Command Economy Definition
Written by True Tamplin, BSc, CEPF®
Updated on July 10, 2021
Define Command Economy In Simple Terms
A command economy is a system where the government owns and controls the means of production, and so determines what goods are available, how much of them there are, and how they are priced.
The government also determines investments and incomes.
Command economies are a key feature of communist societies, being used in countries like Cuba, North Korea, and until recently China, which now uses a hybrid of command and free market economies.
The free-market system is an opposite economic system to a command economy, used by countries like the US and UK, where prices and availability are dictated by supply and demand.
What Does Command Economy Mean In Finance?
Command economies have the following five characteristics:
- The government creates a central economic plan.
- The government allocates all resources, including labor and materials, towards enacting the plan as efficiently as possible.
- The government sets quotas and priorities for production. The goal is to meet the basic needs of the population while appealing to government mandated national priorities like mobilizing for war or generating a certain level of economic growth.
- The government owns monopoly businesses in industries deemed essential, such as transportation and utilities. There is no competition in these sectors.
- The government creates laws to protect and enforce the central plan.
Command Economy Example
Economists note benefits and drawbacks to command economies.
A drawback is that eliminating competition has the potential to reduce the incentive for innovation.
Additionally, without economic data derived from natural market changes, a government may not be able to make well-informed decisions and inefficiencies can occur.
For example, if the government sets the price of food too high, famine can occur even if fields are filled with crops since consumers simply can’t afford to buy food.
One common argument in favor of a command economy is that by controlling the allocation of resources, governments have an easier time implementing things like social welfare, as well as controlling unemployment.