What is a 'Command Economy'

A command economy is a system where the government, rather than the free market, determines what goods should be produced,
how much should be produced and the price at which the goods are offered for sale. It also determines investments and incomes.
The command economy is a key feature of any communist society. Cuba, North Korea and the former Soviet Union are examples of
countries that have command economies, while China maintained a command economy for decades before transitioning to a mixed
economy that features both communistic and capitalistic elements.
BREAKING DOWN 'Command Economy'
Also known as a planned economy, command economies contrast with free market economies, in which the prices of goods are
services are set by invisible forces of supply and demand. A central tenet of a free market economy is that the government does not
intervene in the workings of the market by setting prices, limiting production or hampering competition within the private sector. In
a command economy, there is no competition, as the central government controls all business.
Other Characteristics of a Command Economy
A command economy also sets its own national priorities, including how and when it generates economic growth or when and if it
will go to war.
The government that runs a command economy will also own monopoly businesses, or entities that are considered necessary in
order to meet the goals of the national economy. In these cases, there is no domestic competition in those industries. Examples
include financial institutions, utility companies and the automotive sector.
Finally, all the laws, regulations and other directives are set by the government according to the central plan. All businesses follow
that plan and its targets, and cannot respond to any free market forces or influence.
Drawbacks of Command Economies
Command economies are unable to efficiently allocate goods because of the knowledge problem, or the central planner's inability
to discern how much of a good should be produced. Shortages and surpluses are common consequences of command economies.
The government is disconnected from the body of consumers, whose needs are fluid rather than static. As a result, the entity that
controls the means of production faces constant difficulty responding to ever-changing demand across various sectors in a timely
manner. Moreover, the central planner in a command economy sets prices strictly based on revenue needs, resulting in pricing that
is almost always inefficient with regard to output and demand.
A free-market price system, on the other hand, signals to producers what they should be creating and in what quantities, resulting
in a much more efficient allocation of goods. Further, the same body of consumers that feeds the demand for goods and services
controls the means of production through private enterprise. As a result, no knowledge gap exists, and producers can respond to
changing consumer demands much more efficiently.
Arguments in Favor of Command Economies
Command economies retain their supporters. Those who favor this market system argue that command economies allocate
resources to maximize social welfare, while in free-market economies, this goal is secondary to maximizing profit. Additionally,
proponents allege that command economies have better control of employment levels than free-market economies, as they can
create jobs to put people to work when necessary, even in absence of a legitimate need for such work.
Command Economies vs. Socialism
Many people believe that economic planning and communism are similar to socialism. But the two concepts are not equivalent.
However, a big proponent of socialism involves replacing capital markets with some type of economic planning, so that producers
can control the surplus product.
A command economy is one in which a centralized government controls the means of production. The government determines
what is produced, how it is produced and how it is distributed. Private enterprise does not exist in a command economy. The
government employs all workers and unilaterally determines their wages and job duties. There are advantages and disadvantages
of command economy structures. Command economy advantages include low levels of inequality and unemployment and the
common good replacing profit as the primary incentive of production. Command economy disadvantages include lack of
competition and lack of efficiency.
Because the government controls the means of production in a command economy, it determines who works where and for how
much pay. This power structure contrasts sharply with a free market economy, in which private companies control the means of
production and hire workers based on business needs, paying them wages set by invisible market forces. In a free market economy,
the law of supply and demand dictates that workers who have unique skills in high-demand fields receive high wages for their
services, while low-skill individuals in fields that are saturated with workers settle for meager wages, if they can find work at all.
Unlike the invisible hand of the free market, which cannot be manipulated by a single company or individual, a command economy
government can set wages and job openings to create an unemployment rate and wage distribution that it sees fit.
Whereas the motivation for profit drives most business decisions in a free market economy, it is a non-factor in a command
economy. A command economy government, therefore, can tailor products and services to benefit the common good without
regard to profits and losses. For example, most true command economy governments, such as Cuba, offer free, universal health
care coverage to their citizens.
Command economies sit at a disadvantage as their inherent lack of competition hinders innovation and keeps prices from resting at
an optimal level for consumers. Although those who favor government control criticize private firms that esteem profit above all
else, it is undeniable that profit is a great motivator and drives innovation. For this reason, most advancements in medicine and
technology have come from countries with free market economies, such as the United States and Japan.
Efficiency is also compromised when the government acts as a monolith, controlling every aspect of a country's economy. The
nature of competition forces private companies in a free market economy to minimize red tape and keep operating and
administrative costs to a minimum. If they get too bogged down with these expenses, they achieve lower profits or have to raise
prices to meet expenses; ultimately, they are driven out of the market by competitors capable of operating more efficiently.
Production in command economies is notoriously inefficient as the government feels no pressure from competitors or price-
conscious consumers to cut costs or streamline operations.

