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A command economy or a planned economy occurs when the government control all major aspects of the economy and economic production. In a command economy, it is the government that decides what to produce, how to produce goods and how to distribute goods and service with the economy.
Command Economics System vs Free-market Economics System
Command Economics System
In the command economics system, a large part of the economic system is controlled by centralized power.
Since the government is such a central feature of the economy, it is often involved in everything from planning to redistributing resources.
Command economics has certain advantages over free-market economics, especially in terms of coordination of scarce resources at the time of crisis such as war or any natural disaster.
Free Economics System
An open economy is a system of buying and selling goods and services that is not under the control of the government.
It is where people can buy and sell freely, or the state does not own an economic system where a free market exists and most companies and property.
In a free-market economy, firms and households act in self-interest to determine how resourced get allocated, what goods get produce and who buys the goods. This is how opposite the working of the command economy, where the central government gets to keep the profit.
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Nations with Command Economy
In countries with command economies, health care, housing, and education are usually free. But people incomes are controlled by the government, and private investment is rarely allowed.
Cuba, North Korea are examples of countries that have command economies while China maintained a command economy for decades before transitioning to a mixed economy.
Role of Government in Command Economy
- In the command economy, government officials set national economic priorities, including how and when to generate economic growth, how to allocate resources to production and how to distribute the resulting output.
- A government that runs a command economy operates a monopoly business that is considered necessary to meet the goals of the national economy.
- The government sets all the laws and regulations according to the central plan. All business follow that plan and its targets.
- In a command economy, the government can harness land, labour and capital to serve the economic objective of the state.
Key Factors of Command Economy
- A command economy has a small number of typical elements. A central economic plan, government ownership of the means of production, and social equality are an essential key factor of a command economy.
- Government creates laws, regulations and directives to enforce the central plan.
- Government own monopoly business. These are industries essentials to the goal of the economy. That include finance, utilities and automotive. There is no domestic competition in these factors.
- In a command, the economy government has a multi-year economic plan which set an objective like national employment rates and what the government-owned industries will produce.
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Examples of Command Economy
There are several examples of command economy according to different situations:
- The most common and relevant example of a command economy is the Republic of China were after World War 2. The ruler of the country of china who was Mao Tse Tung created economy of communism. The economy which was planned was a restricted economy with close doors to trade and international flow of goods and services.
The country continues to make five years plan to achieve its long term economics goals and objectives.
- Another important example of a command economy is the state of Iran, where the government owns around 60% of state business which is operating in the country. The government control prices of oil and other state-owned goods and services to regulate the economy.
Pros of Command Economy
Boost up Industrial Power
With the command economy, massive objects could be easily completed by the industrial powers while keeping the tab over social goals.
Limit the Monopolizing
Government ownership of industries prevent monopolies and their inherent abusive market prices such as deceptive advertising.
Control on Unemployment
Since the government regulates jobs and hiring. Unemployment is consistently minimal, and mass unemployment is rare.
Fulfilment of Societal Needs
They can quickly respond to fulfil critical societal needs such as health care, housing and education.
The Society and Government Are Streamlined
This type of economic system gas capability to transform society to be facilitated with the national vision. This means there is harmony between these two units.
Social Welfare Is Seen as a Priority
Social welfare is the main concern in a command economy, where one of its objectives is ensuring maximum welfare will take place.
Government allocates all the resources according to the central plan. It tries to use the nation’s capital, labour and natural resources in an acceptable way possible. It promises to use each person skills and abilities to their high capacity.
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Cons of Command Economy
Rights of Individuals
Command economies breed governments which limits the rights of individuals to pursue their personal financial goals.
Due to their lack of free-market competition command economies discourage innovations. Industry leaders are rewarded for following government directives rather than for creating new products and solutions.
Consumer Needs Are Not Responded in Time
Since their economic plans are unable to respond to consumer needs on time. Command economies often suffer from over and under production resulting in shortages and wasteful surpluses.
Freedom is Restricted
This type of economy normally tied the communism, which means that it also put full control in the hands of government and takes away the freedom people.
Black Markets Would Explode
Because the government puts many restrictions on products and services. Such offerings may not be available. Consequently, they will be offered in the black market.
No Competition is Offered
Market competition is the primary force of improvement, but it is not found in the command economy. Plus it doesn’t encourage competition, and actually, it even tries to eliminate it.
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Rapid change can completely ignore society needs, forcing the development of the black market.
By going through the pros and cons mentioned listed above. You have a good idea of how it does for a certain country and eventually, come up with an informed decision whether it is good for society or not.