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.