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In a command economy, also called a centrally planned economy or command economy, the central government controls all major aspects of the country’s economy and production. It is the government that decides what goods and services are produced and how they are distributed; while, in a market economy, supply and demand regulate the economy. The command economy is based on the principle of collective ownership of the means of production, a concept defined by Karl Marx in the Communist Manifesto. Although command economies are capable of making drastic changes in the socioeconomic structure of a society, they can engage in negative practices such as overproduction and limiting innovation, which has led countries that had command economies such as China and Russia to incorporate free market practices to improve their competition in the global marketplace.
command economy
In a command economy, the government designs a macroeconomic plan to be developed over several years, which sets targets such as the national employment rate and what collectively owned industries will produce. To develop this plan, the government enacts laws and regulations, while controlling the development of the economy in its various aspects.
In the macroeconomic plan, the government defines how financial, human, and natural resources will be allocated. The plan’s objective is also to use human resources to their maximum potential in order to eliminate unemployment, for which companies adapt their recruitment strategies to the plan’s objectives.
Natural monopoly sectors such as utilities, banking, and public transportation are controlled by the government, so there is no competition. Most of the companies that produce goods and services are collectively owned, so the government can set the prices of some of these goods and services. The government guarantees three basic aspects of society: health care, education, and access to housing. In some more restrictive command economies, the government sets limits on personal income.
The evolution of the world economy has led some command economies to change their economic model or incorporate free market practices. Among the countries that maintain a command economy, Cuba and North Korea stand out.
Cuba
In Cuba most industries are collectively owned, controlled by the government. Unemployment is practically non-existent but wages are low and there are often supply problems. Access to housing, medical care and education are free. The Cuban government has recently incorporated some economic liberalization measures; these measures are aimed at individuals and small businesses, in an effort to mobilize a stagnant economy.
North Korea
North Korea’s economy is based on meeting the needs of its population. The government owns the homes and sets their prices, thus keeping the cost of access to housing limited. In the same way, health and education are free and under government administration. However, state industries are inefficient and services such as transportation and medical care do not satisfactorily meet the needs of the population. Individual income is strictly controlled by the government.
Advantages and limitations
One of the advantages of a command economy is that it can change quickly. Being controlled by the government, drastic changes in the economic structure, infrastructure or industrial sites can be made without conflicts associated with political situations or private interests. In a command economy unemployment is usually minimal or non-existent, since the allocation of human resources is part of macroeconomic policy. Due to its economic structure controlled by the State, there are no abusive monopolistic or oligopolistic practices by private companies, as there tends to be in market economies, in which there are excessive prices and misleading advertising. In a command economy, the basic needs of society are usually met in an equitable manner,
The limitations and disadvantages of command economies are associated with the establishment of governments that limit individual economic rights. Due to the lack of competition characteristic of market economies, command economies discourage innovation. This aspect is also reflected in the lack of flexibility of collectively owned industries to adapt to demand, which is why events of overproduction or insufficient production occur, which in many situations also translates into inefficiency in the production process. The strict control of production volumes and prices leads to the emergence of informal markets, black markets, where products are produced and sold outside the formal production system.
Sources
Economics: Its Concepts & Principles (w/ Agrarian Reform & Taxation) . Bon, Kristoffer G.; Gabnay, Roberto M. editors. Rex Bookstore, Inc., 2007.
Elman, Michael. Socialist planning . Third edition. Cambridge University Press, 2014.
Roldan, Paula Nicole. planned economy . Economipedia.com. December 2, 2016.
