Introduction to Command Economy
Command economy is a form of economic system where the production/ supply, demand/ supply of goods and services, selling price, investment type and investment levels, all are regulated by the central governing authority by assigning production goals quantitatively and providing necessary raw materials required for manufacturing to production enterprises.
In a command economy, the proportion of total product used for investing is determined rather than the amount to be consumed i.e. this economic system fixes in advance supply level rather than determining level of production required based on consumer demand. This decision is taken care by ruling political authority. Once the decision is taken, the planners work out the distribution of goods to be produced and limitation of each enterprise on its production. This decision can be influenced by the consumers indirectly if planners take into consideration the excess and shortage that gets developed due to this decision in the market. The consumers have an only direct choice regarding the already produced commodities.
Characteristics of Command Economy
Mentioned below are key characteristics :
- The government has absolute power over all the resources available in this economy. From raw material to finished products, the government has complete command over the resources.
- People in authority like politicians and bureaucrats give orders to all the stakes involved in the market such as buyers, sellers and investors.
- This economy has state-owned entities and privately players but both are controlled by the state.
- The government controls the pricing mechanism and regulates the price of goods and services.
- The government takes all the decisions related to the finances of the country such as wages to workers, assigning jobs to people.
- The command economy also provides room for the black market in the economy. Some people try to practice a monopoly in order to make more money and break rules.
How Does Command Economy Works?
The economic activity in the command economy works on the decision of the central authority. Here the government plays a crucial role in regulating, planning, and governing goods and services produced in the country. The government decides the nature, types, quantity, and prices of the goods and services to be produced/ supplied in the market. All the economic plans related to manufacturing and distribution are developed by the state authority. Labour, capital, natural resources, etc. are all distributed in the economy by the government as it deems efficient. The automotive industries, finance, and equity industries and businesses are monopolized and owned by the state authorities. All the policies relate to the economic plan are created by the government. The motive is the welfare of the society rather than the profiteering of certain individuals.
Examples of Command Economy
The communist countries generally practice command economy such as:
- North Korea
Key Factors of Command Economy
- All the state-owned and privately-owned companies are controlled and regulated by the government.
- The government has full command and control over the nation’s economy that includes the amount of supply, cost of services, and products to consumers.
- State authority takes complete control of the resources available in the country and also manages its allocation and distribution.
- Tariff policies, trade policies are also decided by the government in this form of economy.
Command Economy vs Market Economy
Major differentiation in market economy and command economy is based on factors of production, division of labor, ownership of regulation, and pricing mechanisms. Production in the market economy is not planned, not organized by state authority but is determined through the demand of goods and services in the market. The demand and supply of goods and services are determined by the people in the market economy. Examples are the United States, Japan, England etc. The fundamental aspects of the market economy are private ownership and voluntary exchanges of the means of production. The goods and services are determined on the basis of consumer preferences and resource scarcity.
Whereas, in the case of a command economy, demand does not derives the quantity of goods/ services to be manufactured, supplied but is decided by the ruling government. This economy is supply driven. All state owned as well as private players are controlled centrally by the government.
Some of the advantages are given below:
- Low Unemployment Levels: Government set wages and allot jobs in the command economy to help in the reduction of the unemployment rate and the wages are distributed equally among people.
- Less Inequality: Since the government has the authority of controlling production in the economy, it determines the working class and their payscale. Whether the labor is skilled or unskilled, all shares of wages are equally distributed. The resources allocated are also equal.
- Common Good: The government takes a decision for the welfare of society irrespective of its class. For example, the most government in command economy provides free universal healthcare system to its citizens. It does not favour a particular sector or group of individuals in a society.
- No External Legal Issues: The government can manipulate the vast amount of nation resources for larger projects without the interference of lawsuits or regulatory issues related to the environment.
- One Vision: Government doesn’t go out of business due to lack of resources or wealth, provides entire society for specific vision, and helps in providing equal job distribution among its citizens. This creates job security among citizens of a nation providing an equal standard of living.
Some of the limitations are given below:
- Unequal Demand and Supply: The economy does not work on the basis of the scarcity of products. There are set rules of the production of a commodity. Goods produced does not match demands with supply and this leads to rationing by the citizens.
- No Innovation and Rewards: Leaders and workers involved in production are not rewarded as per their work and does not get a chance for innovation of new ideas. They are only acknowledged for following orders of authorities.
- Red Tape Existence: The mangers in the command economy may sit ideal but appear as busy doing nothing and they become risk-averse since they are not answerable and accountable for decisions of a production.
- Promotes Illegal Activities: Black marketing, monopolism becomes the common norm in the command economy as the consumption patterns cannot be met through regulated production.
Command economy is a form of economic system where production levels and rates are determined centrally by the government instead of demand-based production as like in case of market driven economy. The objective of a command economy is noble and virtuous which eliminates the general population from the fear of the insecurity related to their basic needs such as food, shelter, clothing, and health, etc. the wealth is not accumulated in one portion of society and is equally distributed among all the citizens. It creates balance in the economy reducing disparity, economic crisis, corruption, and political turmoil, poverty gap and creates a balanced distribution of available resources.
This is a guide to What is Command Economy? Here we also discuss the introduction to Command Economy and how does it work along with advantages and limitations. You may also have a look at the following articles to learn more –