Understanding Command Economy: Definition & Examples

Throughout time, various nations have adopted command economies, stretching from Ancient Egypt to the USSR. This distinct economic construct brings along with it a unique blend of pros and cons that makes it different from other economic models. If you're keen to explore more on the juxtaposition of command economy and communism, along with the pros and cons of a command economy, continue reading.

Interpreting Command Economies

Within a command economy, also referred to as a planned economy, the government is tasked with making all of the economic decisions. The major objective of this type of economy is to guarantee societal welfare together with fair distribution of goods.

A command economy is identified by governmental control over all facets of economic activity, including the production, distribution, and pricing of goods and services. Here, the government owns and regulates resources and production facilities, deciding what goods and services should be created and how they should be distributed.

To learn more about various types, dive into our tutorials on different economic systems.

In such an economic structure, the government can ensure a just distribution of vital goods and services across all of its citizens, regardless of their income or social class. For instance, in case of a food scarcity, the government has the authority to intervene and distribute food equally among its people.

Features of a Command Economy

A command economy generally exhibits these characteristics:

• Central Planning: The government determines the production and prices of goods and services.
• Absence of Private Ownership: There is little to no private ownership of businesses or property.
• Focus on Social Welfare: The government's main goal is to promote social welfare and fair distribution of goods, rather than concentrating solely on profit maximization.
• Governmental Control over Prices: The government establishes the prices for goods and services, which remain static.
• Restrained Consumer Choice: Citizens have limited options in terms of purchasing goods and services.
• Absence of Competition: No competitive business environment exists as the government regulates all economic activity.

Economic Structure: Command Economy vs. Communism

The principal contrast between communism and command economy is that communism is an overarching political ideology covering economic, social, and political aspects. In contrast, a command economy is solely an economic structure. In communist regimes, people control all aspects of society including economic, political, and social.

Within communism, individuals do not own land, industries, or machinery; these assets are owned collectively either by the government or the community and their produced wealth benefits all.

A command economy can exist outside the communist ideology. Some authoritarian governments have applied command economies without embracing communism. For instance, the Old Kingdom of Egypt in 2200 BC and the Incan Empire in the 1500s used command economies, thereby marking the earliest documented instances of such systems.

Benefits of Command Economy

Considering that, a command economy presents numerous advantages and disadvantages. We'll examine some of these now.

1. Social welfare is given precedence over profit in a command economy.
2. Command economies aim to resolve market failures by focusing on the production and distribution of goods and services based on societal necessities rather than profit motives.
3. The planned economy creates industrial prowess to achieve large-scale initiatives while accommodating crucial social objectives.
4. The government in a command economy can adjust production rates to meet society's specific needs, which in turn minimizes the incidence of shortages.
5. Resources can be mobilized on a grand scale, fostering rapid progress and economic development.
6. Resources are employed to their full potential, facilitating swift societal advancement and fiscal growth.

Drawbacks of Command Economy

The disadvantages of a command economy include:

1. Lack of Incentives: In a command economy, where the government controls all production means and makes all production decisions, clear incentives for innovation and entrepreneurship might be lacking, leading to stunted economic growth.
2. Inefficient resource allocating: Government intervention can lead to inefficient resource allocation.
3. Reduced Consumer Choice: Owing to the government deciding what goods and services to produce and distribute, it may not align with consumer preferences or needs.
4. No Competition: In a command economy, where the government controls all industries, the benefits of competition are not realized.

Instances of a Command Economy

No country operates under a completely command economy, and likewise, none adheres strictly to a free market system. Most contemporary economies lie somewhere between these two extremes featuring varying degrees of government intervention and market freedom. Countries like China or Cuba showcase significant government control over their economies, yet elements of market competition and private corporations still exist. Conversely, in countries like the US with largely open markets, economic activities are also shaped by regulatory bodies and government actions.

The likes of Cuba, China, Vietnam, Laos, and North Korea are examples of countries with command economies.

China

China serves as a prominent example of a country having a command economy. Mao Zedong's policies, including the Great Leap Forward in the late 1950s, couldn't alleviate economic challenges and led to famine and economic decline. Despite this, China saw significant development over the subsequent decades with investments in education and infrastructure, leading to marked improvements in literacy rates and poverty reduction. In the 1980s, China adopted market-based reforms leading to extraordinary economic growth.

Cuba

Another example of a command economy is Cuba, which has been under communist governance since the Cuban Revolution in 1959. Despite facing numerous challenges, including a US embargo, Cuba has managed to reduce poverty and achieve high literacy rates and healthcare accessibility. However, the country has been criticized for curbing political freedoms and human rights offences.

Vietnam

Similar to China, Vietnam once operated under a command economy but has since transitioned to a more market-driven approach. Although the government maintains considerable control over the economy, it has introduced measures to reduce poverty and improve social welfare. However, like China, Vietnam also comes under scrutiny for its limited political freedoms.

Command Economy - Major Insights

• A command economy is a system in which the government controls all aspects of production, distribution, and consumption of goods and services. This includes ownership and control of all resources and production means, as well as the prices and quantities of goods to be produced and distributed.
• The key difference between communism and a command economy is that the former is a comprehensive political ideology that includes economic, social, and political aspects, whereas the latter is purely an economic setup.
• Vietnam, Cuba, China, and Laos serve as examples of nations with command economies.
• Notable benefits of a command economy include centralized control, social welfare promotion, and market failure elimination.
• Certain drawbacks linked to a command economy encompass a lack of innovation incentives, inefficient resource allocation, corruption, and restricted consumer choice.