Command Economy

Sa ganitong uri ng sistemang pang-ekonomiya, ang ekonomiya ay nasa ilalim ng komprehensibong control at regulasyon ng
pamahalaan.

Ang pagkontrol ay alinsunod sa planong nauukol sa pagsusulong ng ekonomiya ng lipunan.

Ito ay taliwas sa sistemang market economy sapagkat sa huli, ang produksiyon, distribusyon, at pagtatakda ng halaga ay
hinahayaang maresolba ng mga puwersa sa loob ng pamilihan.

Dito, ang pamahalaan ay may kapangyarihan gamitin nang husto ang lupa, paggawa, at capital upang makamit ang mga layuning
pang-ekonomiya ng bansa.

Ang pangunahing nagmamay-ari ng karamihan sa mga pinagkukunang-yaman sa command economy ay ang pamahalaan.

Pamahalaan din ang nagmamay-ari ng karamihan sa mga bahay-kalakal at lumilikha ng mga produkto at serbisyo alinsunod sa
kanilang mga plano.

Ang mga lupang sakahan, pabrika, bangko, pamilihan, at iba pang mga pangkabuhayan ay pinamamahalaan ng mga empleyado ng
pamahalaan.

A command economy is where a central government makes all economic decisions. The government or a collective owns the land
and the means of production. It doesn't rely on the laws of supply and demand that operate in a market economy. A command
economy also ignores the customs that guide a traditional economy. In recent years, many centrally-planned economies began
adding aspects of the market economy. The resultant mixed economy better achieves their goals.

Five Characteristics of a Command Economy

You can identify a modern centrally planned economy by the following five characteristics.

1. The government creates a central economic plan. The five-year plan sets economic and societal goals
for every sector and region of the country. Shorter-term plans convert the goals into actionable
objectives.
2. The government allocates all resources according to the central plan. It tries to use the nation's capital,
labor and natural resources in the most efficient way possible. It promises to use each person's skills
and abilities to their highest capacity. It seeks to eliminate unemployment.
3. The central plan sets the priorities for the production of all goods and services. These include quotas
and price controls. Its goal is to supply enough food, housing, and other basics to meet the needs of
 everyone in the country. It also sets national priorities. These include mobilizing for war or generating
robust economic growth.

1. The government owns monopoly businesses. These are in industries deemed essential to the goals of
the economy. That usually includes finance, utilities, and automotive. There is no domestic competition
in these sectors.
2. The government creates laws, regulations, and directives to enforce the central plan. Businesses follow
the plan's production and hiring targets. They can't respond on their own to free market
forces. (Source: Bon Kristoffer G. Gabnay, Roberto M Remotin, Jr., Edgar Allan M. Uy,
editors. Economics: Its Concepts & Principles. 2007. Rex Book Store: Manila.)

Advantages

Planned economies can quickly mobilize economic resources on a large scale. They can execute massive projects, create industrial
power, and meet social goals. They aren't slowed down by lawsuits from individuals or environmental impact statements.

Command economies can wholly transform societies to conform to the government's vision. The new administration nationalizes
private companies. Its previous owners attend "re-education" classes. Workers receive new jobs based on the government's
assessment of their skills.

