Command economy

What Is a Command Economy?

A command economy, also known as a centrally planned economy, is an economic system in which a central governmental authority dictates the levels of production, sets prices, and controls the distribution of goods and services. This system falls under the broader category of economic systems, contrasting sharply with systems driven by market forces. In a command economy, private ownership of the means of production is either nonexistent or severely restricted, with the state owning and managing most industries. The primary objective is often to achieve specific national goals, such as rapid industrialization or equitable resource allocation, rather than responding to consumer demand or maximizing profit²⁹, ³⁰.

History and Origin

The conceptual origins of the command economy trace back to the Viennese economist Otto Neurath, who developed an extreme version, even suggesting moneylessness, influenced by wartime economies around World War I. The term "command economy" itself derives from the German "Befehlswirtschaft" and was initially applied to the Nazi economy due to its similarities with Soviet Russia's economic structure. However, it found its fullest development and application in the analysis of the economic system of the Soviet Union, particularly under Joseph Stalin²⁸.

Following the Bolshevik Revolution of 1917, the Soviet Union gradually transitioned to an administrative-command system, formalizing central planning with the introduction of "Five-Year Plans" in 1928²⁷. These plans aimed to rapidly industrialize the agrarian nation and build national power, directing vast resources toward heavy industry and military projects²⁵, ²⁶. This approach enabled the Soviet Union to achieve significant industrial growth and transform its economy into a major industrial state²⁴. For much of its existence, from the 1930s until its eventual collapse in the early 1990s, the Soviet command economy served as the prototype and prime exemplar of this system²³.

Key Takeaways

• In a command economy, the government controls all major economic decisions, including production, pricing, and distribution.
• The primary goal is often to achieve social or national objectives, such as full employment or industrial growth, rather than market-driven efficiency.²¹, ²²
• Historically, the Soviet Union and Cuba are prominent examples of countries that adopted command economies.
• Criticisms often highlight issues like inefficiencies, lack of innovation, and limited consumer choice due to centralized decision-making.²⁰

Interpreting the Command Economy

Understanding a command economy involves recognizing that economic decisions are not decentralized and driven by individual consumers and producers, but rather by a central authority. This authority, typically the government, determines what goods and services are produced, in what quantities, and at what prices. Unlike a market economy, where supply and demand signals guide production, a command economy relies on administrative directives and targets.

For instance, if a government in a command economy decides to prioritize steel production for infrastructure projects, resources like labor, raw materials, and machinery are allocated to steel factories based on central plans, not necessarily on current market demand or consumer preferences for other goods. This top-down approach means that economic indicators in a command economy, such as reported Gross Domestic Product figures, might reflect achieved production quotas more than actual economic efficiency or consumer satisfaction.

Hypothetical Example

Consider a hypothetical nation, "Centrania," operating under a command economy. The central planning committee determines that Centrania needs to significantly boost its agricultural output, specifically corn, to ensure food security for its population.

1. Central Directive: The planning committee issues a directive to all state-owned farms, mandating a 20% increase in corn production for the upcoming year.
2. Resource Allocation: The government then allocates specific quantities of seeds, fertilizers, and farm machinery to each collective farm. It also assigns a certain number of laborers to work in agriculture, overriding individual career preferences.
3. Price Controls: The price at which this corn will be sold to consumers is fixed by the government, irrespective of the cost of production or potential market fluctuations.
4. Distribution: Once harvested, the corn is collected by state agencies and distributed to state-run markets and processing plants according to the central plan, ensuring that all regions receive a predetermined quota.

In this scenario, the entire process, from production targets to pricing and distribution, is orchestrated by the central authority, demonstrating the direct control inherent in a command economy. The efficiency of the farms, the actual demand for corn versus other crops, or the overall satisfaction of the labor force are secondary to meeting the centrally determined production quota.

Practical Applications

While pure command economies are rare today, elements of central planning can be observed in various contexts. Historically, the most prominent examples were the Soviet Union and its satellite states, where the government controlled nearly all aspects of the economy, from heavy industry to consumer goods production.

Cuba currently operates as a planned economy dominated by state-run enterprises, with the Communist Party maintaining high levels of public sector control over its economy. The government dictates production and allocation of goods and services, and prices are set by the state¹⁹. Despite some recent allowances for private business and foreign investment, the Cuban economy remains centrally planned, with a significant portion of its workforce employed by the government¹⁷, ¹⁸.

Even in economies that are predominantly market-driven, governments may employ centralized directives during times of crisis, such as war, to redirect industrial capacity towards specific needs like military production. This demonstrates how the command principle can be applied for specific, urgent national objectives, temporarily overriding typical market mechanisms¹⁶.

Limitations and Criticisms

Command economies face several significant limitations and criticisms, primarily concerning efficiency, innovation, and consumer welfare. One major critique, often associated with economists like Friedrich Hayek, is that central planners cannot efficiently respond to complex and constantly changing supply and demand signals within an economy. Without the natural feedback mechanisms of prices and competition found in a free market, planners may struggle to accurately forecast consumer needs, leading to unnecessary shortages or surpluses of goods¹⁵. This often results in a limited variety of products and diminished consumer choice¹⁴.

Furthermore, command economies can suffer from a lack of innovation and efficiency. Since state-owned enterprises often face no competitive pressures or profit motives, there is little incentive for workers or management to improve productivity or quality¹³. Bureaucratic delays and a rigid decision-making process can also slow down responses to economic changes and hinder adaptability¹². The absence of decentralized decision-making can lead to a "shortage economy," where goods are scarce despite efforts to meet targets¹¹. Many former command economies, including the Soviet Union, ultimately proved to be non-viable in the long term, collapsing under the weight of their inherent inefficiencies and inability to compete with market systems⁹, ¹⁰.

Command Economy vs. Market Economy

The fundamental distinction between a command economy and a market economy lies in who makes the primary economic decisions.

While a command economy aims to prevent wealth accumulation and promote social equality, a market economy emphasizes individual freedom and efficiency through competition⁸. The confusion often arises because some modern economies, like China, have adopted a "socialist market economy," blending elements of both systems by allowing private enterprise within a broader framework of state control. However, the core difference remains the degree of central authority versus individual economic freedom and the role of price signals in guiding production and consumption.

FAQs

What are the main characteristics of a command economy?

A command economy is characterized by extensive government control over economic activity, including state ownership of industries, central planning of production targets, government-set prices, and centralized distribution of goods and services.⁶, ⁷

Why do some countries adopt a command economy?

Countries may adopt a command economy with the aim of achieving specific national goals, such as rapid industrialization, equitable distribution of wealth, or full employment, believing that centralized control can overcome market failures and address societal needs more effectively.⁴, ⁵

What are the primary disadvantages of a command economy?

Key disadvantages include inefficiencies due to a lack of incentives and competition, limited innovation, shortages or surpluses of goods due to misaligned central planning, and restricted consumer choice. These factors can hinder overall economic growth and citizen satisfaction.², ³

Are there any pure command economies today?

Pure command economies are very rare in the modern world. Most economies today are considered mixed economies, incorporating elements of both market and command systems. However, countries like Cuba and North Korea still exhibit strong characteristics of a command economy with significant state control over economic activities.

How does a command economy handle inflation and unemployment?

In a command economy, the government has direct control over wages and prices, which can theoretically be used to manage inflation. Similarly, the government can dictate employment levels, aiming for full employment by assigning workers to state enterprises, even if it results in overstaffing or low productivity.¹