In a command economy, the government controls the economy through various commands, laws, and national goals which are used to coordinate complex social and economic systems. In other words, a social or political hierarchy determines what is produced, how it is produced, and how it is distributed. Therefore, the command economy is one in which the government controls all major aspects of the economy and economic production.
Aspect
Explanation
Definition
A Command Economy, also known as a Planned Economy or Centrally Planned Economy, is an economic system in which key economic decisions, such as what to produce, how to produce, and for whom to produce, are made by a central authority, typically the government. In a command economy, the government owns or controls most of the means of production, and economic activities are directed and regulated by central planning agencies. This system contrasts with market economies, where decisions are primarily driven by supply and demand forces in the private sector.
Key Concepts
– Central Planning: Central authorities, usually the government, make critical economic decisions, including resource allocation, production targets, and pricing. – Public Ownership: The government typically owns or controls major industries and assets, including factories, farms, and utilities. – Production Quotas: Production targets and quotas are set by the central planning authority, determining what goods and services will be produced. – Price Controls: The government often regulates prices, wages, and rents to manage inflation and income distribution. – Limited Consumer Choice: Consumers have limited choices, as products are often standardized, and variety may be restricted.
Characteristics
– State Control: The state exercises significant control over economic activities, including ownership of critical industries. – Lack of Competition: In a command economy, competition is limited or non-existent, as the state typically monopolizes key sectors. – Resource Allocation: The government allocates resources and decides on production priorities based on its economic plan. – Income Equality: Command economies often aim to reduce income inequality through income redistribution measures. – Long-Term Planning: Central authorities engage in long-term economic planning and investment decisions.
Implications
– Efficiency Concerns: Command economies may suffer from inefficiencies due to the lack of market-driven competition and price signals. – Limited Innovation: In the absence of market competition, innovation may be limited, leading to stagnation. – Resource Allocation Challenges: Central planning can lead to misallocation of resources if planners make incorrect assessments. – Consumer Choice: Consumers have limited choices, and the availability of goods may not align with consumer preferences. – Equity and Equality: Command economies can achieve greater income equality but may not guarantee equity for all citizens.
Advantages
– Resource Allocation: Central planning can prioritize key sectors, such as education, healthcare, and infrastructure development. – Income Equality: Command economies often achieve a more equal distribution of wealth. – Stability: The government can exert control over inflation and economic stability. – Strategic Planning: Long-term planning can lead to coordinated and strategic economic development. – Public Services: Access to basic services like education and healthcare is typically provided to all citizens.
Drawbacks
– Inefficiency: Lack of market competition can lead to inefficiencies in resource allocation and production. – Bureaucracy: Central planning often involves extensive bureaucracy, which can be slow and prone to corruption. – Limited Innovation: Innovation and entrepreneurship may be stifled due to limited competition. – Consumer Choice: Consumers may have limited choices, leading to shortages of certain products and oversupply of others. – Lack of Individual Freedom: Command economies often restrict individual economic freedom and choices.
Applications
– Historical Examples: The Soviet Union, Maoist China, and North Korea have historically operated command economies. – Mixed Economies: Some countries, like Cuba and Vietnam, combine elements of command and market economies. – Public Services: Public education, healthcare, and utilities are often managed through central planning in many countries. – Defense Industry: In some nations, defense production is centrally controlled and funded. – Resource Management: Command economies are sometimes used to manage and allocate natural resources.
Use Cases
– Soviet Union: The Soviet Union operated a command economy for much of its existence, with central planning agencies directing all economic activities. – China’s Reform and Opening-Up: China transitioned from a strict command economy to a mixed economy with market elements in the late 20th century, leading to significant economic growth. – Cuba: Cuba maintains a command economy with state control over key sectors like healthcare and education. – North Korea: North Korea is an example of a highly centralized command economy with limited international trade. – Public Healthcare: Many countries employ command-style management for public healthcare systems.
Conclusion
A command economy is a centralized economic system where the government plays a dominant role in economic planning and resource allocation. While it has certain advantages in terms of income equality and strategic planning, it also faces significant challenges related to inefficiency and limited innovation. The concept has evolved over time, with many countries adopting mixed economic systems that combine central planning with market mechanisms to varying degrees. The future of command economies will likely involve adapting to modern challenges and balancing state control with economic dynamism.
Table of Contents
Understanding the command economy
Note that private enterprise does not exist in a command economy. Instead, the government owns every company and is the sole employer. The government also controls productpricing to reconcile supply with demand and enables the state to collect revenue.
Command economies have been traditionally associated with Communist political systems where the goal is the reduction of inequality and unemployment. This approach contrasts with the free market systems associated with capitalist societies.
Command economy examples
Some current and former examples of command economies include:
China
Former ruler and communist revolutionary Mao Zedong enforced a strictly planned economy in China after World War II. However, modern China employs what economists suggest is a socialist market economy, where dominant state-owned enterprises coexist with market capitalism and private ownership.
Cuba
The Cuban revolution of 1959 instituted the introduction of Communism and a planned economy, with the Soviet Union subsidizing the country’s economy until 1990. Like China, Cuba is now transitioning to aspects of a free market system.
North Korea
Perhaps the country with the most centrally planned economy. However, chronic mismanagement, underinvestment, and raw material shortages have left the North Korean economy in a state of disrepair.
