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Command Economy

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Command Economy

Do you know what Cuba and North Korea have in common? Of course, communism, but what else? The answer would be a command economy. Both countries are dependent on and controlled by the government to the point where they can't make regular decisions such as where to work: the government tells them where they are going to work. But what's the difference between a command economy and communism? Are they the same thing? To learn about communism versus a command economy, the advantages and disadvantages of a command economy, and more, keep going!

Command Economy definition

The economic system established by society, such as command economy, market economy, or mixed economy, has a significant impact on resource allocation. Each system has its own set of institutional structures as well as a mechanism for allocating limited resources and dispersing output.

A command economy is a type of political economy in which a centralized governing body determines the allowable levels of output and the amounts that may be demanded for products and services.

A market economy is a type of economic system in which two forces, supply and demand, govern the creation of products and services.

To learn more about this topic, check out our explanation of - Market Economy

A mixed economy is a system that allows private property and provides for some economic freedom concerning the use of capital, but on the other hand it also permits governments to intervene in economic activity to achieve social goals.

Head on over to our explanation of a Mixed Economy to learn more details!

Characteristics of a Command Economy

Governments are responsible for regulating command economies. In general, this consists of the following characteristics:

  • Major industries are owned by the public.
  • Inventory levels and distribution mandates are under government control.
  • Prices, as well as wages, are under government control.
  • Strong control over speech/social media is used and propaganda is commonly utilized to advertise the country's success.

Command Economy A hand controlling a wood puppet StudySmarterGovernment Control. Source: Pixabay

The figure above illustrates the reality of citizens living in command economies: people in command economies are no more than marionettes to the government. Not only do governments get to decide how much of certain products to produce and what jobs people will work, but under a command economy, the government also ultimately decides other factors such as how much food everyone receives and what style of house they live in. Individuals have really no authority to make decisions, either democratically or economically.

System of Command Economy: Command Economy vs. Communism

The state controls land, labor, capital, and all other sources of production in communism. A command economy, on the other hand, is one in which the government decides what things must be manufactured, how much will be manufactured, and how much the items should be sold for. It also governs investments and earnings. Sounds similar right? Well, the command economy is an essential component of every communist society. But are they the same thing?

Communism is an economic system in which individuals do not own land, industries, or machinery. These items are instead owned by the government or the entire community and everyone is expected to share the riches they generate.

A command economy is analogous to a tree trunk, whereas communism is comparable to a branch on that tree.

In both cases, the government has absolute control over the enterprises of the country, the resources, and the economic activities. There are, nevertheless, slight distinctions between them.

In communism, for example, everyone owns the land and the money simultaneously, and the produce is dispersed equally. In truth, pure communism has never really been attained. Instead, aspirational versions of it have been observed in the former Soviet Union, Cuba, and China. Private ownership is not permitted in communism. People's salary is determined only by need, not by their accomplishments or performance.

A command economy, on the other hand, is an umbrella term for any controlled economic system.

It is always beneficial to understand the origins of an economic system. But do you know how far back command economies run? The Old Kingdom of Egypt 2200 BC and the Incan empire in the 1500s both had some type of a command economy which are recognized as the oldest known use of these types of economies!

Advantages of Command Economy

As far as market economies are concerned, you may vote on things you like by buying them. Products that people enjoy tend to stay, whereas those that people don't like tend to go. In a command economy, on the other hand, people get what they are given. As a result, if the government decides to say no to particular items, such products will no longer exist within the command economy.

Having said that, a command economy has both benefits and drawbacks. We'll take a look at some of these next.

1. It prohibits monopolization

Because the government regulates all market forces, it's simply not possible for a monopoly to reign in a command economy. Apart from the government, no supplier will be granted the authority to set the market. Monopolization occurs in other economies but not in a command economy.

A monopoly is when there is a single seller that dominates the market.

Don't walk, run to read our Monopoly explanation!

2. There's an increase in industrial power

The command economy generates industrial power to achieve large-scale projects while achieving critical social objectives.

