Command Economy

A centrally planned economy with preference for social equality

What is a Command Economy?

Most economic activity in countries around the world exists on a spectrum that ranges from a pure free market economy to an extreme command economy. The command economy is a type of system where the government plays the principal role in planning and regulating goods and services produced in the country. The state authority determines the types of goods and services to be produced and provided, as well as the quantity and prices that will be offered in the marketplace.

Command Economy Example

 

Modern command economies can be identified by the following characteristics

  • Economic plans are centrally created by the government for the majority, if not all, sectors and regions.
  • The government distributes the nation’s capital, labor, and natural resources in the means it deems most efficient.
  • Production and prices are dictated by the government.
  • Businesses in the finance, utilities, and automotive industries are owned and monopolized by state authorities.
  • Government policies are created to carry out the centralized economic plan.

This type of economic system is a key feature in communist or socialist countries, such as modern-day North Korea.

 

Advantages of a Command Economy

If done properly and with adequate resources, a command economy offers the following benefits:

  • Society favors social welfare and equity rather than profiteering
  • Prevents monopolies by private businesses in identified crucial industries, such as health and energy
  • Reduction of unemployment
  • Ensures access to basic necessities

Compare this with a Market-Based Economy.

 

Disadvantages

On the other hand, even when done “properly”, a pure command economy has significant drawbacks.

  • Gluts and shortages of goods are common results, due to fixed prices and quantity of production. Natural equilibrium is more difficult to achieve when price and quantity are not floating.
  • Inefficient pricing of goods in relation to supply and demand
  • No response or attention to consumer preferences
  • Limits liberties and personal rights to pursue financial stability, in favor of social equality
  • Highly bureaucratic; all planning and execution carried out by the government
  • Not being able to know and respond to consumer preferences or complaints

This is in sharp contrast to how a market economy works.

 

Additional resources

Thank you for reading this guide to understanding how a command economy works. To learn more and help you advance your career, please check out these additional resources:

  • Normative economics
  • Economies of scale
  • Economic value-add (EVA)
  • Financial modeling guide

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