Definition
A command economy, also known as a planned economy, is an economic system where the government or central authority makes all decisions regarding the production, distribution, and consumption of goods and services. It controls what is produced, how it is produced, and to whom it is distributed. This form of economy often exists in communist countries and lacks a free market.
Phonetic
The phonetics of “Command Economy” is:/kəˈmænd iˈkɑːnəmi/
Key Takeaways
- Central Planning: A command economy is guided by a central authority that makes all the decisions related to the production and distribution of goods and services. The government typically owns and controls all resources, including land, labor, and capital.
- No Competition: In a command economy, there is usually minimal or no competition as businesses are state-owned. Prices are set by the government, not by the forces of supply and demand as in a market economy.
- Focused on Social Welfare: Command economies focus on providing for everyone equally, aiming to eliminate wealth disparity and provide for all citizens’ needs. However, this can sometimes lead to inefficiency and lack of innovation due to lack of competition and incentives.
Importance
The business/finance term “Command Economy” is important because it represents a key type of economic system in which the government or a centralized power controls all major aspects of economic production and distribution. This includes deciding what goods and services to produce, how to produce them, and at what prices they should be sold. This system is essential to understand because it contrasts sharply with a market economy, where these decisions are made by individual businesses and consumers through supply and demand. While a command economy can ensure stability and equal distribution of resources, it can also lead to inefficiency and lack of innovation. Therefore, it is crucial for anyone involved in business or finance to comprehend what a command economy is and its potential impacts.
Explanation
A command economy, also known as a planned economy, primarily serves the purpose of centralizing economic control and decision-making in the hands of the government or a central authority. It is used in economies where the government is intended to play a key role in deciding what should be produced, how much should be produced, and what price should be charged for goods and services. The goal of a command economy is typically to ensure that the country’s resources are used most efficiently, and that wealth and income distribution is fair.Command economies are often used with the aim of molding society towards specific social outcomes, along with the shaping of the economy. The government aims to alleviate economic problems like unemployment and inflation through direct control, planning and management of the economy. This type of economic system is generally associated with socialist or communist economic systems, but can vary greatly in its practical implementations – depending on the government’s goals, and the country’s cultural, social, and political contexts.
Examples
1. Cuba: The economy of Cuba is a prime example of a command economy. In Cuba, the government controls and regulates different sectors of the economy such as energy, industry, and agriculture. The government decides which goods and services are produced, how much they should cost, and where they should be distributed.2. North Korea: Perhaps the most extreme example of a command economy exists in North Korea. The government of North Korea owns all property, decides on all resource allocation, controls all economic output, and sets all wages.3. Former Soviet Union: Although it’s not a present-day example, the economy of the Soviet Union was a notable example of a command economy. The government controlled all economic activities, including what and how much was produced, how goods and services were distributed, and what they would cost. This system was in operation until the dissolution of the Soviet Union in 1991.
Frequently Asked Questions(FAQ)
What is a Command Economy?
A Command Economy is an economic system in which the central government, rather than individual consumers and businesses, makes all decisions about the production and distribution of goods and services.
How does a Command Economy work?
In a Command Economy, the government determines what goods should be produced, how much should be produced, and the price at which the goods will be offered for sale. It also makes decisions about investments and incomes.
What are some examples of Command Economies?
Some of the most notable examples of command economies include the former Soviet Union, Cuba, North Korea, and China (though China is now considered a mixed economy with elements of a market economy).
What are the advantages of a Command Economy?
Among the potential advantages of a Command Economy are economic stability (no cyclical fluctuations), low levels of inequality, and the potential for rapid large-scale economic changes.
What are the disadvantages of a Command Economy?
Command Economies often suffer from lack of competition, leading to low efficiency and potential shortages. They may not respond quickly to consumers’ needs and wants, leading to inefficiencies and waste. There’s also a potential for the misuse of resources as the government controls all decisions.
How is a Command Economy different from a Market Economy?
Unlike a Command Economy where the government makes all economic decisions, in a Market Economy, economic decisions and pricing are guided by the interactions of citizens and businesses.
Can a Command Economy work with private sectors?
In most cases, a Command Economy does not usually allow private enterprise. But, in certain cases, a mixed economy can exist where the government controls certain sectors and the private sectors control others.
Is Command Economy synonymous with Socialism or Communism?
While socialism and communism do often employ a command economic structure, a command economy can exist outside of these political systems. The key is the central control over economic decisions, not necessarily the political structure.
Related Finance Terms
- Central Planning
- State-owned Enterprises
- Resource Allocation
- Five-year Plan
- Economic Equality
