Updated July 7, 2023
What is Command Economy?
A Command economy is a political system where a sole governing authority sanctions all aspects of the economic flow, such as investment, production volume, trade, and more.
For example, the North Korean or the Democratic People’s Republic of Korea (DPRK) government runs a tightly controlled and isolated economy. The Korean governing body plans, coordinates, and runs the economy.
In this economy, the central or governing body owns, creates, and distributes everything. It is also known as an authoritarian regime where the regime decides on economic, social, and political factors. They control the supply-demand chain and decide what to produce, the quantity, prices, etc. They also solely make the policies, i.e., individuals/businesses have little or no say in the economic decisions.
Key Highlights
- In a command economy, the central governing body controls the economy and makes all crucial decisions on monetary policies, trade relations, investments, and supply-demand chains.
- Its primary characteristic is that the governing body intervenes in every aspect of economic activity. It owns the land, controls the market, distributes goods/services, etc.
- The benefit of this economy is that it promises full utilization of resources and distributes equal wages.
- However, the major disadvantage of such economies is the lack of freedom to be innovative and ambitious.
How Does Command Economy Work?
- The level of government intervention in a market decides the type of economy of a country. Therefore, in this economy, the government regulates the market and the production of goods and services.
- The government may need a short-term or long-term plan for every sector to have a properly functioning economy. These plans prioritize the distribution of the country’s natural, capital, and labor resources.
- Here, the ruling body controls the industries that form the pillars of an economy. They determine the price of commodities and manage the demand and supply chain.
- Its goal is to use its resources efficiently and ensure an adequate supply of basic human needs. It focuses on utilizing every individual’s skills to ensure that unemployment does not weaken the economy.
Examples of Command Economy
Example#1:
The Cuban economy was wholly a command economy in its constitution until the 1990s, but later it became mixed. Though even today, it mostly has state-run initiatives. The Cuban governing body employed most of the labor force and later encouraged the development of worker co-operatives and self-employment. 2019 the constitution granted free-market rights, private property, and foreign direct investment.
Example#2:
The North Vietnam economy, run by a communist dictatorship, was a command economy in its constitution. South Vietnam was more liberal and capitalist in its constitution until the North won the war in 1975. North Vietnam then tried to bring the command economy system to the South. Eventually, the economy leaned towards a mixed economy.
Characteristics of Command Economy
Monopoly
- The central authority guides the factors of production with little or no input from the national citizens
- It directly contrasts with free-market economies, i.e., against privatization and free-market pricing.
Economic Future Planning
- The controlling body creates economic plans for all sectors and sets priorities for each sector
- These can be three or five-year plans that focus on the future goals of the economy.
Resource Allocation
- The ruling body owns the country’s land and other resources and manages all aspects of resource allocation.
- It creates a space for the black market, where people can avail things not provided by the ruling body.
Restrictive Laws
- The governing body lays various legal restrictions on the citizens, such as business models, goods and services prices, etc.
- They can also be social norms, like no access to the internet, particular dressing styles, and more.
Benefits and Drawbacks of Command Economy
|
Benefits |
Drawbacks |
| The State Authorities allocate resources that ensure optimal utilization and maximize society’s welfare. | In the name of societal goals, it sacrifices individual liberties. For example, during the 1930s, the Soviet Union murdered thousands of peasants in the name of collective ownership of farming lands. |
| It enhances the equal pay system as the authorities decide the wages. It also reduces the unemployment rate. | The government owns all production factors, which leads to inefficiencies due to a lack of competition. Moreover, on fixed wages, the workers often lack the incentive to perform better. |
| The governing authority can mobilize the resources and execute any national-level project without interference. | In a controlled economy, people work within the ordained parameters that don’t allow risk-takers and business leaders to flourish. |
| The government offers equal care to the individuals in a society, irrespective of caste, class, or skills.
It ensures no scope for inequality and corruption. |
The economy works on the pre-decided rules. Thus, it does not take into account consumer needs. |
| Everyone has equal access to better facilities provided by the government. | It often faces the problem of producing one thing in excess and a shortage of other things, which often leads to the problem of rationing and hoarding. |
Final Thoughts
The ruling party governs flow-of-production in this economy, from concept to distribution, without consulting the demand-supply parameters. Therefore, it does not meet the needs of the people but follows the orders of authoritarian regimes. As a result, workers lack the incentive to be innovative or perform better. It has also made Korea 90% dependent on China for its basic needs like machinery, fuel, and grain. However, most countries are going for a mixed economy by adopting more growth-oriented methods of a free-market economy.
Frequently Asked Questions(FAQs)
Q1. Differentiate Command and Free Economy.
Answer: The state authorities control every aspect of the economic flow in the command economy. They decide the laborers’ wages to the production, trade, and investment level.
In contrast, in a Free-Market economy, market forces determine the course of the supply chain and the prices of products. There is little/no government intervention in the free market economy.
Q2. What is the primary feature of a Command Economy?
Answer: Its primary feature is that the governing authority controls the economy, while private ownership does not exist. The government decides everything but is not answerable to anyone. It believes in the concept of collective ownership.
Q3. Which country still has a total Command Economy?
Answer: North Korea’s economy is an ideal example of the command economy. It regulates every aspect of the economy, from the supply chain to personal decisions on hairstyles to clothing styles. It strictly follows social equality.
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