Command Economy - Explained
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Table of ContentsWhat is a Command Economy?How does the Command Economy Work?Academic Research on Command Economy
What is a Command Economy?
A command economy is a structure established by the government in which all the means of production are owned and controlled by the government which serves as the central authority. A command economy can also mean a planned economy where the government has the absolute authority to determine means of production include what is produced, how they are produced. In a command economy, the government determines all investments and incomes, it also determines the amount at which the goods that are produced are sold. Communist societies such as Cuba, Soviet Union and North Korea use command economy.
Back to:ECONOMIC ANALYSIS & MONETARY POLICY
How does the Command Economy Work?
The means of production are publicly owned in a command economy. The types of goods produced and the rates they are sold are also controlled by the government. Unlike free markets where production and prices of goods and services are determined by demand and supply, command markets are controlled by a central authority (the government). The government manages the market or economy in a command market as against what we have in free markets where the government has little or no intervention in means of production and prices of market. Instead of market forces or mechanisms, centralized authority are prominent in command market, this market features no competition since the government has total control.
What are some features of Command Economies?
There are other salient features of command economies aside from the overwhelming intervention of government that replace market forces or mechanisms. This type of economy empower governments of countries practice it in terms of financial strength and making economic decisions. Monopoly markets is a salient feature of command markets, government adopt this system to cater for its needs and meet national economy goals. Command market also features governments of states playing principal role in planning and regulating goods and services produced in markets and how much they are sold. Laws and regulations are established by the government and domestic competition of free market in any form is not allowed in command economies.
What are some negative consequences of Command Economies?
There are certain downsides of command economies such as the absence of competition in markets which can lead to deceleration in some industries.
- Prices of goods and services are set based on the needs of the government resulting in inefficiency of output and demand.
- Also, because the command economy is controlled by a central authority, this central authority might not be able to efficiently manage market mechanisms due to limited knowledge in the market.
- Inability of the government to efficiently decide on what goods and what quantity to produce can cause shortages or surpluses in command economies.
- Difficulty in responding to the dynamic nature of demand is another drawback of command economies.
What are some benefits of Command Economies?
Despite that there are diverse prevailing drawbacks of a command economy, there are some arguments in favor of the economy.
- One of the arguments in favor of a command economy is that the allocation of resources (prices) and control of the means of production are tailored towards social welfarism. That is, government allocate prices strictly to cater for social needs.
- Another argument is that command economies tend to control employment levels better than countries that practice free market. This means that government of command economies create employment opportunities when the need arises.
What are some types of Command Economies?
According to general belief, socialism and communism are attributed to command economies.
In fact, socialism is regarded as a type of command economic system, this is because majority of the means of production (such as capital goods and lands) are controlled by the state government. Also, some people hold the position that economic planning and communism are similar to socialism but the fact is they are not equivalent.
Socialism entails the engagement of the states in the central planning regarding the production of goods and services but not a prevalent control is exercised by the government in command economies.
- Command Economy
- Centrally Planned Economy
- Traditional Economy
- Mixed Economy
- Underground Economy
- Black Economy