What is a command economy and how does it work?

When it comes to defining a command economy, it refers to any sovereign state where the governing body has total control over economic, political and social activity.

What is a command economy?

The command economy represents an alternative monetary system in which the decision-making power lies with the government. This method makes no inferences about the law of supply. The political framework also plays a role in the command economic framework. The decision to produce goods efficiently ignores customer preference. Here, the goods and services they generate could be dated, and the price will be set by the government while keeping in mind that everyone in the country can afford to buy them. Making a profit is not the primary focus of a command economy, macroeconomics and social objectives are. It regulates the price and analysis of the market economy and provides its efficient makers and producers with less incentives.

Features of a command economy

Below are some of the features:

• The government is in charge of managing the national economy. In its national plan, the government typically begins by establishing certain economic targets. However, based on the state of the nation’s economy, it may add a number of additional programs or objectives. Some governments even have short-term objectives that provide them the flexibility to determine if they can establish attainable benchmarks and broaden the goals’ scope. The economy of the nation might establish new goals after it reaches that target.
• The government not only establishes attainable economic targets but also distributes various resources in accordance with the objectives established in the central economic plan. It takes into account several factors, including labor, capital and natural resources, and seeks to optimize these resources in order to get rid of challenges like poverty and unemployment in the nation.
• The government creates a national plan that includes a list of goals. This will cover necessities for the country’s citizens’ daily needs in terms of goods and services. The aim of the government is to ensure that every person has access to adequate food, clothes and housing to lead comfortable lives.
• In this kind of economy, there are no internal competitors in different industries. It is a government-run exclusive business. The government makes the decisions about which industries should take precedence over others. The government frequently tackles the automobile, financial and utility industries. These sectors are regarded by the government as the foundation of the national economy.
• To ensure that the nation’s citizens adhere to the command economy plan, the government may enact new laws, rules, regulations and directives. The government’s production targets must be fulfilled by businesses.

Purpose of command economy and how it works

A command economy represents a system in which the government is in total control. This implies that it has the authority to issue companies orders defining what and how much they are required to produce. Prices can also be regulated by the government. This enables it to guarantee that certain items are in limited supply or that they are offered at a reasonable price. Furthermore, the government is free to distribute funds as it considers appropriate. This implies that it can instruct companies to use particular resources or to make investments in particular economic areas. The degree of output can also be regulated by the government. This enables it to guarantee that a certain commodity is neither too abundant nor undersupplied.

A command economy’s main purpose is to guarantee that the government can achieve its financial objectives. These objectives could include attaining full employment, controlling in inflation, or fostering the growth specific sectors. Thus, increasing economic production is not always the goal of a command economy. Rather, it is about accomplishing certain objectives that the government has laid down.

Advantages of a command economy

Here are some of the advantages:

Social welfare: A command economy is advantageous because a large part of its emphasis lies on social welfare. In a free-market economy, the wellbeing of people is typically not taken into consideration in favour of maximizing business profits.

Better employment: This form of economy has far more control over employment levels because the government hires the citizens of its country. If there is a strong demand for certain goods or services, it could result in the creation of more jobs for individuals.

Utilisation of resources: In a command economy, supply and product regulation are major responsibilities of the state. A command economy ensures that resources are equally divided across sectors and that citizens have access to all the necessities of life as long as the government maintains and distributes them.

Streamlined approach: Since the government is the only entity in charge of the nation’s economic activity, economic objectives are more carefully thought out. This simplified process contributes to the nation’s economic stability. Emergencies that arise in a nation, such as hunger, war or natural catastrophes, can be handled more effectively with a prepared strategy.

Read more: 10 countries with the highest minimum wages in the world in 2024

Disadvantages of a command economy

Here are some of the disadvantages:

Inefficiency: There could be less motivation for innovation and efficiency in the absence of the profit motive and competition, which might result in waste and inefficiency.

Limited customer choice: Because the government controls what is produced, consumers have fewer options. Goods shortages or surpluses may result from this.

Bureaucracy: A large amount of bureaucracy can cause delays and inefficiencies when making decisions and carrying out economic strategies.

Restricted freedom: People’s and companies’ ability to make financial decisions is restricted, which may hinder personal initiative and entrepreneurship.

Examples of a command economy

Here are some of the examples:

Soviet Union: All states under the USSR worked as a command economy from 1930 until 1991. The government made all the important decisions for the entire country.

China: After the Second World War, China worked under a society ruled by communism, where the government created a plan for economic growth. Although now the country operates under mixed economies, its government still creates five-year plans for economic growth and objectives.

Cuba: Since the 1959 revolution, Cuba has worked as a command economy, now moving towards a mixed economy to increase growth.

Difference between market economy and command economy

Frequently Asked Questions (FAQs)

Which country first started a command or planned economy?

Russia was the first country to implement a command economy back in the year 1917 during the Russian Revolution.

How does the government decide what goods to produce in a planned economy?

The government assesses the average demand for various goods and services of the country before producing them.

Who owns different sectors in a command economy?

The government owns and manages the different sectors that produce various goods and services for the citizens.

Can the government increase or decrease the prices of products in a command economy?

Yes, the government determines the prices of different products and services. It can increase or decrease the prices according to consumers’ demands.

Does the command economy prevent the monopoly of businesses?

Yes, the monopoly of private enterprises can be reduced or controlled in society through price capping and the prohibition of mergers.

Conclusion

The misuse of monopolies can be prevented by a command economy. The production level is set by the government as it is in charge of product distribution. That being said, if a country has a command economy, then no enterprise can establish a monopoly. Furthermore, issues of mass unemployment could be substantially decreased in a command economy. It creates products according to its needs. Additionally, this lessens the waste of items that the public often doesn’t want. The nation’s ability to provide a comfortable future for its population increases with the amount of resources preserved.

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