Command Economy Explained

What is a Command Economy?

In economics, whoever owns the factors of production decides what should be produced, for whom, and at what price. In a command economy, the government owns such factors of production as opposed to the private sector. Therefore, a command economy is a framework where the public authority, or central government, decides what products ought to be produced, what amount ought to be created, and the cost at which the goods made are available for purchase.

Key points

• The Central Government answers the basic economic questions in a command economy
• Citizens, and the private sector, do not own factors of production
• The central plan, created by the government, is the basis for production and allocation of goods and services

Characteristics of a Command Economy

The government is responsible for all economic decisions in a command economy. It owns all factors of production, including land. And it does not follow the supply and demand laws when making economic decisions.

The central plan is a national production ‘guide’ produced by the government, setting out all national output priorities. This plan is enforced with the help of laws that the government creates from time to time. In command economies, the government is a monopoly, hence faces no competition in the production and distribution of goods and services. The laws that it sets are enforced with minimum to no resistance.

Central to the command economy are politicians in government offices. As such, their priority is to win people over. They want this more than growing the economy to competitive levels when compared to international and regional economies. Government in a command economy seeks to eliminate unemployment through utilization of every working-age person’s skills. Employment is created in the production and distribution lines – which are planned through five-year plans, or any that the government chooses.

A command economy is a vital element of any socialist society. Cuba, North Korea, and the previous Soviet Union are instances of nations that have or had this type of an economy. China kept a command economy for quite a long time prior to progressing to a blended economy that highlights both radical and industrialist components. However, judging by recent attacks on Tech firms in China, completely doing away with the command mentality is not easy. Leaders are tempted to always revert to setting the rules for all the sectors, even those that infringe on basic human rights for free access of goods and services they desire.

Examples of Command Economies

Belarus, the former Soviet satellite, and North Korea are still the modern-day command economies. While China and Russia, among others, have moved towards a freer economic system.

Advantages of command economy

Even though they are widely criticized, command economies do have a few advantages.

The government’s strict policies ensure that tasks are quickly completed. Decision-making is central; hence no time is wasted when reaching a decision.

The government also ensures equal distribution of goods and services among the people. This is unlike a market economy where private producers distribute goods and services where there are people who can afford them, creating a gap between the rich and poor.

Disadvantages of a Command Economies

This type of an economy works in countries where there is a near or full dictatorship, as such, these kinds of governments thrive on a willing army and police force – to control the people. Therefore, they tend to direct more of their expenditure towards acquiring tools to police the nation rather than expand on innovation and grow the country’s GDP.

More so, since all monetary designs are available no matter what to the public authority, individual flexibilities are restricted inside a command economy. In many occurrences, individuals can work one sort of work and should do as such because the public authority requests it. Refusal could mean prison time… or something more terrible. Their pay is directed by the public authority too. Individuals are compelled to seek after everyone’s benefit of the public authority rather than their own.

Below are more disadvantages of a command economy.

It limits growth

There tends to be complacency in a command economy. This leads to lack of research and innovation. An economy without these struggles to grow. One of the economic ideas states that, for an economy to grow, it must have room for innovation and reward such.

In any economy, the private sector leads in terms of innovation. Therefore, it is the obvious missing factor within a command economy, leading to little or no innovation as the government relies on its ‘tried and tested’ methods.

It may lead to underground economies

Inside a command economy, individuals can’t generally get what they need to meet their daily needs. This is because most command economies are hugely inefficient in distribution of goods and eservices. Most luxury services are not sufficiently provided. Therefore, to get these things, they turn to secret markets – which enterprising individuals tend to create as they risk jail or other forms of punishment from the central government.