A command economy is an economy in which the government has the power over the financial management of the country. This type of economy is often seen in communist or socialist countries, where the government centrally plans and controls the economy. Command economies can be helpful in stabilizing prices and preventing economic fluctuations. However, they can also lead to inefficiencies and a lack of innovation.
Government control is integral to the command economy definition. A free-market system in which demand determines production and prices is an alternative to a command economy. A communist political system has a command economy, whereas capitalism has a free market system. Command economies argue that, by centrally planning production and allocation, scarce resources can be better used to achieve social goals. Command economies tend to incorporate planning by a government organization or a single ruler that commands what will be produced and how it will be allocated.
What is Command Economy?
Definition: Command economy is a type of economy in which the government, for example, is a central governmental authority that sets the quantity of products that are allowed to be produced and the prices that may be charged for products and services.
Command economies are often the result of a centrally planned economy. Command economies can also be found in socialist countries, as well as some communist countries. The Soviet Union is an example of a country that had a command economy. The government-owned all businesses and determined what was produced, how it was produced, and the price at which it was sold.
Understanding Command Economy
In a command economy, the government centrally plans and controls the economy. This means that the government makes all economic decisions, such as what to produce, how to produce it, and who gets to consume it. Command economies are often created after a revolution, as a way to move away from capitalism.
Command economies can be helpful in stabilizing prices and preventing economic fluctuations. However, they can also lead to inefficiencies and a lack of innovation.
Command economies may be found in Cuba, North Korea, and the former Soviet Union. China’s command economy ended in 1978 when it started a transition to a mixed economy that combines communist and capitalist elements. The current model has been labeled a socialist market economy by some analysts.
A command economy, sometimes known as a planned economy, necessitates that the central government own and control the country’s means of production. In most cases, there is no private ownership of land or capital. Within the commercial sector, central planners set pricing, output levels, and limits or bans on the competition. There is no private sector in a total command economy because the central authority owns or controls all enterprises.
History of Command Economy
Command economies have existed in various parts of the world throughout history. One example is ancient Sparta, which used a military-based command economy to support its armies.
The Soviet Union is another example of a country that relied on a command economy. After the Bolshevik Revolution in 1917, the Soviet Union moved away from capitalism and toward socialism. The Soviet Union’s command economy was based on the works of Karl Marx and Vladimir Lenin. The government centrally planned the economy, setting output levels and prices.
The Soviet Union’s command economy ultimately led to inefficiencies and a lack of innovation. The Soviet Union dissolved in 1991, moving from a command economy to a free market system.
Viennese economist Otto Neuratnerh proposed the idea of a command economy in his 1922 book “Economic Planning and International Order.” He proposed it as a way of controlling hyperinflation. The German word “Befehlswirtschaft” is sometimes used to refer to a command economy.
How do Command Economies work?
The government creates a central economic plan in a modern, centrally planned command economy. For example, the government might issue a five-year plan that sets economic and societal objectives for every sector and region of the country. Shorter-term plans turn aspirations into actionable aims.
The administration allows resources in accordance with the national plan. The country’s capital, labor, and natural resources are used to the greatest extent possible in order to achieve the optimum outcome.
The government decides the priorities for the manufacture of all goods and services. Quotas and price controls are included in this category. The goal is to ensure that everyone in the nation has enough food, shelter, and other basics. National goals such as mobilizing for war are also determined by the center plan.
Monopoly businesses in sectors deemed critical to the economy’s objectives, such as finance, utilities, and auto manufacturing, are owned by the government. There is no domestic competition in industries that become part of the command economy.
The government enforces the central plan through legislation, rules, and instructions. Companies must adhere to production and hiring targets set forth in the plan. They are unable to react independently to market forces.
Command Economy vs Free Market Economy
A free-market economy is one in which the prices for goods and services are determined by supply and demand. Individual companies are free to set their prices, hire and fire employees, and produce whatever they deem profitable.
In a command economy, the government makes all economic decisions. The government sets prices determines what will be produced, and allocates resources. Command economies are also known as planned economies.
Some economists argue that command economies are more efficient than free-market economies, while others contend the opposite. Command economies can be more nimble in times of crisis, but they may also be less efficient and lead to stagnation.
There are pros and cons to both systems, and most countries have a mixed economy that includes elements of both. Command economies are more common in countries with authoritarian governments, while free-market economies are more prevalent in democracies.
