A command economy is an economy type where all aspects of production are centrally controlled by the government. Details of production, pricing, investments, and even worker incomes are managed by the government instead of a private business. The actual means of production, however, can be publicly owned.
Most command economies fall within the spectrum of socialism when looking at the modern world. China is often thought of as a command economy, though they are a mixed economy instead, combining traits from the market and command economy types to create something that is unique to them.
The former Soviet Union is a good example of a large-scale command economy. North Korea would be an example of a small-scale command economy.
There are specific pros and cons of a command economy that are worth examining. Here are a few of the key points to consider.
List of the Biggest Pros of a Command Economy
1. Command economies make it easy to mobilize resources.
Because the government is in control of resource movement, the transfer of goods or services to where they are needed the most becomes an efficient process. Production levels can be immediately increased to meet local demands after an emergency. The government can even transition where production occurs to ensure that each sector of the economy has employment access that supports workers.
2. It reduces price-fixing issues from a private company perspective.
The goal of any business within any economy type is to earn as much as possible. Even traditional economies seek to maximize production by allocating the right people to the right job. Within a command economy, once a business can achieve a majority market share, they can begin to fix prices to benefit the business instead of benefiting the consumer. Because the government controls this medium, price-fixing is virtually eliminated. There may be fewer choices for consumers, though the availability of goods and services is usually consistent.
3. Production rates are easier to change within a command economy.
Because the government controls production rates, the exact demands of the economy can be met with precision efficiency. That process helps to reduce the risk of a potential shortage occurring within the economy. It also means that workers can have a certain level of assurance that their basic needs will be met through government action and personal productivity efforts.
4. It is able to boost industrial production levels.
Command economies are much better equipped at completing large-scale projects than other economy types. That is because the government can immediately dedicate whatever resources are required to complete the project at any given time. In other economy types, an extensive approval process is often required to allocate the resources a project requires. The faster movement found in this benefit makes it easier for the command economy format to improve industrial production levels as a means of economic growth.
5. Command economies harmonize the production method.
There are fewer expectation gaps found between business and government within a command economy. The government communicates what the needs of the population happen to be to the producers. Then the producers create the product that is required. The distributors then work to ensure everyone who needs that product is able to receive it. Instead of having two distinctive entities often working to counteract each other, a command economy makes the process happen within one basic entity instead.
6. It reduces inequality within the society.
Command economies still put people into the jobs which best reflect their overall skill level and natural talent. There may be job choices available within this economy type as well. At the same time, workers within a command economy are often paid or given room and board on an equal playing field. Workers are evaluated on their ability to be a producer. When accurately implemented, there are fewer issues with gender, race, culture, or ethnicity in a command economy when compared to other economy types.
7. Community building is still encouraged in a command economy.
Command economies are typically larger than traditional economies. These two economy types do share one trait: both emphasize the welfare of the community as a top priority. They just do it in different ways. Traditional economies tend to focus on agricultural processes as a way to meet the needs of the population. Command economies tend to focus on commercial and industrial processes instead.
8. Business operations within a command economy are consistent.
Because each business is directly influenced by the government within a command economy, there is greater consistency in the operational profiles of each company, industry, and opportunity. Each business functions in a way that best represents the needs of the government at that time. Instead of examining mergers and acquisitions, companies are focused on producing needed goods and services. The government already owns a dominant market share, which allows them to dictate how operations should proceed.
9. Resources are not exclusionary within a command economy.
Because companies in a command economy are linked together through the government, there is no real competition. The resources which are available within this economy type work together to benefit the whole of society. That would be like Ford and Chevy working together to build trucks or Sony and Microsoft working together to build video game consoles. By having resources work together instead of in competition with each other, it becomes easier for the government to direct higher levels of production when they are needed.
10. It limits the effects of economic inequality within the economy.
In the United States, Bloomberg reported in March 2018 that income inequality reached a disturbing new threshold. Median wages grew by just 0.2%. Wages for African-Americans declined in almost every wage bracket. Women with graduate degrees made less money than men with undergraduate degrees. In contrast, households in the 95th wage percentile saw an average wage growth of 1.5%. In a command economy, most of these issues go away. Those in charge still have higher income levels or access to resources than workers. The overall inequality across multiple socioeconomic groups goes away.
List of the Biggest Cons of a Command Economy
1. Command economies tend to limit personal freedoms.
There are many forms of socialism that governments may employ. Even the U.S. offers limited socialism components through public education and public medical care. Most command economies in the world today, however, take the idea of socialism to the extreme. People living in these economies do not usually have the opportunity to choose a job or career. Their work is based on what the economy needs at any given time. The needs of the many even outweigh the personal skills an individual could use to contribute in other economy types.
