Command Economy: What Is It And What Are The Signs

2 months ago
Command economy
Command economy

In the process of development of human society, several basic types of economic systems naturally formed, which were eventually adopted by many states. While the top of this evolution is considered the market economy, and the traditional one is the lot of underdeveloped countries, the command economy stands apart, which cannot be unequivocally called a bad or good option for organizing economic relations. 

In this material, we will analyze in detail what a command type of economic system is, what advantages and disadvantages it is characterized and in which countries it has found application.

What is Command Economy

Command economy concept
Command economy concept

The command (or planned) economy is an economic system characterized by the supremacy of the country's government in matters of production regulation and resource allocation, which are in public (and in fact in state) property. In essence, this is the direct opposite of a market economy, since there is no place for private ownership of the means of production, freedom of entrepreneurship and healthy competition. 

Instead, a centralized economic plan is created (hence the name — the planned economy), which prescribes what products, for whom and in what quantity enterprises should produce.

The market within a state with a command economy is absent as such, but there are purely formally related elements in the form of a network of trade institutions (state or cooperative), through which the sale of goods to the population takes place.

☝️
In this case, pricing also occurs at the direction of the state.

Also watch the video below for a detailed comparison of the command and market economies:

Command and Market Economies

Signs of a Command Economy

How to recognize the command economy
How to recognize the command economy

You can understand that a command type of economic system has been established in the country by the following signs:

  • The state controls all elements of the economy, from the production of goods to the setting of prices for them and the size of workers' wages;
  • Most of the productive resources are owned by the state or are publicly owned;
  • There is a nationwide legislatively enshrined plan of economic measures for a certain period (for example, five-year plans in the USSR);
  • Private entrepreneurship is limited or absent altogether, as well as free business relations between business entities;
  • There is a pronounced shortage of some categories of goods, and those products that are on store shelves differ little in assortment and quality level;
  • Centralized distribution of labor and financial resources between enterprises;
  • Allocation of a significant part of the state budget for the needs of the military-industrial complex;
  • High level of employment of the population;
  • Excessive bureaucratization of the state apparatus;
  • There is a pronounced political ideology, opposition to which is considered a crime.

Command Economy Examples

Command economy in Russia
Command economy in Russia

One of the most striking examples is the Soviet Union (USSR), which is the first country that at the time of its formation immediately completely switched to a command economy and adhered to this system throughout its entire existence.

Private entrepreneurship in the USSR was a pretext for criminal liability, since it contradicted the idea of centralized management of the economy. Also, in some periods, it was considered a crime not to work without a good reason at working age.

Increased attention was paid to the development of the military-industrial complex and industries producing production assets — in total, their share in the economy reached 70%. At the same time, in terms of GDP, the Soviet Union throughout its history was significantly inferior to the countries of Western Europe. 

At one time, Cuba, Germany, China, Vietnam, North Korea and other socialist states of Europe and Asia followed the example of the USSR. In Germany, the command economy existed during the heyday of the National Socialist doctrine of the Third Reich (from 1933 to 1945). Elements of central planning and active government intervention in economic processes were widespread.

Also during the Second World War, the practice of withdrawing resources and using forced labor was used, especially in the occupied territories. The main production emphasis, of course, was on military equipment.

In Cuba, the command economy emerged when Fidel Castro came to power in 1959. Banks were nationalized, as well as a number of industrial enterprises, lands and other types of property, including those belonging to foreign companies. At the same time, tariffs for utilities and medical services for the population were reduced, and a card system was introduced. Subsequently, in almost all countries with command economies, there was a weakening of centralization and infringement of private entrepreneurship, and a smooth transition to market relations began. 

The exception is still North Korea — a completely closed country for more than 60 years with a planned mobilization economy focused on the agricultural and industrial sectors with a bias towards total militarization.

Team Economy: Pros and Cons

The advantages and disadvantages of the command economy
The advantages and disadvantages of the command economy

If we look at the experience of states with a command economy, we can come to the conclusion that the main disadvantages of such systems are:

  • Centralized management, which, due to subjectivity, leads to unbalanced development of industries and economic stagnation;
  • A complex clumsy bureaucratic system that works according to templates and makes it impossible to promptly make effective economic decisions;
  • The lack of a competitive environment and the desire to fulfill the plan has a detrimental effect on the quality and range of products;
  • Deficiency of goods for which there is demand, and overproduction of less popular products;
  • Excessive expenditures of natural, financial and labor resources for defense production;
  • Low living standards, lack of freedom of speech and infringement of the rights of the population.

The positive aspects of the command economy include:

  • Relatively stable development and lack of uncertainty in the economy, thanks to a predetermined plan;
  • The ability to mobilize the economic system for the production of the most necessary products in crisis situations;
  • Lack of pronounced social stratification due to centralized income balancing;
  • High level of employment of the population.

Despite some clear advantages, history speaks of the weak efficiency and viability of the command economy.

Market Economy: Concept and Signs

Mixed Economy: Signs and Examples

What is Diversification and Why is It Needed