Characteristics of Command Economy
1. Central Economic Plan
Command economies have a central economic plan. This plan is designed by the government and it takes into account the needs of the people.
2. Price Controls
Command economies also have price controls. This means that the government can set prices for goods and services. This can help to keep inflation in check.
3. Allocation of Resources
Command economies also allocate resources in a more efficient manner. This is because the government can decide what needs to be produced and how it should be distributed.
Command economies also have monopolies. This means that there is only one company that produces a good or service. This can lead to lower prices and more efficient production.
5. Legal and Social Restrictions
Command economies also have legal and social restrictions. This means that the government can regulate what people do and how they behave. This can help to keep crime in check and ensure that people follow the law.
Advantages of Command Economy
1. Ability to Change Quickly
Command economies can change quickly in response to a crisis. This is because the government can make all of the decisions about what needs to be done.
2. Efficient Allocation of Resources
Command economies can also allocate resources in a more efficient manner. This is because the government can decide what needs to be produced and how it should be distributed.
Command economies can also provide stability. This is because the government can set prices and keep them stable. This can help to prevent inflation.
4. Low Levels of Inequality
Command economies also have low levels of inequality. This is because the government can distribute resources more evenly.
5. Common Good versus Profit
Command economies also focus on the common good. This means that the government can make decisions that are not based on profit.
Disadvantages of a Command Economy
Some of the downsides of such centrally planned economies are
1. Lack of innovation
Command economies often lack innovation. This is because the government is in control of all economic decisions. This can lead to a lack of new products and services.
2. Lack of competition
Command economies also lack competition. This is because there is only one company that produces a good or service. This can lead to higher prices and less efficiency.
3. Lack of freedom
Command economies also often lack freedom. This is because the government is in control of all economic decisions. This can lead to a lack of personal freedom and less choice.
Command economies can also be inefficient. This is because the government is in control of all economic decisions. This can lead to a waste of resources and a lack of efficiency.
5. Inefficient Production
Command economies can be inefficient because companies are not motivated to produce goods and services that people want.
6. Less Flexibility
Command economies are less flexible than free-market economies. This is because the government makes all of the decisions and companies cannot respond to market forces.
Command Economy Examples
China is a country that has a command economy. The government controls all aspects of the economy, including prices, production, and distribution.
2. North Korea
North Korea is another country with a command economy. It is an extremely tight regime that employs a steel fist to discipline the economy. Propaganda is likewise widespread, with central authorities claiming they won the football World Cup.
Cuba is another country with a command economy. The Communist Party of Cuba, which was founded in 1965, controls the country. The industry is centrally controlled and directed by the government, with a unified economic plan.
Vietnam is another country with a command economy. It’s a one-party communist country in which the government controls all economic resources. Vietnam has an absolute monopoly in both economics and politics. It uses that power to stifle religion, freedom of speech, and the media.
5. The Soviet Union
The USSR is another country with a command economy. It was a communist state that controlled all aspects of the economy, including prices, production, and distribution. The Soviet Union was the gold standard of command economies in the 20th century. It established 5-year economic plans and redistributed resources throughout the country. Within its society, there was a scarcity of alternatives. Only one brand of toothpaste, one brand of bread, and one variety of yogurts were available.
The transition from Command to Market Economies
Many command economies, such as the Soviet Union, made the shift to a mixed economy in the 1980s. This entailed the privatization and price deregulation of public businesses.
A mixed economy allows for both free-market opportunities as well as government intervention on an individual basis. China has gone from a command economy to a mixed one – albeit nominally remains communist
A command economy is an economic system in which a central government makes all economic decisions. Command economies can have some advantages, such as stability, low levels of inequality, and a focus on the common good. However, command economies also have disadvantages, such as a lack of innovation, competition, and freedom. Command economies are less flexible than free-market economies and can be less efficient.
Consumer preferences are not taken into account in a command economy, as the government determines what will be produced. Command economies also do not allow for competition, as there is only one producer of each good or service. Economic growth may be slower in a command economy, as there is less innovation and creativity. Command economy examples include China, North Korea, Cuba, Vietnam, and the Soviet Union. What are your thoughts about the usefulness of the command economy in today’s world?
If you liked this article, we bet that you will love the Marketing91 Academy, which provides you free access to 10+ marketing courses and 100s of Case studies.