2. There is a lack of innovation with command economies.
Command economies focus on production above anything else. That means, over time, a lack of innovation begins to creep into the production cycle. Innovation is not given a priority because the focus of production is to meet the direct needs of the people. That focus creates a utilitarian approach to innovation. Research and development receives money only when the current system is no longer well-suited to meeting domestic needs
3. It reduces the number of options available to consumers.
Within a command economy, the government tells people what goods and services will best meet their needs. That often means there is only one product choice available to consumers. The lack of choices extends beyond the goods being produced within the economy. Workers often have little say in where they decide to live or what job they are able to work. The government literally controls everything, including the workforce, and households must accept this fact to receive any benefits.
4. Command economies create underground markets.
A command economy might restrict production. Other economy types around the world may not. When people within a command economy see others enjoying product variety, they begin to want a piece of that action. They’ll pay higher prices to obtain wanted goods through underground markets instead of settling for the needed goods they receive from their government. These markets are usually outlawed, as are their products, and the consequences can be severe. In 1961, two men in the Soviet Union, Rokotov and Faibishenko, were sentenced to death, in part, for trafficking in jeans.
5. There is little competition within a command economy.
Within a command economy, private enterprises may be able to “own” a business. How the business operates, however, is directly controlled by the centralized government. That means most businesses have little direct competition within the economy. Any competition would essentially be the government competing against itself. That means the concepts of supply and demand have little effect on pricing or production within this economy type. There is no need to improve business practices either. If only one thing is being produced nationwide by one company, people are forced to obtain it, which means business is always booming.
6. Production levels are rarely adequate within a command economy.
The goal of a command economy is to create needed goods and services on a large enough scale that everyone can have their basic requirements met. The reality of a command economy, however, is that few people are fully satisfied in every need category. Product rationing is a common way of life in command economies because shortages are frequent. Produced items are almost always sold domestically as well since the international community is usually investing more into industry innovation.
7. Export incomes are limited within a command economy.
In 2016, the global value of trade export volumes was nearly $16 trillion, according to data published by Statista. The U.S. imports about $2.25 trillion worth of goods each year. True command economies struggle to gain a competitive advantage within this market, which limits their ability to grow export incomes. Even if there is knowledge about international trade opportunities, the command economy is usually behind the current industrial best practices of the rest of the world. There are some exceptions, such as Cuba and their exported cigars, though most exports originate from other economy types.
8. It offers few incentives for workers.
Workers within a command economy have the lowest overall motivation in any economy type. In a market economy, there is always the opportunity for advancement. In a traditional economy, what you’re working on will eventually become yours when you become the head of the household. In a command economy, workers are instructed to be in certain positions and to behave in certain ways. The only incentive to work is the threat of what may happen to them if they choose not to work.
9. Command economies exploit resources.
Command economies have a singular focus. That can be a good thing, like developing a new natural resource. For the most part, however, that singularity prevents coordination, efficiency, and investment from achieving their maximum possible results. The end result is a waste of natural resources. Even worse, those resources may be exploited for the needs of the few who are high up in the government chain-of-command at the expense of the general population.
10. International companies are hesitant to work with command economies.
In 2017, Venezuela seized an automobile manufacturing facility from General Motors. The government decided to take control of operations, stripping the business managers from their responsibility. The car manufacturer estimated that they lost over $100 million from that one action. Although businesses are allowed to operate within a central economy, it is done at the pleasure of the government. People can be replaced, and assets can be seized at any time. For those reasons, many international companies are hesitant to place any resources within the borders of a command economy.
11. The freedom to communicate is often restricted in command economies.
There is internet access available to the people of North Korea. In 2016, when the domains were accidentally revealed to the rest of the world, it was discovered that there were just 28 available sites for residents to access. By comparison, those living outside of a command economy have access to several million websites. Command economies often restrict the freedom to communicate with the world outside of that specific economy. Allowing outside communication would let workers see what others are doing and that could create production problems for the government.
12. It incentivizes survival.
For many workers within a command economy, the goal is to make it to another day and nothing more. The government directs how much you earn and what you’re permitted to own. It is an economy which tells people their value by what it decides to provide for them. There are rarely opportunities for individuals to decide what they feel is the best course of life to pursue. That means many people are forced to pursue hobbies or dreams out of sight from government overseers, which may create a whole new set of problems if that person were to be caught.
The biggest advantages and disadvantages of a command economy show us that it can be a responsive, responsible entity when managed correctly. The issue this economy type must face is a lack of available resources. If people will receive the same basic compensation if they choose to work or if they choose not to work, most people choose not to work. That action limits workforce availability and hampers overall production. It is because of these potential negatives that many command economies become mixed economies, with market principles, to maximize their available benefits.