What is a Command Economy?

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Definition:

A command economy is where the government owns all resources, sets prices, and tells businesses what and how much to make — all, theoretically, to maximize the population’s welfare.

🤔 Understanding a command economy

As the name implies, in a command economy (aka "planned economy"), the government has a plan, which it uses to give orders to industries. The government also regulates people's incomes. You cannot invest your money, as the government owns almost everything, including land. This policy reduces competition in the country — and, typically, leads to material deprivation. In theory, the government's primary goal is not to make a profit. Instead, it aims to take care of its citizens by giving them free or subsidized education, housing, and healthcare.

Example

Unlike the United States, which has a market economy, North Korea has a command economy. Its government provides free medical care and education, and subsidized housing to its citizens. However, the United Nations has found that the quality of these services is inadequate. The government has invested a considerable amount of money in its nuclear program and has neglected social welfare. In fact, the government has starved people on purpose to maintain control. In response, people have set up unofficial private markets to survive. The government has cracked down hard on such private markets in the past. Economic hardship has gone hand-in-hand with extreme political repression and human rights abuses in North Korea, as it has historically in virtually all countries with command economies.

Takeaway

If a command economy were a puppet show, the government would be the puppeteer…

In a command economy, the government makes all the major economic decisions. It controls all means of production, such as raw material, money, land, and industries in a country. The government holds the strings; the people are left hanging.

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What are the characteristics of a command economy?

A command economy has a small number of typical elements: A central economic plan, government ownership of the means of production, and (supposed) social equality are essential features of a command economy. Based on the central plan, the government allocates physical resources to businesses and gives them hiring and production targets. But the central plan may not always reflect what people want. Additionally, people are only allowed to own a few personal possessions, such as clothes and small household items. Their income, job, and diet (in extreme cases) are generally controlled by the government. Even though people’s welfare is ostensibly the government’s ultimate aim, it usually falls short in achieving it.

What are the advantages of a command economy?

Countries like Russia and China had command economies at one point in time for several different reasons.

To attempt to redistribute wealth

Income inequality can breed resentment. Command economies — in theory — usually aim to redistribute wealth more equally.

Production can be increased quickly

In theory, the government can use all its resources to provide people with most necessities quickly during emergencies like natural disasters or wars.

Low prices

The government decides prices in a command economy. They are not influenced by demand, supply, or any other factors. In theory, the government does not look to make a profit, so, everything is usually affordable — though low-quality goods (think East German tenements) and persistent shortages (think bread lines) tend to be the results.

High employment The government can provide jobs to all citizens because it controls all businesses. So the unemployment levels can be close to zero, in theory, even if many jobs create no economic value. The government’s central plan usually has a low unemployment target.

What are the disadvantages of a command economy?

A command economy works in theory. But in reality, inefficiencies generally pile up in the system. That’s why countries like Russia and China have moved away from a command economic system.

  • Low personal freedom

The government decides your income and the type of job you do. Even if you are allowed to do non-government work, this right may be withdrawn at any moment. This policy reduces personal freedom. For example, the North Korean government does not allow its citizens to move from city to city, even within the country.

  • Shortage and wastage

The government decides what should be made and what quantities are produced. But it may not accurately understand what people want. If the government created an excess of something that is not needed, there will be wastage. Similarly, there can be a shortage if it produces little of something that is in demand.

  • Limited innovation and incentive

Even if people work hard, their income stays the same. So, there is no external incentive to do better work. There is almost zero competition, so businesses may become inefficient. They also do not typically work toward productivity and improving technology as the government controls them. All this limits innovation and reduces productivity.

  • Increase in illegal activity

People may not always get what they want as the government controls almost every financial aspect of their life. People also get limited money and opportunities. So they may engage in illegal activities to find new sources of income, or at times to buy the things of which the government is not producing enough.

If you lived in North Korea, you would find it extremely hard to access the internet due to strict government laws. So you may turn to the black market to buy smuggled USB drives that have websites similar to Wikipedia, eBooks, and Hollywood movies.

Command Economy vs. Free Market Economy

A command economy is fundamentally different from a free market economy.

  • Business Decisions: In a free market economy, businesses are like kids with no adult supervision — They can do whatever they want. The demand and supply of different items determine their availability and price in a free market economy. In a command economy, the central plan decides everything.
  • Freedom: Free market economy — The name tells all. In it, people can choose their professions and are free to move about in their country. In contrast, people have limited freedom in a command economy.
  • Ownership: In a free market economy, people and companies can own businesses and make investments. In a command economy, the government owns almost everything, so you cannot invest in anything.
  • Incentive: Profit is the main motivating factor in a free market economy as opposed to society’s welfare in a command economy.

Which countries have a command economy?

Most countries in the current age do not have a pure command or free-market economy. They have a combination of both government-run enterprises and private companies (this is called a mixed economy). However, North Korea, Cuba, and Belarus are closest to having command economies.

Venezuela also has features of a command economy.

Is a command economy socialism or communism?

A command economy is like a tree trunk, while socialism and communism are its different branches.

Both socialism and communism are types of a command economy. In all three, the government controls businesses, resources, and economic activity in the country. All have central planning, too. However, there are subtle differences between them.

In socialism, everything is controlled by the government. The people and government have a common objective, which is usually social welfare. Profits in socialism are distributed according to people’s contributions.

In communism, everyone collectively owns the land and money, and the output is distributed equally. In reality, pure communism has never been achieved. Instead, we have seen aspirational versions of it in the Soviet Union, China, and Cuba. In communism, private ownership is not allowed. People’s pay is based on only need and not their contribution.

Command economy is an umbrella term for any controlled economic system — it encompasses both socialism and communism.

On the other hand, capitalism is a type of free market economy. It is characterized by private ownership and low government interference. People’s pay is based on what an employer is willing to pay them in the market. A free-market economy and capitalism are on the opposite of a command economy, socialism, and communism.

What is the history of a command economy?

Just like a superhero’s origin story helps you understand the plot better, it is always useful to know the beginnings of an economic system.

  • The first seeds of command economy: The Old Kingdom of Egypt around 2200 BC and the Incan civilization in the 16th century had some form of a command economy.
  • The way we know of it today: A command economy as we know it today was first fully articulated by Karl Marx and Friedrich Engels in The Communist Manifesto in 1848. The struggle between workers and owners motivated them to come up with the command economy system. Their work was preceded by several early socialist thinkers.
  • First real-life example: In 1917, the former Soviet Union became the first communist state of the world, and adopted a command economy. It lasted until the Soviet empire collapsed in 1991.
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