What Is a Command Economy? How Command Economies Work

A command economy, also known as a planned economy, is an economic system in which the central government makes major economic decisions about the production and distribution of goods. In a command economy, all of the major industries are publicly owned. Various government committees and organizations set long-term operation plans for the economic system.

There have been different approaches to command economies throughout history. Some common features in most command economies that distinguish them from capitalist economies or market systems include:

1. 1. Central planning: Most command economies have a high degree of planning at the top of the political system to decide priorities, draw plans, and devise strategies to measure progress and keep the economy running.
2. 2. Public ownership: Command economies are made possible by a high degree of state ownership, meaning the government owns land and primary industries, and largely controls the monetary system. Decisions about allocating resources move down the chain of command.
3. 3. Price setting: Another essential feature of command economies is fixed prices for basic goods and services. Fixed prices and controlled wages can, in theory, ensure that every person in the country has access to the resources to live a comfortable life.

Command economies generally exist as part of a communist political system. There have been many command economies throughout history, including:

1. 1. USSR: Beginning with the Russian Revolution of 1917 and lasting until the dissolution of the Soviet Union in 1991, the USSR used a variety of different approaches to central economic control with some degree of central control of economic activity. Throughout that time, various economic sectors implemented five-year plans laid out by the government.
2. 2. China: China maintained a centrally planned command economy beginning after the Communist Revolution in 1948 until 1978 when it began to shift toward a mixed economy. Like the Soviet-style economic models, Chinese Communist Party officials used five-year economic plans to set goals for growth and productivity.
3. 3. Cuba: Cuba is notable for its continued use of a command economy, although there have been adjustments to incorporate a greater degree of market participation in recent years.
4. 4. North Korea: North Korea is another example of a top-down command economy, although there is little reliable information about North Korea’s economy.

Some of the advantages of a command economy include:

1. 1. Full employment: Command economies can ensure that everyone is adequately employed. Employment is a policy decision, and the labor force is not subject to the whims of private employers and the marketplace.
2. 2. Swift change: Command economies don’t have to rely on the incentives of profitability, so the government's central authority can change the economy's direction much more effectively than free-market economies. This can have advantages in responding to macroeconomic or political crises and new technologies.
3. 3. Social welfare: When the wellbeing of all citizens is a political priority, command economies don’t need the profit motive to provide essential goods and services, such as food and healthcare. Central planners can direct essential resources to be universally available.

The following are some of the disadvantages of a command economy:

1. 1. Less innovation: Command economies may have trouble with innovation. There can be a strong incentive to remain in line with the status quo and minimal market forces to respond to, discouraging risk-taking.
2. 2. Corruption: As with any political and economic system, command economies have struggled with corruption. Countries that have command economies are typically controlled by one political party, and the political class and those closely associated with them generally have more power, leading to corruption and graft. Shortages can lead to the rise of a sizeable black market to meet consumer demand.
3. 3. Lack of information: In traditional economics, the interplay of supply and demand creates the market price for goods and services. With central planning, the demand must be estimated beforehand using incomplete information about consumer preferences and potential inefficiencies. This can lead to faulty economic decision-making, shortages, surpluses, or a lack of economic growth.

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