What is a Command Economy?
Command economy is a system where the government takes the decision regarding goods production, process, quantity, and price in a country. In this system, the government also manages even income and investments. A Communist nation like the former Soviet Union, Cuba, North Korea work according to this system.
- In a free economy, the market makes a decision on goods and services in demand and arrange supply, production process, and price of goods and services. Such a market generally operates as per customer choice and factors like demand and supply, price of the product, and services generally depend on demand and supply available in a market. But, In 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 are trying to mix certain aspects of capitalism in their economy, resulting in a mixed economic system, which includes certain aspects of capitalism and command economy helping them to achieve economic growth.
#1 – Government Control
Centralize plan for the economy is created by the government, 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 and budget 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. Government decisions on the utilization of natural resources and the nation’s capital depend on the objective plan and progress of every sector. The government also makes a decision regarding 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 to be produced in a country. For e.g. Food, Clothing, and Shelter for all can be set as a national priority for the government and they can create a plan and allocate necessary resources to work on that goal.
4.9 (831 ratings) 117 Courses | 25+ Projects | 600+ Hours | Full Lifetime Access | Certificate of Completion
#4 – No Competition
Since Government control, almost every aspect of the economy, there is no competition between private companies. The government controls major sectors like Finance, Automobiles, Information Technology, and Utilities.
#5 – Authority
Since Government is the only authority in making important decisions in such an economy, they can create policies, rules, and regulations, targets, prices, and quantity in the centralized plan for the economy. Even if there is the existence of the private sector, all companies have to follow rules and regulations set by the government and cannot act on free will.
Examples of Command Economy
- Soviet Union: All states under the soviet union worked as per the command economy from 1930 till its end in 1991. The government made all the important decisions for the entire country.
- China: after the second world war, China worked under society ruled by communism, where the government created a plan for economic growth. Although now the country operates under mixed economies government still creates five-year plans for economic growth and objectives.
- Cuba: Since the 1959 revolution Cuba worked as per command economy, now moving towards a mixed economy to increase growth.
- Dictatorship: Countries, where the government is controlled by the authority of one person also worked on a command economy where the government controls a large percentage of business sectors. For e.g. some middle east countries like Egypt, Iran, Libya, etc.
Command Economy Advantages
- 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, make changes to achieve economic and social goals.
- No Interruptions: Since the government controls everything, decisions and projects cannot be slowdown by individual lawsuits against these decisions.
- 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 at a better place.
- Direct Utilization of Resources: The government takes decisions on the utilization of resources through a five-year plan and manages budget through a single financial year to observe growth.
- Complete Control to Government: In this economy Government takes all decisions and people have to follow these decisions. In this process, many times requirements, the capacity of the system is ignored and people are forced to act on it.
- 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 which are not provided by the government with an additional price tag. Such markets create illegal wealth and money flow, which can weaken the entire economic and social system in a country.
- Lack of Understanding: Many governments in command economies face the challenge of understanding updates on the needs of the market, which makes it difficult for them to match consumer needs and prices.
- Discourage Competition and Innovation: It discourages innovation and competition in the market, which can lead 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.
- This works with centralized control on the economy, which does not allow important factors like demand and supply to make decisions 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 the allocation of resources with the target of achieving economic and social welfare over time, many countries under command economies failed to match that objective. There are certain advantages of the command economy where the government can take rapid decisions as per the requirement of the market to achieve its economic goals.
- As times passes in a new age especially after falling of the soviet union in 1991, many economies in a world are including capitalism aspects in their economy, which creates a concept of mixed economies where competition and innovation are promoted but certain goods and services still remain under government control while most of the sectors are now controlled by demand and supply.
This has been a guide to What is a Command Economy & its Definition. Here we discuss the characteristics of command economy and examples along with advantages and disadvantages. You can learn more about from the following articles –