Why is a command economy better?

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A command or planned economy occurs when the government controls all major aspects of the economy and economic production. In a command economy, it is the government that decides what to produce, how to produce goods and how to distribute goods and services within the economy. Command economies were often associated with the political system of Communism. It was Karl Marx, in the Communist manifesto who argued for ‘common ownership of the means of production.’

A command economy works in contrast to a free market economy. In a free market economy, goods and services are produced by private enterprise with distribution occurring according to market forces.

How a command economy works

• Government ownership of the means of production. In command economies, governments will own some or all of the industries producing goods and services.
• Government pricing and production decisions. In a command economy, production is decided by government agencies, who decide the most socially efficient goods to produce. Government agencies may also set prices or give consumers rations directly.
• Government macro-economic objectives. In a command economy, the government will have over-riding macroeconomic objectives such as employment rates and what to produce.
• Some centrally planned economies may consist of not just state-owned enterprises, but some privately owned firms who are closely directed by state management.

How a command economy compares to a free market economy

Advantages of  command economies

• Supporters of command economies argue that it enables the government to overcome market failure, inequality and create a society that maximises social welfare rather than maximises profit.
• Command economies can prevent abuse of monopoly power.
• Command economies can prevent mass unemployment, often a feature of capitalist economies.
• Command economies could produce goods which benefit society and ensure everyone has access to basic necessities.
• Although Command economies are associated with failing inefficient economies of the late Soviet Union and Cuba, in the 1920s and 30s, the Soviet Union made periods of very rapid economic growth. Between 1928–40 – the first three Five-Year Plans, the Soviet Union made rapid economic growth changing from a largely agrarian society to a major industrial nation. (This also occurred during a period of depressed world demand during the Great Depression.)

Disadvantages of command economies

• Government agencies usually have poor information about what to produce. Centralisation means that decisions are taken by people who may have no access to what is actually happening. Command economies, like the Soviet Union, often produced goods that weren’t used.
• Unable to respond to consumer preferences.
• Inefficient firms are protected and kept going; making it hard for resources to move to dynamic and efficient firms.
• Threat to democracy and liberty. A command economy creates a very powerful government which limits individuals rights to pursue economic objectives. This invariably creates a climate where governments can extend their control into other areas of people’s lives.
• Bureaucratic. Command economies tend to be very bureaucratic with decisions held up by planning and committees.
• Price controls invariably lead to shortages and surpluses.

Transition from command to market economies

From the 1980s, many command economies, such as the Soviet Union began to make the transition to a mixed economy. This involved a process of privatisation and price deregulation. A mixed economy enables the benefits of both free market and some selected government intervention.

China has also made the transition from a command economy to a mixed economy – though politically the country still remains communist.

A command economy is a type of economic system in which the government is the sole controller of most aspects of the economy. This includes setting prices, allocating resources, and dictating production levels.

In a command economy, the government is able to control economic outcomes directly. This can be done by issuing directives to businesses.

For example, the government may tell a steel manufacturer to produce more steel, even if there is insufficient demand.

Or, the government may set prices that are different from what would occur in a market economy. This can distort the signals that businesses use to make decisions about what to produce and how much to produce.

What Is the Purpose of a Command Economy?

The purpose of a command economy is to ensure that the government can meet its economic goals. These goals may include ensuring that there is full employment, controlling inflation, or developing specific industries.

This means that a command economy is not necessarily about maximizing economic output. Instead, it is about achieving specific goals that the government has set.

How Does a Command Economy Work?

In a command economy, the government holds all the power. This means that it can issue directives to businesses, telling them what to produce and how much to produce.

The government can also control prices. This allows it to ensure that goods are available at a low price, or those specific goods are available in short supply.

In addition, the government can allocate resources as it sees fit. This means that it can direct businesses to invest in certain sectors of the economy or to use specific resources.

The government can also control the level of production. This allows it to ensure that there is not too much or too little of a particular good.

What Are the Advantages and Disadvantages of a Command Economy?

The advantages of a command economy are:

• The government can ensure that there is full employment.
• The government can control inflation.
• The government can direct businesses to invest in certain sectors of the economy.
• The government can develop specific industries.
  
  

The disadvantages of a command economy are:

• There is less economic freedom.
• Businesses do not have the freedom to make decisions about what to produce and how much to produce.
• The government can distort pricing signals, which can lead to inefficiencies in the economy.
• The level of production is not always responsive to market demand.
• The government can be wasteful with resources.

How Does Pricing Signal Information in a Command Economy?

In a command economy, prices are not determined by supply and demand. Instead, they are set by the government.

This can make it difficult for businesses to make informed decisions about what to produce and how much to produce.

For example, if the government sets a price for steel that is higher than the market price, businesses will have less incentive to produce steel. This can lead to shortages of steel in the market.

Alternatively, if the government sets a lower price for steel than the market price, businesses will have more incentive to produce steel. This can lead to overproduction of steel and shortages of other goods.

How Does the Performance of a Command Economy Compare to a Market Economy?

There is no one-size-fits-all answer to this question. The performance of a command economy will vary depending on the specific goals that the government is trying to achieve.

However, a command economy is likely to be less efficient than a market economy. This is because the government cannot respond to changes in supply and demand as quickly as businesses can in a market economy.

Additionally, businesses in a market economy are motivated by profit. This means that they will produce goods that people are willing to buy at a price that covers the cost of production and allows for a profit.

In a command economy, businesses may produce goods that people do not want or that are not profitable.

What Is the Difference Between a Command Economy and a Socialist Economy?

A command economy is different from a socialist economy in several ways.

First, the government controls a command economy, while the workers control a socialist economy.

Second, in a command economy, businesses are directed to produce specific goods, while in a socialist economy businesses are free to produce whatever they want.

Third, prices are set by the government in a command economy, while prices are determined by supply and demand in a socialist economy.

Finally, a command economy aims to achieve specific economic goals, while the goal of a socialist economy is to create a more equal society.

Do Command Economies Still Exist?

Yes, command economies still exist in some countries. However, they are becoming less common as more countries move to a market economy.

Examples of countries with a command economy include Cuba and North Korea.

The Bottom Line

In a command economy, prices are set by the government, and businesses are directed to produce specific goods.

The performance of a command economy is likely to be less efficient than a market economy.

Command economies still exist in some countries, but they are becoming less common. Examples of countries with a command economy include Cuba and North Korea.

FAQs

1. What is the purpose of a command economy?

A command economy aims to achieve specific economic goals, such as maximizing production or ensuring that all citizens have access to essential goods.

2. How does pricing signal information in a command economy?

In a command economy, prices are not determined by supply and demand. Instead, they are set by the government.

3. How does the performance of a command economy compare to a market economy?

There is no one-size-fits-all answer to this question. However, in general, a command economy is likely to be less efficient than a market economy.

4. How is a command economy different from a socialist economy?

The government controls a command economy, while the workers control a socialist economy.

5. Is a command economy the same as a centrally planned economy?

No, a command economy is not the same as a centrally planned economy. In a command economy, businesses are directed to produce specific goods, while in a centrally planned economy, businesses are free to produce whatever they want.

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