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.

Contents

Understanding the command economy
Command economy examples
Advantages and disadvantages of command economies
- Advantages
  - Efficiency
  - Less inequality
- Disadvantages
  - Complexity
  - Lack of innovation
Key takeaways:
Connected Business Concepts
- Related

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:

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.

Belarus

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.

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.

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.