Disadvantages

This rapid mobilization often means command economies mow down other societal needs. For example, the government tells
workers what jobs they must fulfill. It discourages them from moving. The goods it produces aren’t always based on consumer
demand. But citizens find a way to fulfill their needs. They often develop a shadow economy or black market. It buys and sells the
things the command economy isn't producing. Leaders' attempts to control this market weakens support for them.

They often produce too much of one thing and not enough of another. It's difficult for the central planners to get up-to-date
information about consumers' needs. Also, prices are set by the central plan. They no longer measure or control demand. Instead,
rationing often becomes necessary.

Command economies discourage innovation. They reward business leaders for following directives. This doesn’t allow for taking the
risks required to create new solutions. Command economies struggle to produce the right exports at global market prices. It's
challenging for central planners to meet the needs of the domestic market. Meeting the needs of international markets is even
more complex.

Examples

Here are examples of the most well-known countries with command economies:

 Belarus - This former Soviet satellite is still a command economy. The government owns 80 percent of
its businesses and 75 percent of its banks.
 China - After World War II, Mao Tse Tung created a society ruled by Communism. He enforced a strictly
planned economy. The current leaders are moving toward a market-based system. They continue to
create five-year plans to outline economic goals and objectives.
 Cuba - Fidel Castro's 1959 revolution installed Communism and a planned economy. The Soviet Union
subsidized Cuba’s economy until 1990. The government is slowly incorporating market reforms to spur
growth.
  Iran - The government controls 60 percent of the economy through state-owned businesses. It uses
price controls and subsidies to regulate the market. This created recessions, which it has ignored.
Instead, it devoted resources to expanding its nuclear capability. The United Nations imposed
sanctions, worsening its recessions. The economy improved once the nuclear trade deal ended
sanctions in 2015.
 Libya - In 1969, Muammar Gaddafi created a command economy reliant upon oil revenues. Most
Libyans work for the government. Gaddafi had been instituting reforms to create a market-based
economy. But his 2011 assassination halted these plans.

 North Korea - After World War II, President Kim Il-sung created the world's most centrally-planned
economy. It created food shortages, malnutrition and several bouts of mass starvation. Most state
resources go into building up the military.
 Russia - In 1917, Vladimir Lenin overthrew the czars. He created the first Communist command
economy. Josef Stalin built up military might and quickly rebuilt the economy after World War II. The
Soviet State Planning Committee, or “Gosplan,” has been the most studied command economy entity.
The USSR was also the longest running command economy, lasting from the 1930s until the late 1980s.
Then, the state transferred ownership of the largest companies to oligarchs.

Development of the Theory

Viennese economist Otto Neurath developed the concept of a command economy after World War I. Neurath proposed it as a way
to control hyperinflation. The phrase “command economy” comes from the German word "Befehlswirtschaft.” It described
the fascist Nazi economy. (Source: John Eatwell, Murray Milgate, Peter Newman, Problems of the Planned Economy. 1990. p 58.)

But centrally planned economies existed long before Nazi Germany. They included the Incan empire in 16th century Peru and the
Mormons in 19th century Utah. The United States used a command economy to mobilize for World War II. (Source: John Gary
Maxwell, The Civil War Years in Utah. University of Oklahoma Press. 2016. "Inca Government and Economy." Early Civilizations in
the Americas Reference Library, edited by Sonia G. Benson, et al., vol. 1: Almanac, Vol. 1, UXL, 2005, pp. 179-198. World History in
Context.)

List of 16 Big Pros and Cons of a Command Economy

 Economy
In most cases, each country in the world has its own economic system in power, operating within its own type of economy. One
known type is referred to as a command economy. Where an economic system is important to a nation, proper planning and
development is an integral part to its overall success to evade from suffering financial difficulties and instability. For a command
economy, it is primarily implemented in communist countries, such as the former Soviet Union, Cuba and North Korea.
This type of economic structure has suffered a negative reputation due to the control provided to the government. However, this
structure can offer a nations citizens some strengths as well. Here is a look at the pros and cons of a command economy.

