What Is The Command Economy? The Command Economy In A Nutshell

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.

DefinitionA 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 ConceptsCentral 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.
CharacteristicsState 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.
ImplicationsEfficiency 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.
AdvantagesResource 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.
DrawbacksInefficiency: 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.
ApplicationsHistorical 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 CasesSoviet 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.
ConclusionA 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.

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 product pricing 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:


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.


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. 


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. 


In this former Soviet satellite country, the government still owns more than 80% of all companies and 75% of all financial institutions

Advantages and disadvantages of command economies

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.



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. 



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 product pricing 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 product pricing 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.

Connected Economic Concepts

Market Economy

The idea of a market economy first came from classical economists, including David Ricardo, Jean-Baptiste Say, and Adam Smith. All three of these economists were advocates for a free market. They argued that the “invisible hand” of market incentives and profit motives were more efficient in guiding economic decisions to prosperity than strict government planning.

Positive and Normative Economics

Positive economics is concerned with describing and explaining economic phenomena; it is based on facts and empirical evidence. Normative economics, on the other hand, is concerned with making judgments about what “should be” done. It contains value judgments and recommendations about how the economy should be.


When there is an increased price of goods and services over a long period, it is called inflation. In these times, currency shows less potential to buy products and services. Thus, general prices of goods and services increase. Consequently, decreases in the purchasing power of currency is called inflation. 

Asymmetric Information

Asymmetric information as a concept has probably existed for thousands of years, but it became mainstream in 2001 after Michael Spence, George Akerlof, and Joseph Stiglitz won the Nobel Prize in Economics for their work on information asymmetry in capital markets. Asymmetric information, otherwise known as information asymmetry, occurs when one party in a business transaction has access to more information than the other party.


Autarky comes from the Greek words autos (self)and arkein (to suffice) and in essence, describes a general state of self-sufficiency. However, the term is most commonly used to describe the economic system of a nation that can operate without support from the economic systems of other nations. Autarky, therefore, is an economic system characterized by self-sufficiency and limited trade with international partners.

Demand-Side Economics

Demand side economics refers to a belief that economic growth and full employment are driven by the demand for products and services.

Supply-Side Economics

Supply side economics is a macroeconomic theory that posits that production or supply is the main driver of economic growth.

Creative Destruction

Creative destruction was first described by Austrian economist Joseph Schumpeter in 1942, who suggested that capital was never stationary and constantly evolving. To describe this process, Schumpeter defined creative destruction as the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Therefore, creative destruction is the replacing of long-standing practices or procedures with more innovative, disruptive practices in capitalist markets.

Happiness Economics

Happiness economics seeks to relate economic decisions to wider measures of individual welfare than traditional measures which focus on income and wealth. Happiness economics, therefore, is the formal study of the relationship between individual satisfaction, employment, and wealth.


An oligopsony is a market form characterized by the presence of only a small number of buyers. These buyers have market power and can lower the price of a good or service because of a lack of competition. In other words, the seller loses its bargaining power because it is unable to find a buyer outside of the oligopsony that is willing to pay a better price.

Animal Spirits

The term “animal spirits” is derived from the Latin spiritus animalis, loosely translated as “the breath that awakens the human mind”. As far back as 300 B.C., animal spirits were used to explain psychological phenomena such as hysterias and manias. Animal spirits also appeared in literature where they exemplified qualities such as exuberance, gaiety, and courage.  Thus, the term “animal spirits” is used to describe how people arrive at financial decisions during periods of economic stress or uncertainty.

State Capitalism

State capitalism is an economic system where business and commercial activity is controlled by the state through state-owned enterprises. In a state capitalist environment, the government is the principal actor. It takes an active role in the formation, regulation, and subsidization of businesses to divert capital to state-appointed bureaucrats. In effect, the government uses capital to further its political ambitions or strengthen its leverage on the international stage.

Boom And Bust Cycle

The boom and bust cycle describes the alternating periods of economic growth and decline common in many capitalist economies. The boom and bust cycle is a phrase used to describe the fluctuations in an economy in which there is persistent expansion and contraction. Expansion is associated with prosperity, while the contraction is associated with either a recession or a depression.

Paradox of Thrift

The paradox of thrift was popularised by British economist John Maynard Keynes and is a central component of Keynesian economics. Proponents of Keynesian economics believe the proper response to a recession is more spending, more risk-taking, and less saving. They also believe that spending, otherwise known as consumption, drives economic growth. The paradox of thrift, therefore, is an economic theory arguing that personal savings are a net drag on the economy during a recession.

