What Is a Command Economy?

What Is a Command Economy?

Let me tell you directly: a command economy, which you might also hear called a planned economy, is where a central government authority takes charge of setting production levels and prices for goods and services. This means most industries are owned publicly. It's the opposite of a free-market system, where supply and demand handle those decisions.

You should know that the main alternative is indeed the free-market system, with supply and demand calling the shots on production and prices. Command economies tie into communist political systems, while free-market ones fit with capitalist societies.

Key Takeaways

Here's what you need to grasp: in a command economy, the central government controls production levels and prices, and there's little to no private ownership of industries. Government plans dictate national economic priorities, often via multi-year strategies, and they keep competition in check.

Critics will tell you these economies struggle with incentive issues and a lack of info for efficient resource allocation, which leads to waste and inefficiencies. On the flip side, supporters say they allocate resources better for social welfare and handle crises more effectively. Remember, this differs from free-market systems where market forces like supply and demand make the calls, not government orders.

How Command Economies Function

Countries like Cuba, North Korea, and the old Soviet Union run on command economies. China stuck with one until 1978, then shifted to a mixed setup blending communist and capitalist bits—now it's called a socialist market economy.

In a command economy, or planned economy, the central government owns and controls the means of production. Private ownership of land and capital? It's either nonexistent or heavily restricted. Central planners set prices, manage production levels, and limit or ban competition in the private sector. In a pure version, there's no private sector at all—the government owns or controls every business.

Government officials in these systems decide on economic growth, how resources get allocated, and how output is distributed, usually through multi-year plans.

Criticisms of Command Economies

Capitalists often point out two big issues with command economies: the incentive problem and the information vacuum for central planners.

Starting with the incentive problem—it begins at the top. Political interest groups dominate policymaking more here than in capitalist setups, without market checks like credit ratings or capital flight. Wages get set centrally for workers, and profits aren't there to motivate management. There's no real push to excel, boost efficiency, cut costs, or put in more than the bare minimum to avoid punishment.

Advancing means pleasing party bosses and using connections, not maximizing shareholder value or satisfying consumers. Corruption runs rampant. This ties into the tragedy of the commons on a huge scale—commonly owned resources are effectively unowned, so no one bothers preserving them. Housing, factories, machinery—they all wear out fast in these systems.

Then there's the information vacuum. Austrian economists Ludwig von Mises and F. A. Hayek first described the economic calculation problem here. Central planners have to figure out how much of everything to produce and distribute. In a free-market system, supply and demand handle this decentralized way—consumers drive demand by what they buy, producers respond accordingly, and everything's quantifiable along the supply chain.

In a command economy, planners might get the basics like food, clothing, and shelter right at first, but without supply and demand, they've got no rational way to match production to consumer wants. Over time, these incentive and calculation problems waste resources and capital, leaving society poorer.

Benefits of Command Economies

Supporters argue that command economies focus resource allocation on social welfare, not private profit like in free markets. They can control employment better, creating jobs even without real need to keep people working.

Finally, they're seen as stronger in national emergencies like wars or disasters. Even market societies might ramp up government powers temporarily in those cases.

What Are the Characteristics of a Command Economy?

Government planners run command economies from the top down. Monopolies are common and seen as essential for national goals. Generally, this involves public ownership of major industries, government control over production levels and distribution quotas, and government setting prices and salaries.

How Does a Command Economy Differ From a Free-Market Economy?

In a free-market economy, private enterprises set production based on supply and demand. In a command economy, the government dictates it. No free-market economy today is purely laissez-faire—governments use policies to push things like fuel-efficient cars. Some command economies have eased up; China's growth kicked off when it mixed socialist ideology with capitalist enterprise.

How Do Central Plans Work in a Command Economy?

Communist nations with command economies often roll out multi-year plans aimed at improving life for everyone. China has had 14 five-year plans, with the latest ending in 2025. These plans set goals for industries and sectors, requiring participation in things like cutting carbon emissions or boosting rural areas.

The Bottom Line

To wrap this up, a command economy is where a central government authority sets production levels, distribution terms, and pricing. It's part of communist systems and stands in contrast to free markets, where supply and demand largely determine prices.