitalist include aspects, which have created a concept of mixed economies where competition and innovation are promoted. However, certain goods and services remain under government control while most sectors are now controlled by demand and supply.

The market decides goods and services in demand in a free economy and arranges supply, production process, and price. Such a market generally operates as per customer choice, factors like demand and supply, price of the product, and services generally available in a market. But, in a command economy, production, process, price, and quantity (supply) of goods and services are planned, managed, and controlled by government authorities.

In recent years, many command economies have been trying to mix certain aspects of capitalism in their economy, resulting in a mixed economic systemMixed Economic SystemA mixed economic system is one that combines capitalist and socialist ideals. It allows for the protection of private assets while also allowing for liberty in use of capital and federal intervention in economic decisions.read more that is helping them achieve economic growth.

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Characteristics

Let us discuss the characteristics of a command economy system through the explanation below.

command economy characteristics

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#1 – Government Control

The government of a nation creates a centralized plan for the economy, generally for five years where they concentrate on social and economic goals for the country depending on factors like sectors and region, while the budget is planned and managed every year to observe the completion of goals and make necessary changes in policy if the situation demands.

#2 – Budget and Allocation of Resources

After setting goals for five years, the government also makes policies, allocates resources to various sectors, and observes growth. The government utilizes natural resources, and capital depends on every sector’s objective, plans, and progress. The government also decides against reducing unemployment in a country.

#3 – Prioritization

As per the situation, the government creates a plan on production, process, price, and quantity of goods and services produced in a country. For example, food, clothing, and shelter for all can be set as a national priority by the government, and they can create a plan and allocate the necessary resources to work on that goal.

#4 – No Competition

Since the government controls almost every economic aspect, private companies have no competition. For example, the government of a nation controls major sectors like finance, automobiles, information technology, and utilities.

#5 – Authority

Since the government is the only decision-making authority for important decisions in such an economy, they create policies, rules, regulations, targets, prices, and quantity in a centralized economic plan. Therefore, even if the private sectorPrivate SectorThe private sector is a section of the national economy that the government does not own. The business conducted under this sector is carried out by companies or entrepreneurs who focus on profit maximization and customer satisfaction.read more exists, all companies have to follow the rules and regulations set by the government and cannot act on free will.

Purpose

In a command economy, the government holds the reins when it comes to economic decisions. It’s like having a chief conductor in an orchestra, ensuring that all the instruments play in harmony. The purpose here is to achieve specific societal goals.

First and foremost, command economy traits strive for equality. It wants to make sure that wealth and resources are distributed fairly among its citizens. This can be seen as a noble endeavor, especially in contrast to free-market economies where the rich often get richer while the poor struggle.

Another key purpose is to allocate resources efficiently. By centralizing decisions, a command economy can direct investments into strategic sectors like healthcare, education, and infrastructure. This can lead to rapid development, as seen in countries like China.

However, there are downsides to this approach. These types of economies can stifle innovation and individual freedom. When the government controls everything, there’s less room for entrepreneurs and individual creativity.

Therefore, the purpose of a command economy is to create a more equitable society and steer economic progress in a direction that serves the collective good. However, it comes with trade-offs that need careful consideration.

Examples

Now that we understand the basics, characteristics, and purpose, let us also discuss a few examples to reiterate our learning and intricacies of command economy traits.

command economy types

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  1. Soviet Union: All states under the USSR worked as per the command economy from 1930 until 1991. The Government made all the important decisions for the entire country.
  2. China: After the second world war, China worked under a society ruled by communismCommunismCommunism is an ideology that bases itself on the belief that the means of production in a society should belong to the state.read more, where the government created a plan for economic growth. Although now the country operates under mixed economies, its government still creates five-year plans for economic growth and objectives.
  3. Cuba: Since the 1959 revolution, Cuba has worked as per command economy, now moving towards a mixed economy to increase growth.
  4. Dictatorship: These are countries where the authority of one person controls the government. They also work in a command economy where the government controls many business sectors. For example, some Middle Eastern countries like Egypt, Iran, Libya, etc., run under a dictatorship.

Advantages

The advantages of the command economy system are as discussed below.

  • Mobilization of Resources: In a mixed economy, since the government has all control, they can make quick decisions regarding the utilization of resources, start big projects and make changes to achieve economic and social goals.
  • No Interruptions: Due to government control, decisions and projects cannot be slowed by individual lawsuits against them.
  • Unique Vision: It works as per the unique vision set by the government, and all people in the economy work towards that goal, which makes the country achieve its social and economic objectives in a better way.
  • Direct Utilization of Resources: The government decides the utilization of resources through a five-year plan and manages the budget through a single financial year to observe growth.

Disadvantages

Despite the various advantages discussed in the section above and the rest of the article, there are a few factors that prove to be a disadvantage. Let us discuss them through the points below.

  • Complete Control to Government: In this economy, the country’s administration takes all decisions, and people must follow them. The system’s capacity is often ignored in this process, and people are forced to act on them.
  • Development of Shadow Economy/Black Market: When the needs of people in this economy are not satisfied, markets operate through the shadow economy/black market, where the market provides goods and services that the government does not provide with an additional price tag. Such markets create illegal wealth and money flowMoney FlowMoney flow (MF) refers to a mathematical function used to analyze changes in the value of a security by multiplying its typical price by daily trading volume.read more, weakening the entire economic and social system.
  • Lack of Understanding: Many governments in command economies face the challenge of understanding updates on the market’s needs, making it difficult for them to match consumer needs and prices.
  • Discourage Competition and Innovation: It discourages innovation and competition, leading to a slowdown in the economy as the global market works and operates on innovation, competition, and adaptation of new technology. For this, it is always a big challenge to satisfy the needs of the consumer market in terms of the domestic and global economy.

Command Economy Vs Market Economy

Let us understand the differences between a command economy system and a market economy through the comparison below.

Command Economy

  • Government-centric approach.
  • Centralized decision-making.
  • Government plans what to produce, how, and for whom.
  • Aims for equitable resource distribution.
  • Often seen in socialist or communist systems. 
  • May stifle individual creativity and innovation.

Market Economy

  • Decentralized, individual-driven system.
  • Supply and demand determine production and prices.
  • Encourages entrepreneurship and innovation.
  • Tends to create wealth disparities.
  • Common in capitalist societies.
  • Balance sought between individual freedom and resource allocation.

Frequently Asked Questions (FAQs)

How does a command economy grow?

Government officials establish national economic priorities in a command economy, such as when and how to promote economic growth, share resources, and disperse the produce. It frequently takes the shape of a long-term plan.

Do command economies end up failing?

Marx predicted that command economies would not lead to capitalism; instead, they would collapse because they are inefficient and immoral, basing their economic decisions on tainted interpersonal relationships.

Is a command economy a monopoly?

The government controls every industry under a command economy. It implies that all finance, manufacturing, utilities, and transportation aspects are centralized.

How does a command economy adapt to change?

Adapting and altering quickly in a command economy is quite easy. There are no obstacles to go past, unlike in a capitalist system. They are exempt from requesting congressional authorization or facing legal challenges.

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