When a country’s central government decides the approximate production levels of different goods and also sets their prices, it is known as a command economy or planned economy. This type of economy doesn’t follow the norms of a typical free-market system, in which private markets determine the production and supply of products based on their demand. The concept of command economy has been introduced to abolish over-taxation of products and services.
As the name suggests, in a command economy, the government takes all the economic decisions. The government has complete control over deciding what should be produced in the country, how it should be produced, and for whom it should be produced. A command economy is also known as a planned economy, as the production, expenditure, and prices are centrally decided by the government.
Understanding different aspects of a command economy
The government of the country has full control over the economy and determines the prices of various goods and services. It implements various administrative resources, such as laws, national goals, and commands, to ensure that the economic system remains well coordinated. This is why a command economy also goes by other names, such as the centrally planned economy and centralised economy. It is an authoritarian economic structure where the government doesn’t consider factors, like demand, supply of raw materials, labour costs, or profit margins of companies to determine the prices of different products in the country. A few examples of countries that have command or planned economies are Cuba, China, Russia, Belarus, North Korea, Iran, and Libya.
Characteristics of a Command Economy
Following are some of the common characteristics that you will notice in a command or planned economy:
It is the government’s responsibility to control the country’s economy. Generally, the government starts by setting different economic goals in its five-year plan. However, it can add multiple new plans or goals depending on the country’s economy. Some governments even have short-term goals that allow them to decide whether they can expand the objectives of those goals and set achievable targets. Once the country’s economy can meet that target, it can set a new set of objectives. This way, the government makes sure that the country’s economy doesn’t see a steep decline.
In addition to setting achievable economic goals, the government also allocates different resources according to those objectives set in the central economic plan. It considers different avenues, such as the natural resources, labour, and the country’s capital, and tries to make the most of these resources to eliminate problems like unemployment and poverty in the country.
The five-year plan, which the government comes up with, contains a list of priorities. This will include essential goods and services that the citizens of the country would require in their day-to-day lives. The government aims to provide enough food, clothing, and shelter to its citizens so that they can live comfortably. It also sets aside a significant portion of the goods for a crisis like war, natural calamities, or pandemics.
There are no domestic competitions in various sectors in this type of economy. It is a monopoly business run by the government. The government decides which industry should be given importance over another. Some of the industries that the government usually targets are automotive, finance, and utilities. The government considers these industries as the pillars of the country’s economy.
The government may come up with new rules, regulations, directives, and laws to ensure that the people of the country follow the command economy plan. Companies must follow the production targets set by the government. No company can produce less than what they have been told to. Otherwise, they may face severe consequences.
Advantages of a Command Economy
One of the important reasons why a command economy is beneficial is that it focuses more on social welfare. If you consider a free-market economy, it tends to maximise the profits of companies and usually doesn’t think of the welfare of the country’s citizens.
This type of economy controls the employment levels much better, since the government is responsible for employing the residents of the country. It can create more jobs for people if there is a high demand for a specific product or service. This is usually not possible in free-market economies.
In a command economy, the government plays a vital role in product regulation and supply. As the government maintains and distributes the resources, a command economy ensures that the resources are equally distributed among sectors and that the citizens have access to all the basic supplies required to live.
Since the government solely controls all of the country’s economic activities, economic goals are more planned and well-defined with a scheduled time frame to achieve them. This streamlined approach helps in achieving economic stability in the country. With a planned approach, emergencies arising in a country, like war conditions, famine, or natural disasters can be managed better.
A command or planned economy can prevent the abuse of monopoly. Since the government is responsible for the distribution of products, it determines the production level as well. As a result, no company can start a monopoly business if the country in which it operates follows a planned economy. Additionally, a command economy can significantly prevent the risks of mass unemployment. It produces goods according to its demands. This also reduces the wastage of goods that the citizens don’t usually want. The more resources the country saves, the more it allows its citizens to live comfortably in the future.