Russia
After the Russian Revolution in 1917, Vladimir Lenin created the first Communist command economy. This economy existed in some shape or form until the USSR collapsed in the late 1980s. Since then, the Kremlin has transferred ownership of large companies to oligarchs during an era of privatization.
Despite the obvious drawbacks of a command economy, there do exist some distinct advantages. We have a listed a few of these below in addition to some disadvantages.
Advantages
Efficiency
Command economies can mobilize quickly to deploy resources on a large scale. They are not hindered by lawsuits, environmental impact statements, or anti-competitive conduct guidelines.
Less inequality
In a free-market economy, the law of supply and demand determines where employees work and how much they are paid. In a command economy, the government reduces inequality as the sole determiner of employee job titles and salaries. The government also uses its power to create new jobs – regardless of whether there is a need for them – which reduces the unemployment rate.
Disadvantages
Complexity
Despite their best efforts, many nations have found managing the complex machinations of an entire economy to be extremely difficult. Without prices to better predict supply and demand, these economies may produce too much of one good and not enough of another. Nations also become more insular because they cannot produce goods at globally competitive market prices.
Lack of innovation
Business leaders in command economies are rewarded for following state objectives. There is no scope for innovation and the economic growth and prosperity that follows.
Case Studies
Soviet Union (USSR): The former Soviet Union was known for its centrally planned command economy, where the government owned all major industries and controlled production and distribution.
North Korea: North Korea is often cited as one of the most centrally planned economies in the world, with the government controlling nearly all economic activities.
Cuba: Cuba has a long history of a command economy, particularly after the Cuban Revolution of 1959. While it has introduced some market-oriented reforms, it remains a command economy with state ownership of most industries.
China (Maoist Era): Under the leadership of Mao Zedong, China implemented a strict command economy, but it has since transitioned to a socialist market economy with elements of central planning.
East Germany (German Democratic Republic): During the division of Germany, East Germany operated under a command economy influenced by the Soviet model until reunification in 1990.
Vietnam (Before Đổi Mới Reforms): Prior to the Đổi Mới economic reforms in the late 1980s, Vietnam had a command economy heavily influenced by the Soviet Union.
Cambodia (Khmer Rouge Era): Under the Khmer Rouge regime in the 1970s, Cambodia experienced a command economy with extreme collectivization and state control.
Laos (Before Market Reforms): Laos had a command economy influenced by socialist principles before it initiated market-oriented reforms in the late 20th century.
Mongolia (Before Transition to Market Economy): Mongolia had a command economy during its socialist period, characterized by state ownership and central planning, before transitioning to a market economy.
Albania (Hoxha Era): During Enver Hoxha’s leadership in Albania, the country operated a strict command economy with centralized state control.
Yugoslavia (Before Dissolution): Yugoslavia had a unique form of socialism with self-management, but it maintained some characteristics of a command economy before its dissolution.
Tanzania (Ujamaa): Tanzania implemented the Ujamaa policy under Julius Nyerere, which included elements of central planning and collectivization in the 1960s and 1970s.
Key takeaways:
The command economy is one in which the government controls all major aspects of the economy and economic production. Without private enterprise, the government owns every company and controls productpricing to reconcile supply with demand.
Examples of current and former command economies include China, Belarus, North Korea, Russia, and Cuba. Both China and Cuba and now incorporating aspects of a free market economy into their respective systems.
The command economy is more efficient at mobilizing initiatives and reducing wage inequality and unemployment. However, the difficulty in managing an economy can cause the nation to become uncompetitive, insular, and lacking in innovation.
Key Highlights:
Definition of Command Economy: In a command economy, the government exercises control over economic activities through commands, laws, and national goals. It dictates what is produced, how it’s produced, and how resources are distributed. Private enterprise is non-existent, and the government owns all major companies.
Government’s Role: The government in a command economy is the sole employer and controls productpricing to match supply and demand. This system aims to reduce inequality and unemployment, contrasting with capitalist free-market economies.
Examples of Command Economies:
China: Transitioning from a strictly planned economy, modern China combines elements of a socialist market economy with state-owned enterprises alongside market capitalism.
Cuba: Implemented communism and a planned economy after the 1959 revolution, but it is gradually introducing elements of a free market system.
North Korea: Operates one of the most centrally planned economies, although it faces significant economic challenges.
Russia: Originating from the 1917 Russian Revolution, the command economy existed until the late 1980s. Privatization followed the USSR’s collapse.
Belarus: The government maintains ownership of the majority of companies and financial institutions.
Advantages of Command Economies:
Efficiency: Quick mobilization of resources on a large scale without legal hindrances or competitive constraints.
Less Inequality: Reduced income inequality as the government determines job titles and salaries, along with creating jobs to combat unemployment.
Disadvantages of Command Economies:
Complexity: Difficulty in managing the entire economy may lead to overproduction of some goods and shortages of others. Can result in insularity and an inability to compete globally.
Lack of Innovation: Lack of incentives for innovation and economic growth due to adherence to state objectives.
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In a command economy, the government controls the economy through various commands, laws, and national goals which are used to coordinate complex social and economic systems. In other words, a social or political hierarchy determines what is produced, how it is produced, and how it is distributed. Therefore, the command economy is one in which the government controls all major aspects of the economy and economic production.
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In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.
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Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
