Command Economy: Definition & Characteristics (2024)

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Command Economy Definition

An economic system is a way a society organizes the production, distribution, and consumption of goods and services. In a command economy, also known as a planned economy, the government makes all of the economic decisions. The aim of a command economy is to promote social welfare and fair distribution of goods.

A command economy is an economic system in which the government makes all the economic decisions regarding the production, distribution, and consumption of goods and services. The government owns and controls all the resources and means of production and also determines the prices and quantity of goods and services to be produced and distributed.

In a command economy, the government can ensure that all essential goods and services are distributed fairly to all citizens, regardless of their income or social status. For instance, if there is a shortage of food in the market, the government can intervene and distribute food equally among the population.

Characteristics of a Command Economy

In general, a command economy has the following characteristics:

• Centralized economic planning: The government controls what goods and services are produced, and how much they cost.
• Lack of private property: There is little to no private ownership of businesses or property.
• Emphasis on social welfare: The government's main goal is to promote social welfare and fair distribution of goods, rather than maximizing profits.
• The government controls prices: The government sets the prices of goods and services, and they remain fixed.
• Limited consumer choice: Citizens have limited options when it comes to purchasing goods and services.
• No competition: There is no competition between businesses since the government controls all aspects of the economy.

Fig. 1 - Collective farming is one of the characteristics of a command economy

System of Command Economy: Command Economy vs. Communism

The main difference between communism and a command economy is that communism is a broader political ideology that encompasses economic, social, and political aspects, whereas a command economy is just an economic system. In a communist system, the people control not only the economy but also the political and social aspects of society.

Communism is an economic system in which individuals do not own land, industries, or machinery. These items are instead owned by the government or the entire community, and everyone shares the riches they generate.

While a command economy is a component of the communist system, it is possible to have a command economy that is not based on communist ideology. Some authoritarian governments have implemented command economies without embracing communism. For example, the Old Kingdom of Egypt in 2200 BC and the Incan empire in the 1500s both had some type of a command economy which are recognized as the oldest known use of these types of economies.

Advantages of Command Economy

Having said that, a command economy has both benefits and drawbacks. We'll take a look at some of these next.

1. Social welfare is prioritized in a command economy over profit.
2. Command economies aim to eliminate market failures by ensuring that goods and services are produced and distributed according to social needs rather than profit motives.
3. The command economy generates industrial power to achieve large-scale projects while achieving critical social objectives.
4. In a command economy, production rates can be adjusted to meet the specific needs of society, reducing the likelihood of shortages.
5. Resources can be deployed on a massive scale, allowing for rapid advancement and economic growth.
6. Command economies typically have low unemployment rates.

Fig. 2 - Social housing is an important element of a command economy

Disadvantages of Command Economy

Disadvantages of a command economy include:

1. Lack of incentives: In a command economy, the government controls all the means of production and makes all the decisions about what goods and services will be produced. This can lead to a lack of incentives for innovation and entrepreneurship, which can hinder economic growth.
2. Inefficient resource allocation: Government interfering with pricing signals can cause an inefficient allocation of resources
3. Decreased consumer choice: The government decides what goods and services will be produced and distributed, which may not reflect consumer preferences or needs.
4. Lack of competition: In a command economy, where the government controls all industries, the benefits of competition are not visible.

Pros and Cons of a Command Economy Summarized

The pros and cons of the command economy can be summarized in the table below:

To summarize, a command economy has the advantage of centralized control, promoting social welfare and eliminating market failures. However, it also has significant disadvantages, such as a lack of incentives for innovation and entrepreneurship, inefficient resource allocation, corruption, and lack of consumer choice. Overall, while a command economy can lead to social equality and stability, it often comes at the cost of economic efficiency and individual freedom

Examples of a Command Economy

It is important to note that there is no country in the world that has a pure command economy. Similarly, there is no country that has a purely free market system. Most economies today exist on a spectrum between these two extremes, with varying degrees of government intervention and the free market. While some countries may have a greater degree of government control over the economy, such as China or Cuba, there are still elements of market competition and private enterprise at work. Likewise, even in countries with relatively free markets, such as the United States, there are still regulations and government policies in place that affect the economy.

Examples of command economy countries include Cuba, China, Vietnam, Laos and North Korea.

China

China is a good example of a country with a command economy. In the late 1950s, Mao Zedong's policies, like the Great Leap Forward, failed to address economic challenges, leading to famine and economic decline. Despite this setback, China continued to develop in the following decades, investing in education and infrastructure, leading to significant improvements in literacy rates and poverty reduction. In the 1980s, China implemented market-oriented reforms that enabled it to become one of the fastest-growing economies in the world.

Cuba

One example of a country with a command economy is Cuba, which has been under communist rule since the Cuban Revolution in 1959. Despite a US embargo and other challenges, Cuba has made significant strides in reducing poverty and achieving high levels of literacy and healthcare access. However, the country has also faced criticism for limiting political freedoms and human rights abuses.

Vietnam

Similarly to China, Vietnam has implemented command economy policies in the past, but has since moved towards a more market-oriented approach. Despite this shift, the government still plays a significant role in the economy and has implemented policies to reduce poverty and improve social welfare. Like China, Vietnam has also faced criticism for its lack of political freedom.

Which nations have a command economy?

China, Vietnam, Laos, Cuba, and North Korea.

What is a command economy?

A command economyis an economic system in which the government makes all the economic decisions regarding the production, distribution, and consumption of goods and services.

What are the characteristics of a command economy?

What is the difference between a command economy and communism?

What is an example of a command economy?

An example of a country with a command economy is Cuba, which is under communist rule since the 1959 revolution, has made progress in reducing poverty and improving healthcare and literacy despite facing a US embargo and other obstacles, but has also been criticized for its human rights abuses and limited political freedoms.

Is China a command economy?

Which element of a command economy is also used in a mixed economy?

One of the elements of a command economy that is also used in a mixed economy is the provision of economic services to citizens by the government.

Is a command economy communism?

Not necessarily; a command economy as an economic system can exist under different political systems, including socialism and authoritarianism, not just communism.

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