List of Pros of a Command Economy

1. It does not allow monopolizing.
It is impossible for a monopoly to rule in a command economy because all the forces of the market are regulated by the
government. No provider will be given control to set the market and rule aside from the government in power. Monopolizing exists
in other economies, but not present in a command economy.
2. It boosts industrial power.
Command economy creates industrial power to complete massive projects while attaining imperative social goals.
3. It adjusts production rates and availability of completed goods.
It is possible to adjust production rates to meet the population’s exact demands. Although there will not be many choices as
compared to other economies, a command economy lessens the chances for shortages to occur.
4. It allows for better mobilization of resources.
Due to the unique make-up of command economy, production is done as efficiently and effectively as possible. So, all resources are
mobilized on a very large scale, making sure that progress is fast.
5. It streamlines the society and government.
This type of economy is capable of transforming the society to conform to the government’s vision for the country, which means
harmony between the two units.
6. It prioritizes social welfare.
In a command economy, social welfare is made a major concern. In fact, one of its overriding goals is making sure that maximum
social welfare takes place. Because there is a sense of community bred due to the lack of income inequality, the society as a whole
takes on production and benefit, and as a result, less divisions are formed.
7. It offers easy response to emergencies and internal disasters.
The command and central authority in this type of economy can easily increase production in most facilities that are not affected by
a disaster or calamity. This is important in maintaining the continued flow of goods on the market. Aside from this, increased
production of certain products can be done, which greatly helps communities to overcome disasters.

List of Cons of a Command Economy

1. It restricts freedom.
Due to the fact that this type of economic system is tied to communist countries, it is no surprise that it also takes the freedom
away from the people and puts full control in the hands of the government alone. People cannot choose their careers based on
their skills and interests; rather, it is based upon what the government forces them to do. All jobs are aligned with needs at a time,
and people have little freedom of choice. This major downside to a command economy can lead to discontented citizens.
2. It may ignore societal needs.
Command economy often ignores the needs of the society for its betterment. Workers will not be given the options on where they
can work or where they can move.
3. It slows down innovative developments.
Unlike a free market that encourages change and innovation, a command economy does not offer this advantage. Since the
government controls the market, it does not make innovation a priority or does not encourage it all in all. This is because it controls
all aspects of production and leaves no room for people to make it better, leading to a workforce that is less motivated to create
higher-quality products or services.
4. It causes black markets to explode.
Because of restrictions by the government, some products and services are not offered in the command economy, so they would
be offered on black markets.
5. It offers no competition.
Competition on the market is one of the main forces of improvement, but in a command economy, there is little competition. The
government owns all the industries and does not encourage competition or actually exerts effort to eliminate it. The benefits
gained from competition are not seen in this type of market.
6. It causes unbalanced amounts of goods.
Some items will probably be mass produced, while others will not be enough to support economic needs. It is difficult for the
government entity controlling the economy to obtain up-to-date information about consumer needs, so most of the time, rationing
becomes a way of life.
7. It leads to export problems.
The export of products becomes problematic as it is difficult for the controlling government entity to determine which goods and
prices will be most successful within the international market.
8. It makes coordination difficult or even impossible.
Because planners coordinate their economic decisions on production, consumption, investment and trade of producers and
consumers in the entire country, coordination is deemed impossible to be done efficiently. Products can even fall on shortages and
mismatches occur on supply and demand. Other issues cannot be completely resolved by planners, such as the balance among
transportation facilities, food and electronic devices.
9. It misplaces incentives.
Supply and prices are monitored and regulated by the central government, instead of planners and other market forces. Also, the
government decides on the goods and services to be produced and distributed. As a result, rewards will not get to the deserving
individuals.
Understanding command is a bit complex, but by going through its pros and cons, we can have ideas of how it does for a certain
country and, eventually, come up with an informed conclusion.