3. It modifies manufacturing rates and the availability of finished items

It is feasible to change production rates to match the specific wants of the society. So, even though there will be fewer options than in other countries, a command economy reduces the likelihood of shortages occurring.

4. It enables greater resource mobilization

Because of the command economy's distinct composition, production is carried out as smoothly and effectively as is possible. As a result, all resources are deployed on a massive scale, ensuring rapid advancement.

5. It places a high value on social welfare

Social welfare is prioritized in a command economy. In actuality, one of its overarching objectives is to ensure optimal social welfare. Because of the feeling of community fostered by the lack of wealth disparity, the community itself takes on manufacturing and benefit, resulting in fewer conflicts or divisions.

Disadvantages of Command Economy

1. It limits freedom

Because this form of economic system is linked to communist regimes, it is unsurprising that it takes away people's liberty and places complete authority in the government's hands alone. People cannot pick their occupations based on their abilities and inclinations; instead, they are forced into certain careers by the government. People have minimal freedom of choice because all employment are linked with demands at the moment. This main disadvantage of a command economy might result in dissatisfied citizens.

2. It stifles inventive breakthroughs

A command economy, in contrast to a free market, does not stimulate change or innovation. Because the government regulates the markets, it does not prioritize or foster innovation in general. This is due to the fact that it regulates all areas of production and allows little space for individuals to improve it, resulting in a workforce which is less driven to develop better-quality goods or services.

3. It causes the black market to flourish

Some items and services are not available in the command economy due to government limitations, hence people might flock to black markets to find what they are looking for.

4. There isn't any competition

Market competition is one of the primary sources of progress, yet there is minimal competition in a command economy. The government controls all industries and neither encourages nor actively seeks to eliminate competition. In this sort of market, the benefits of competition are not visible.

5. The quantity of goods becomes unbalanced

Some things will almost certainly be mass-produced, whilst others would not be sufficient to meet economic demands. It is hard for the government organization in charge of the economy to gather up-to-date details concerning consumer wants, therefore rationing becomes the norm most of the time.

Examples of a Command Economy

Consider the following examples of command economies:

China

Following World War II, Mao Tse Tung established a communist-ruled society. He imposed a rigidly managed economy. The present leaders are attempting to transition to a market-based system. They are still developing five-year plans that establish economic aims and objectives.

Cuba

Fidel Castro's revolution of 1959 which established Communism is another good example of a command economy. Until 1990, the Soviet Union financed Cuba's economy. To stimulate growth, the government is gradually implementing market reforms.

North Korea

It has one of the world's leading, most communist regimes and has had this communist economy for decades. North Korea's economy is virtually beyond repair owing to corruption, lack of investment, and resource shortages. North Koreans continue to experience hunger and malnutrition.

Command Economy - Key takeaways

  • A command economy is a type of political economy in which a centralized governing body determines the allowable levels of output and the amounts that may be demanded for products and services.
  • A command economy is analogous to a tree trunk, whereas communism is comparable to a branch on that tree.
  • Individuals have really no authority to make decisions in command economies, either democratically or economically.
  • North Korea, Cuba, and China are examples of countries with command economies.

Frequently Asked Questions about Command Economy

A command economy is a type of political economy in which a centralized governing body determines the allowable levels of output and the amounts that may be demanded for products and services.

North Korea, Cuba, China, etc.

  • Major industries are owned by the public.
  • Inventory levels and distribution mandates are under government control.
  • Prices, as well as wages, are under government control. 
  • Strong control over speech/social media is used and propaganda is commonly utilized to advertise the country's success.

A command economy is analogous to a tree trunk, whereas communism is comparable to a branch on that tree. Communism is a controlled system while a command economy is more of an umbrella term for any controlled system.

North Korea is one of the most well-known command economies in the world. The economy is so far gone that it is, at this point, basically beyond repair. 

Final Command Economy Quiz

Question

What's a command economy?

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Answer

A command economy is a type of political economy in which a centralized governing body determines the allowable levels of output and the amounts that may be demanded for products and services.

Show question

Question

What's a market economy?

Show answer

Answer

A market economy is a type of economic system in which two forces, supply and demand, govern the creation of products and services.