Circular Flow Model

In simplistic terms, the circular flow model describes the mutually beneficial exchange of money between the two most vital parts of an economy: households, firms and how money moves between them. The circular flow model describes money as it moves through various aspects of society in a cyclical process.

Trade Deficit

Trade deficits occur when a country’s imports outweigh its exports over a specific period. Experts also refer to this as a negative balance of trade. Most of the time, trade balances are calculated based on a variety of different categories.

Market Types

A market type is a way a given group of consumers and producers interact, based on the context determined by the readiness of consumers to understand the product, the complexity of the product; how big is the existing market and how much it can potentially expand in the future.

Rational Choice Theory

Rational choice theory states that an individual uses rational calculations to make rational choices that are most in line with their personal preferences. Rational choice theory refers to a set of guidelines that explain economic and social behavior. The theory has two underlying assumptions, which are completeness (individuals have access to a set of alternatives among they can equally choose) and transitivity.

Conflict Theory

Conflict theory argues that due to competition for limited resources, society is in a perpetual state of conflict.

Peer-to-Peer Economy

The peer-to-peer (P2P) economy is one where buyers and sellers interact directly without the need for an intermediary third party or other business. The peer-to-peer economy is a business model where two individuals buy and sell products and services directly. In a peer-to-peer company, the seller has the ability to create the product or offer the service themselves.


The term “knowledge economy” was first coined in the 1960s by Peter Drucker. The management consultant used the term to describe a shift from traditional economies, where there was a reliance on unskilled labor and primary production, to economies reliant on service industries and jobs requiring more thinking and data analysis. The knowledge economy is a system of consumption and production based on knowledge-intensive activities that contribute to scientific and technical innovation.

Command Economy

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.

Labor Unions

How do you protect your rights as a worker? Who is there to help defend you against unfair and unjust work conditions? Both of these questions have an answer, and it’s a solution that many are familiar with. The answer is a labor union. From construction to teaching, there are labor unions out there for just about any field of work.

Bottom of The Pyramid

The bottom of the pyramid is a term describing the largest and poorest global socio-economic group. Franklin D. Roosevelt first used the bottom of the pyramid (BOP) in a 1932 public address during the Great Depression. Roosevelt noted that – when talking about the ‘forgotten man:’ “these unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power.. that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid.”


Glocalization is a portmanteau of the words “globalization” and “localization.” It is a concept that describes a globally developed and distributed product or service that is also adjusted to be suitable for sale in the local market. With the rise of the digital economy, brands now can go global by building a local footprint.

Market Fragmentation

Market fragmentation is most commonly seen in growing markets, which fragment and break away from the parent market to become self-sustaining markets with different products and services. Market fragmentation is a concept suggesting that all markets are diverse and fragment into distinct customer groups over time.

L-Shaped Recovery

The L-shaped recovery refers to an economy that declines steeply and then flatlines with weak or no growth. On a graph plotting GDP against time, this precipitous fall combined with a long period of stagnation looks like the letter “L”. The L-shaped recovery is sometimes called an L-shaped recession because the economy does not return to trend line growth.  The L-shaped recovery, therefore, is a recession shape used by economists to describe different types of recessions and their subsequent recoveries. In an L-shaped recovery, the economy is characterized by a severe recession with high unemployment and near-zero economic growth.

Comparative Advantage

Comparative advantage was first described by political economist David Ricardo in his book Principles of Political Economy and Taxation. Ricardo used his theory to argue against Great Britain’s protectionist laws which restricted the import of wheat from 1815 to 1846.  Comparative advantage occurs when a country can produce a good or service for a lower opportunity cost than another country.

Easterlin Paradox

The Easterlin paradox was first described by then professor of economics at the University of Pennsylvania Richard Easterlin. In the 1970s, Easterlin found that despite the American economy experiencing growth over the previous few decades, the average level of happiness seen in American citizens remained the same. He called this the Easterlin paradox, where income and happiness correlate with each other until a certain point is reached after at least ten years or so. After this point, income and happiness levels are not significantly related. The Easterlin paradox states that happiness is positively correlated with income, but only to a certain extent.

Economies of Scale

In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organization scale further.

Diseconomies of Scale

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.

Economies of Scope

An economy of scope means that the production of one good reduces the cost of producing some other related good. This means the unit cost to produce a product will decline as the variety of manufactured products increases. Importantly, the manufactured products must be related in some way.

Price Sensitivity

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.

Network Effects

In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

Negative Network Effects

In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

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