Command Economies

Definition

A command economy is an economic system where the government, rather than the market, makes all decisions about the production and distribution of goods and services. In a command economy, the government controls the factors of production and makes all choices about their use, with the goal of achieving specific economic and social outcomes.

5 Must Know Facts For Your Next Test

1. Command economies are characterized by a high degree of government control and intervention in the economy, with the government setting production quotas, prices, and wages.
2. The primary goal of a command economy is to achieve specific social and economic outcomes, such as full employment, economic growth, and an equitable distribution of resources.
3. Command economies often struggle with inefficiencies, shortages, and a lack of incentives for innovation and productivity, as the government's central planning may not accurately reflect consumer demand.
4. Examples of command economies include the former Soviet Union, China (prior to market reforms), and North Korea, where the government exerts significant control over the economy.
5. The transition from a command economy to a market-based economy, known as economic liberalization, can be a complex and challenging process, as it involves privatization, deregulation, and the development of new institutions and infrastructure.

Review Questions

• Explain the key features of a command economy and how they differ from a market economy.
  • The key features of a command economy include centralized planning by the government, state ownership of the means of production, and the government's control over the allocation of resources and the distribution of goods and services. This contrasts with a market economy, where production and distribution decisions are primarily made by private individuals and businesses in response to supply and demand. In a command economy, the government sets production quotas, prices, and wages, while in a market economy, these are determined by the free market.
• Analyze the potential advantages and disadvantages of a command economy compared to a market economy.
  • Potential advantages of a command economy include the ability to achieve specific social and economic objectives, such as full employment and an equitable distribution of resources. However, command economies often struggle with inefficiencies, shortages, and a lack of incentives for innovation and productivity, as the government's central planning may not accurately reflect consumer demand. In contrast, market economies are generally more efficient and responsive to consumer preferences, but they may also lead to greater income inequality and the unequal distribution of resources. The transition from a command economy to a market-based economy can be a complex and challenging process, as it involves privatization, deregulation, and the development of new institutions and infrastructure.
• Evaluate the role of the government in a command economy and how it differs from the government's role in a market economy.
  • In a command economy, the government plays a dominant and extensive role, making all decisions about production, distribution, and the allocation of resources. The government owns the majority of the means of production and uses centralized planning to achieve its economic and social objectives. This is in contrast to a market economy, where the government plays a more limited role, primarily focused on providing a legal and regulatory framework, addressing market failures, and ensuring a basic social safety net. In a market economy, the majority of economic decisions are made by private individuals and businesses in response to supply and demand, rather than by the government. The different roles of government in these two economic systems have significant implications for individual liberty, economic efficiency, and the distribution of resources and wealth.

Related terms

Centralized Planning: The process in a command economy where the government makes all decisions about what to produce, how much to produce, and how to distribute those goods and services throughout the economy.

Planned Allocation of Resources: In a command economy, the government decides how to allocate land, labor, capital, and other resources to achieve its economic and social objectives, rather than leaving those decisions to the free market.

State Ownership: In a command economy, the government owns the majority of the means of production, including factories, farms, and natural resources, rather than private individuals or businesses.