M RahmanAdvantages and disadvantages of a command economy
This article examines some of the key advantages and disadvantages of a command economy. A command economy is an economic system where the government directly controls and manages the production of goods and services. It is also known as a centralised economy or a planned economy.
What is a command economy?
According to Augustyn (2022) in a command economy, the means of production are publicly owned, and economic activities are controlled by a central authority that assigns quantitative production goals. There is very little, if any, private-sector involvement in the production of goods and services.
A command economy is often referred to as a ‘planned economy’ as the government uses various types of planning and control mechanisms to direct production of goods and services. It is is also referred to as a ‘socialist economy’.
Characteristics of a command economy
There are several key characteristics of a command economy as follows:
Central planning
In a command economy, the government uses central planning to organise and direct all activities. Under central planning, it directs individuals and firms to produce particular goods and services. Central planners also use various types of mathematical models to help them organise economic activities.
State ownership
In a pure command economy, the government owns all industries including all firms and businesses. Private enterprises do not exist in this type of economic system.
No private ownership
There is no private ownership or private control of production in a command economy. This means that there is no private control or ownership (or sometimes severely limited) of land or natural resources in a command economy. The government owns all the land and uses it to direct production as it sees fit.
Advantages of a command economy
Despite the disadvantages, there are some good advantages of a command economy that are outlined below.
Less likely shortages
The most obvious advantage of a command economy is that shortages of goods and services are less likely than in a free-market economy. After all, the government owns and controls all the production in the economy. Therefore, the government can ensure that shortages of necessary goods and services, such as food and clothes, are unlikely.
Price controls
Price control is one of the key advantages of a command economy. The government regulates the prices and rates that firms can charge for goods and services. Price controls are often implemented in command economies to make goods and services more available and less expensive for consumers.
Financial crisis is unlikely
In a command economy, government regulators and officials have the power to directly control and manage the activities of financial institutions. As such, financial crises are unlikely to occur.
Disadvantages of a command economy
Elimination of competition
One of the most obvious disadvantages of a command economy is that it eliminates competition between firms and companies. As the government owns and controls all production in the economy, there is very little (if any) competition between firms and companies.
Limited choices for consumers
In a command economy, consumers lose the ability to choose which goods and services they want to buy. They can only buy those items that the government allows them to buy.
Corruption and abuse of power
Corruption and abuse of power are also likely to happen in a command economy. After all, government officials and regulators directly control all aspects of production. This means that they have a lot of power over producers and companies which may sometimes result in exploitation and abuse of authority.
Examples of command economies
Finding examples of command economies in pure sense of the terms in modern time is somewhat difficult. However, there are some economies in the world that display many of the characteristics of a command economy. The Soviet Union was a pure command economy. It directly controlled virtually everything in its economy.
Today, China’s economic system is often compared to a command economy. However, China is not a purely command economy at all, even though it does have some characteristics of a command economy. This is evident from its state-owned enterprises and its heavy regulation of industries.
Other countries that also have some characteristics of a command economy are Belarus, Cuba, Iran, Libya, North Korea, and Russia (World Population Review, 2022). However, as stated above, there is no country in the world that can be regarded as a pure command economy.
Why does a command economy fail?
Command economies fail because they set up a system where the government controls and manages the production of goods and services in the economy. The government does not allow consumers to influence the production of goods and services. Therefore, this type of economy is not responsive to consumer demands or preferences; hence less efficient. In other words, the economy produces less than it would in a free market economy.
Summary of the advantages and disadvantages of a command economy
Thus, it is clear that there are different advantages and disadvantages of a command economy. This economic system is very effective to control prices and rates; however, there is little or no role for private-sector companies in it. Instead, the government owns and operates all companies in the economy.
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Advantages and disadvantages of free market economies
Resource allocation and economic systems
Effects of government intervention in markets
Last update: 11 November 2022
References:
Augustyn, A. (2022) Command economy, available at: https://www.britannica.com/topic/command-economy (accessed 10 November 2022)
World Population Review (2022) Command economy countries, available at: https://worldpopulationreview.com/country-rankings/command-economy-countries (accessed 10 November 2022)
Author: M Rahman
M Rahman writes extensively online and offline with an emphasis on business management, marketing, and tourism. He is a lecturer in Management and Marketing. He holds an MSc in Tourism & Hospitality from the University of Sunderland. Also, graduated from Leeds Metropolitan University with a BA in Business & Management Studies and completed a DTLLS (Diploma in Teaching in the Life-Long Learning Sector) from London South Bank University.
