Command Economy – Definition, Characteristics, Advantages and Disadvantages
In a command economy (as well known as a centrally planned economy), the central government controls all major characteristics of a nation’s economy and production. Instead of the traditional laws of supply and demand of the free market economy, the government mandates what goods and services will produce and how they will be distributed and sold.
Karl Marx defines the theory of a command economy in the Communist Manifesto as “common ownership of the means of production “. It became a typical feature of communist governments.
Key Takeaways – Command Economy
- A command economy, before a centrally planned economy, is a system in which the government controls all facets of the nation’s economy. All businesses and homes are owned and regulated by the government.
- In a command economy, the government regulates what goods and services will produce and sell according to a central multi-year macroeconomic plan.
- In nations through command economies, health care, housing and education are often free, but the government controls people’s incomes, and private investment is rarely allowed.
- And also, in the Communist Manifesto, Karl Marx defined the command economy as “common ownership of the means of production.”
- While command economies are typical of communism and socialism, the two political ideologies spread over them differently.
Although command economies are capable of rapidly making sweeping changes to a country’s economy and society, their essential risks, such as overproduction and stifling innovation, have led many long-time command economies such as Russia and China to incorporate free-market practices to better compete in the global market.
Characteristics of the Command Economy
In a command economy, the government takes a multi-year central macroeconomic plan that sets national employment rates and what government-owned industries will produce.
The government passes laws and regulations to device and enforce its economic plan. Perhaps, the central plan dictates how all the country’s resources, financial, human, and natural, will be allocated. The major program intends to eliminate unemployment and use the nation’s human capital to its fullest potential. However, industries must adhere to the overall hiring goals of the plan.
Potential monopolistic industries, such as utilities, banking, and transportation, owned by the government, and competition within those sectors not permitted. This way, monopoly prevention measures, such as antitrust laws, are excessive.
The government owns the greatest, if not all, of the country’s industries that produce goods or services. It can also set market prices and provide consumers with necessities, including health care, housing, and education.
In more controlled command economies, the government imposes limits on individual income.
Examples of Command Economy
Globalization and financial burden have led many former command economies to change their economic model and practices. Still, some countries remain faithful to command economy principles, such as Cuba and North Korea.
Most Cuban industries persist owned and operated by the communist government. While unemployment is virtually non-existent, the average monthly salary is less than USD 20. Housing and medical care are free, but the government owns all houses and hospitals. Since the former Soviet Union stopped subsidizing Cuba’s economy in 1990, the Castro government has gradually incorporated some free-market policies to stimulate growth.
The dominant economic philosophy of this secretive communist nation centres on meeting the needs of its people. For example, by owning all the houses and setting their prices accordingly, the government keeps the cost of housing down. Similarly, health care and education in government-run hospitals and schools are free. However, since the lack of competition leaves them with little reason to improve or innovate, state-owned industries operate inefficiently. Overcrowded transportation facilities and long waits for medical care are typical. Finally, with their income strictly controlled by the government, people have no avenue to accumulate wealth.
Pros and cons
Some benefits of a command economy contain:
- They can change quickly. Industries can complete massive projects without politically motivated delays and fear private lawsuits if controlled by the government.
- Since the government regulates jobs and hiring, unemployment is minimal, and mass unemployment is rare.
- State ownership of industries can prevent monopolies and inherently abusive market practices, such as price gouging and misleading advertising.
- They can respond quickly to meet critical social needs, such as health care, housing, and education, often available at little or no cost.
Disadvantages of a Command Economy Include:
- Command economies breed governments that limit the rights of people to pursue their personal financial goals.
- Due to their lack of free-market struggle, command economies discourage innovation. Industry leaders reward for following government directives instead of creating new products and solutions.
- Later, their economic plans cannot promptly respond to changing consumer needs. Command economies often suffer from over-and under-production, resulting in wasteful shortages and surpluses.
- They encourage ” black markets ” that illegally manufacture and sell products not produced by the command economy.
Communist Command Economy vs Socialist Command Economy
Although command economies are typical of communism and socialism, the two political ideologies apply them differently.
Together forms of government ownership and control maximum industries and production, but socialist command economies do not attempt to control people’s work. Instead, people are free to work as they wish based on their qualifications. Similarly, companies are free to hire the best-qualified workers instead of having workers assigned to them according to the central economic plan. In this way, socialist command economies inspire higher worker participation and innovation.