The majority of economic activity in nations around the world lies between a severe command economy and a pure free-market economy. A command economy is a type of economic structure where the government is in charge of organising and controlling the nation’s production of goods and services.
Governmental officials decide on the kinds of goods and services that will be produced and provided, as well as the quantity and pricing that will be sold in the market. The government owns the bulk of industries.
The main alternative to a command economy is a free-market system, in which demand decides output and pricing. While capitalist countries have a free market economy, communist political systems also include a command economy.
Characteristics of Contemporary Command Economies
- If not all industries and areas, the vast majoity have economic plans developed by the government.
- Wealth, labour, and natural resources are distributed by the government in the most effective manner feasible.
- The government regulates both prices and production.
- The financial, electricity, and car industries are all monopolies owned by state governments.
- Governmental initiatives are used to carry out the centralised economic strategy.
This kind of economic structure is a key component of communist or socialist countries, as the current North Korea.
North Korea, Cuba, and the former Soviet Union all have command economies. Up until 1978, China had a command economy before starting the transition to a mixed economy that combined communist and capitalism elements. A socialist market economy is the term used to describe its existing economic structure.
In a command economy, commonly referred to as a planned economy, the nation’s central government must possess and oversee the means of production.
Ownership of private property, including land, is either nonexistent or severely constrained. Prices are fixed, output is regulated, and central planners restrict or outright ban competition in the private sector. In a strictly command economy, all companies are owned by or under the supervision of the central government, hence there is no private sector.
In a command economy, government authorities set national economic goals, such as when and how to promote economic growth, how to allocate resources, and how to distribute the outcomes. Frequently, a multi-year approach is used for this.
Benefits of Command Economy
- Income disparity can lead to irrational rage. Theoretically, command economies aim to distribute wealth more fairly.
- The government can potentially use all of its resources to quickly provide people with the most basic necessities during emergencies like natural disasters or wars.
- Prices are established by the government. They are unaffected by elements such as supply, demand, and others. Theoretically, since the government doesn’t care about profits, everything should be affordable; nonetheless, this frequently leads to low-quality goods and shortages.
- The government is able to provide employment for all citizens since it controls all businesses. As a result, unemployment rates might theoretically be close to zero even though many jobs had no economic value. A low unemployment rate is typically the main goal of the government strategy.
Free Market Economy vs Command Economy
In a free-market economy, the availability and cost of various goods are determined by the supply and demand for those goods. In a command economy, the central plan determines everything.
People are free to choose their professions and to live wherever in their country as they like. On the other hand, people in a command economy have limited freedom.
In a free market economy, individuals and businesses can own businesses and make investments. You cannot invest in anything in a command economy because the government essentially owns everything. In a free market economy, profit is the primary driver, whereas in a command economy, the welfare of society is the primary driver.
In a command economy, all economic activities are planned, organised, and governed by the central government in an effort to maximise societal welfare. Command economies, in contrast to free-market economies, do not allow market forces like supply and demand to determine production or prices.
Former strongholds like China and Russia have transformed into mixed economies over time by adopting more free-market pressures. Command economies may stifle innovation and lead to inefficiency.