In a command economy (also known as a planned economy), the means of production are owned and controlled by the nation’s central government. This is one of the prominent command economy characteristics. This economic system works with centralized control and, therefore, does not allow factors like demand and supply to influence the production, quantity, process, and price of goods and services in a country.
A command economy is in contrast with a free market economy because it discourages competition and innovation. Therefore, the main motive of a command economy is the welfare of society rather than the profiteering of certain individuals. In this article, we will discuss the characteristics of a command economy and how it works.
Related: What is one way a command economy affects the lives of private citizens?
What is a command economy?
Command economy is an economic system whereby the means of production are publicly owned and the economic activities are controlled by a central authority. This central authority is in charge of assigning quantitative production goals and allocating raw materials to productive enterprises. That is, a command system is a key aspect of a political system wherein a central governmental authority dictates the production levels that are permissible as well as the prices that may be charged for the goods and services.
In a command economy, the majority of the industries are publicly owned. In such a system, a centrally made political decision is made to determine the proportion of total product used for investment rather than consumption. After this, the central planners work out the assortment of goods to be produced and the quotas for each enterprise.
The central planners may be indirectly influenced by consumers if the planners take into consideration the shortages and surpluses that have developed in the market. Therefore, the only direct choice made by consumers is among and limited to the commodities already produced. As earlier said, a free market system is the main alternative to a command economy wherein demand dictates production and prices. A free market system works in capitalist countries whereas a command economy is a component of a communist political system.
Central planning in a command economy has its advantages as it enables a government to mobilize resources quickly on a national scale, especially during wartime or some other national emergency. Nonetheless, the costs of centralized policies are quite high, and usually, in most cases, the majority of the burden of these costs is shifted away from the government. For instance, the military draft largely shifts the cost of mobilizing troops from the government to the draftees, who could have been employed at a higher rate of pay elsewhere.
In the early 20th century, two economists of the Austrian school, Ludwig von Mises, and F.A. Hayek criticized command economies as inherently unworkable. The Soviet Union and the communist countries of the Eastern bloc exhibited command economy characteristics, and are historical examples of command economies. However, their inefficiencies were among the factors that contributed to the fall of communism in those regions in 1990–91. Therefore, the majority of all the remaining communist countries (except North Korea) while maintaining one-party rule incorporated market elements into their economies to varying degrees.
See also: What is liberal economics? A liberal view on the economy
What are the characteristics of a command economy?
The main characteristics of a command economy include limited property rights, governmental control of wages and pricing, government ownership of a majority of businesses and industries, and robust black markets. That is, the essential features of a command economy would be a central economic plan, government ownership of the means of production, and (supposed) social equality.
The goal of a command economy is to place the government in charge of all economic activities in order to encourage economic growth and stability through the even distribution and allocation of resources. Thus, the command economy requires that the central government of a nation owns and controls the means of production. Also, another prominent characteristic of a command economy is the nonexistence or severe limitation of private ownership of land and capital.
In this type of economic system, the central planners control production levels, set prices, and limit or prohibit competition within the private sector. Therefore, there is no private sector, because the central government owns or controls all businesses. Government officials set national economic priorities, such as how to allocate resources, how and when to generate economic growth, and how to distribute the output. This usually takes the form of a multi-year plan.
Check out: What is prohibited in a command economy?
Command economy characteristics
- The government controls the production levels and distribution quotas in a command economy
- One of the command economy characteristics is the usage of centralized economic plans
- The state-owned entities and privately owned entities are controlled by the state (public ownership of major industries)
- One of the main command economy characteristics is that the government controls the prices of goods and services
- In this economic system, the government takes all the decisions related to the nation’s finances such as assigning jobs to people and wages to workers.
Let’s discuss these command economy characteristics:
Centralized economic plans
There are centralized economic plans in a command economy. This is one of the prominent command economy characteristics. In this economic system, economic activities are based on the decision of the central authority where the government plays a major role in planning, regulating, and governing goods and services produced in the country.
The government creates a centralized plan for the economy on production, process, price, and quantity of goods and services to be produced in a country, generally for five years. They concentrate on economic and social goals for the country and every year, the budget is planned and managed to observe the completion of goals in order to make necessary changes in policy if need be.
The multi-year central macroeconomic plan sets objectives like what the government-owned industries will produce and nationwide employment rates. Then, the government enacts regulations and laws to implement and enforce the economic plan. That is, the central plan dictates how all of the economy’s resources are to be allocated with the aim of eliminating unemployment and using the economy’s human capital to its highest potential.
Government control of production levels and distribution quotas
Government control of production levels and distribution quotas is one of the characteristics of a command economy. After setting goals for five years, the government allocates resources to various sectors and observes growth. In a command economy, the government decides the nature, kind, and quantity of the goods and services to be produced or supplied in the market.
In this economic system, all the economic plans related to manufacturing and distribution are developed by the state authority. Hence, the central authority assigns production goals in terms of physical units and allocates the physical quantities of raw materials to entities. Physical resources are allocated to businesses based on the central plan and the government gives them production and hiring targets.
The central plan may not always reflect what the people want, therefore, in a command economy, the people’s income, job, and diet (in extreme cases) are generally controlled by the government. Hence, they are only allowed to own a few personal possessions, like items of clothing and small household items.
This means that in a command economy, natural resources, labor, capital, etc. are all distributed by the government as it deems logical. This is one of the command economy characteristics that makes it different from the free market economy where production is influenced by demand and supply.
Public ownership of major industries
The public ownership of major industries in the economy is a characteristic of a command economy. In this type of economic system, the government is the only decision-making authority and as discussed earlier, they are responsible for creating rules, regulations, policies, targets, prices, and quantity in a centralized economic plan.
This means that, even if the private sector exists, the companies cannot act on free will but have to follow the rules and regulations set by the government. In a command economy, the government controls major sectors such as automobiles, finance, utilities, and information technology. In addition, due to the fact that government controls almost every economic aspect, private companies do not experience competition.
Government control of prices of goods and services
Government control over the price of goods and services is another characteristic of a command economy. In this type of economy, the government controls the pricing mechanism and regulates the prices of goods and services. The central planners set the prices for goods and services.
The prices set by the central planners are used mainly as instruments to reconcile the total demand for consumer goods with the supply available while generating revenues for the state. This is one of the major characteristics of a command economy that makes it extremely different from the free market economy where prices serve as signals to producers of goods to increase or decrease production.
The government takes all the decisions related to the nation’s finances
One of the main characteristics of command economy is that the government makes all decisions for finances in the country, such as assigning jobs to people and hourly rate of pay for workers. Because the government has the power to control production in a command economy, it determines the working class and their pay scale.
The government is in charge of setting wages and allocating jobs to help reduce the unemployment rate and wages are distributed equally among people. All shares of wages are distributed equally, regardless of whether the labor is skilled or unskilled. Nonetheless, the hourly rate of pay is regulated and tends to be only enough to survive. As a result, people tend to try and break the rules and indulge in selling stuff on the black market in order to make more money. A robust black market is definitely one of the disadvantages associated with a command economy.
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