Show question

Question

What are the characteristics of a command economy?

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Answer

  • Major industries are owned by the public
  • Inventory levels and distribution mandates are under government control.
  • Prices, as well as wages, are under government control. 
  • Strong control over speech/social media is used and propaganda is commonly utilized to advertise the country's success.

Show question

Question

_______ are abundant in command economies.

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Answer

Monopolies 

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Question

What's a monopoly?

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Answer

A monopoly is when there is a single seller that dominates the market.

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Question

Define communism

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Answer

Communism is an economic system in which individuals do not own land, industries, or machinery. These items are instead owned by the government or the entire community and everyone is expected to share the riches they generate.

Show question

Question

A command economy is an ________ term for any controlled economic system.

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Answer

umbrella

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Question

What are the advantages of a command economy?

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Answer

  • It prohibits monopolization
  • There's an increase in industrial power
  • It modifies manufacturing rates and the availability of finished items
  • It enables greater resource mobilization 
  • It places a high value on social welfare

Show question

Question

Why is it said that command economies limit freedom?

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Answer

A command economy takes away people's liberty and places complete authority in the government's hands alone.

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There ___ competition in a command economy.

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Answer

isn't

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Question

What's a mixed economy?

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Answer

A mixed economy is a system that allows private property and provides for some economic freedom concerning the use of capital, but on the other hand it also permits governments to intervene in economic activity to achieve social goals.

Show question

Question

The command economy is an essential component of every ________  _______.

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Answer

communist society

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Question

What happens to the quantity of goods within a command economy?

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Answer

The quantity becomes unbalanced

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Question

Due to government limitations, some products and services are not available in command economies. Where do people go to get these things then?

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Answer

The black market

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Why don't monopolies exist in command economies?

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Answer

Because the government regulates all market forces, it's simply not possible for a monopoly to reign in a command economy. Apart from the government, no supplier will be granted the authority to set the market.

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Question

What level of government intervention in the market would you expect from a command economy?

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Answer

High

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Question

What role does the public play in a command economy?

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Answer

The public has collective ownership of major industries.

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What is a differences between communism and a command economy?

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Answer

In communism, the state controls all forms of production, whereas in a command economy they only dictate what to produce.

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What are 3 similarities between communism and a command economy?

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Answer

The government controls the economic activity.

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What is not an advantage of a command economy?

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Answer

It places high value on individual economic success.

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What is not a disadvantage of a command economy?

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Answer

There is a higher standard of overall quality of goods.

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What is the relationship between command economies and the black market?

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Answer

Black markets are common because the lack of diverse goods in a command economy put people toward the illegal markets.

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Why might North Korea's economy be past repair?

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Answer

Overwhelming corruption.

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What aspect of a command economy is used in a mixed economy?

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Answer

Government intervention in economic activity.

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Question

In a command economy, ___________, as well as wages, are under __________ control.

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Answer

prices, government

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Question

If communism is the tree trunk, then the command economy is the tree branch.

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Answer

False. It is the other way around.

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Question

Strong control over speech/social media is highly frowned upon in a command economy.

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Answer

False, it is common to have very limited freedom of speech.

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What role does propaganda play in a command economy?

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Answer

Propaganda is a tool used by the government to convince its citizens of the nation's economic success.

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Question

In communism, the state controls land, labor, capital, and all other sources of production.

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Answer

True.

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Question

In a command economy, the government controls only supply.

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Answer

False, They also control the amounts of goods that may be demanded.

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Question

If a firm wanted to double its output and you lived in a command economy, could it?

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Answer

No, not without government approval.

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A command economy places a high value on social wellbeing.

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Answer

True. One of its main objectives is social welfare. 

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How might a command economy limit freedom?

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Answer

To optimize efficiency, the government will place workers where they are needed rather than allow them to choose their own profession or path. 

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How are monopolies dealt with in a command economy?

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Answer

They do not need to be dealt with because they cannot form in the first place since the government regulates all market forces.

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Question

Can businesses be individually owned in a command economy?

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Answer

Yes, but what they can produce, how much, and at what price is set by the government.

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