A command economy is one in which all economic decisions are made by the central authority. The land and the means of production are owned by either the government or a collective. It rejects the conventions that guide a traditional economy and does not rely on the principles of supply and demand that govern a market economy.
Learning how various economies run and interact with one another, as well as their advantages and disadvantages, may assist provide a better understanding of how different economies operate and interact.
Command economies are exemplified by the following examples.
Take a look at the following examples of command economies:
- Belarus is still a command economy, despite being a former Soviet satellite. The government owns 80% of the enterprises and 75% of the banks in the nation.
- China: Following World War II, Mao Tse Tung established a communist-ruled society. He insisted on a well-planned economy. The present administration is working toward a market-based economy. They’re still drawing up five-year plans to lay out their economic aims and ambitions.
- Fidel Castro’s revolution in 1959 established Communism and a planned economy in Cuba. Cuba’s economy was supported by the Soviet Union until 1990. The government is progressively introducing market reforms in order to enhance growth.
- Iran: The government has a mix of direct and indirect state control over large swaths of the economy. This control has resulted in inefficiencies and recessions, which have been exacerbated by foreign sanctions. These sanctions were lifted in 2015 as part of a nuclear trade agreement but were reinstated in 2018 after President Trump backed out of the agreement.
- North Korea has had one of the world’s most centrally planned economies for decades. Due to mismanagement, underinvestment, and material shortages, the US administration believes North Korea’s industrial capital stock is virtually beyond repair. Famine and starvation continue to afflict North Koreans.
- Russia: The Russian Revolution and Vladimir Lenin established the first Communist command economy in 1917. From the 1930s through the late 1980s, the Union of Soviet Socialist Republics (USSR) was the world’s longest-running command economy. Since the dissolution of the Soviet Union, the Russian government has handed over control of the country’s main corporations to oligarchs.
Some centrally planned economies, such as China and Russia, have begun to include market-oriented elements, resulting in a mixed economy. Other economies, such as North Korea’s and Cuba’s, are nonetheless constrained economically.
B. What Are Command Economies and How Do They Work?
The government sets a central economic plan in a contemporary, centrally planned command economy. For example, the government may create a five-year plan that lays out economic and sociological objectives for each industry and area of the country. Goals are translated into practical objectives in shorter-term strategies.
All resources are allocated according to the central plan by the government. It seeks to make the most effective use of the country’s money, labor, and natural resources.
The goal of command economies is to maximize the utilization of each person’s talents and competencies. A command economy aims to reduce unemployment by doing so.
A command economy aims to reduce unemployment by doing so.
The central plan establishes production priorities for all goods and services. Quotas and price restrictions are examples of this. The objective is to provide adequate food, shelter, and other necessities for everyone in the country. The central plan also establishes national priority on matters such as war mobilization.
The government owns monopoly enterprises in areas that are deemed critical to the economy’s aims, such as banking, utilities, and automobiles. In sectors that become part of the command economy, there is no domestic competition.
To execute the central plan, the government enacts laws, rules, and directives. The plan’s production and hiring objectives are followed by businesses. They are unable to respond to free-market pressures on their own.
1. Theoretical Development
Following World War I, Austrian economist Otto Neurath established the notion of a command economy. It was presented by Neurath as a means of controlling hyperinflation. “Befehlswirtschaft” is a German term that means “command economy.” It was a description of Nazi Germany’s fascist economy.
While the term comes from Nazi Germany, centrally planned economies have been around for a long time. A command economy occurs when the government asserts control over industries rather than allowing market forces to decide economics. Even the United States, which has generally valued free-market economics, has employed command economies in the past, such as diverting supplies to war activities during World War II.
2. Economic Freedoms in Different Parts of the World
National rankings by the level of economic freedom, from most free to most constrained, are shown below:
C. The Benefits and Drawbacks of a Command Economy
1. Explained Advantages
- Speed: Planned economies can deploy vast amounts of economic resources fast. They can carry out large-scale initiatives, generate industrial power, and achieve social objectives. They are unaffected by individual lawsuits or environmental impact assessments.
- Unity: Command economies have the potential to completely alter society to fit the government’s agenda. The new administration has the authority to nationalize private firms and impose regulations on residents as necessary to guarantee that the whole country works together to achieve a common objective. Workers may be offered new positions depending on the government’s evaluation of their abilities and how they can best collaborate with other sectors of the economy.
2. The Drawbacks are Expounded
- Ignores the desires of customers: Command economies sometimes suffocate other community requirements as a result of their fast mobilization. The government, for example, instructs people what occupations they must do, which inhibits them from transferring. Consumer demand isn’t always reflected in the things produced. Citizens, on the other hand, find a method to meet their wants and desires, which frequently leads to the creation of a shadow economy or black market that buys and sells goods that the command economy does not provide. Leaders’ attempts to regulate the market erode public support.
- Inefficiencies: Command economies frequently generate too much of one item while producing insufficient amounts of another. Central planners have a hard time getting up-to-date information regarding customer wants. Meeting the demands of foreign markets is much more difficult, therefore command economies struggle to provide the proper exports at market rates that are internationally competitive.
- Business executives are rewarded for obeying orders, which discourages innovation. This system forbids taking the risks necessary to develop innovative solutions.
A command economy is a type of economic system in which the government determines output levels and rates rather than demand-based production as in a market-driven economy. The goal of a command economy is lofty and virtuous: it frees the general public from the dread of instability in essential requirements such as food, housing, clothes, and health, among other things. Wealth is not concentrated in one area of society but is spread evenly among all inhabitants. It restores economic balance by eliminating disparities, economic crises, corruption, and political unrest, as well as the poverty gap, and ensuring a fair allocation of available resources.