A Command Economy is an economic system in which a central governmental authority dictates the levels of production, the allocation of resources, and the distribution of goods and services. This centralized planning aims to control all major economic activities, contrasting sharply with market economies where such activities are driven by market forces such as supply and demand.
History and Evolution
The concept of command economies has been predominantly associated with socialist and communist countries, notably the Soviet Union, Cuba, and North Korea. The command economy was seen as a way to mobilize economic resources quickly and achieve specific national goals, such as rapid industrialization or military expansion.
Mechanisms of Operation
Central Planning
In a command economy, central planning bodies, often a government or a dedicated planning committee, create comprehensive plans that outline economic activities, such as production targets, labor allocation, and inventory control.
Resource Allocation
Resources, such as labor, capital, and raw materials, are allocated based on guidelines established in the central plan. Unlike market economies, where resources are allocated through price signals and competition, command economies rely on state directives.
Key Characteristics
Government Control
All major economic decisions are made by the government, which owns and manages the production resources.
Lack of Competition
The absence of competition leads to monopolistic conditions, often resulting in inefficiencies and lack of innovation.
Fixed Prices
Prices of goods and services are set by the government, unrelated to the actual market demand and supply.
Examples of Command Economies
The Soviet Union
The Soviet Union’s centralized planning system involved Gosplan, the State Planning Committee, which created detailed five-year plans for national economic goals.
North Korea
North Korea operates under a strict command economy, with the government controlling almost all aspects of economic life.
Frequently Asked Questions
What are the Advantages of a Command Economy?
- Focused Resource Utilization: Resources can be quickly mobilized for large-scale projects.
- Reduced Inequality: Wealth distribution can be controlled to reduce extreme disparities.
What are the Disadvantages?
- Economic Inefficiency: Lack of competition often results in low innovation and productivity.
- Shortages and Surpluses: Misallocation of resources can lead to significant imbalances in the economy.
Related Terms
- Market Economy: An economic system where decisions are driven by market forces.
- Mixed Economy: A combination of market and command economy features.
- Central Planning: The process of creating comprehensive economic plans by a centralized body.
References
- Samuelson, Paul A., and William D. Nordhaus. “Economics.” McGraw-Hill Education, 2010.
- Kornai, János. “The Socialist System: The Political Economy of Communism.” Princeton University Press, 1992.
- Gregory, Paul R., and Robert C. Stuart. “Comparing Economic Systems in the Twenty-First Century.” South-Western College Pub, 2003.
Summary
A command economy is characterized by the central authority’s control over all economic activities, which can have both advantages, such as focused resource allocation, and disadvantages, such as economic inefficiency. Understanding command economies is crucial for insights into alternative economic systems and their impacts on societal development.
