Command Economy

Definition

A command economy is an economic system where the government, rather than the free market, determines what goods and services should be produced, how they should be produced, and how they should be distributed. In a command economy, the government plans and directs the economy, making all the major decisions about investment, production, and the allocation of resources.

5 Must Know Facts For Your Next Test

1. In a command economy, the government sets production quotas, determines prices, and allocates resources to different sectors of the economy.
2. Command economies are often associated with socialist or communist political systems, where the state plays a dominant role in economic decision-making.
3. The lack of a free market and private property rights in a command economy can lead to inefficiencies, shortages, and a lack of innovation.
4. Examples of command economies include the former Soviet Union, China under Mao Zedong, and North Korea.
5. The transition from a command economy to a market-based economy, such as the reforms implemented in China and Russia, can be a complex and challenging process.

Review Questions

• Explain the key features of a command economy and how it differs from a market economy.
  • In a command economy, the government, rather than the free market, makes all the major decisions about production, investment, and the allocation of resources. The government sets production quotas, determines prices, and directs the flow of goods and services. This is in contrast to a market economy, where these decisions are made by individual consumers and producers through the interaction of supply and demand. Command economies are often associated with socialist or communist political systems, while market economies are typically found in capitalist societies.
• Analyze the potential advantages and disadvantages of a command economy compared to a market economy.
  • The potential advantages of a command economy include the ability of the government to prioritize and direct resources towards specific economic and social goals, such as full employment or the development of strategic industries. Additionally, command economies can provide a greater degree of economic stability and security for citizens. However, the potential disadvantages include a lack of incentives for innovation and efficiency, shortages of consumer goods, and the potential for misallocation of resources due to the government's limited information and decision-making capabilities. The lack of a free market and private property rights in a command economy can also lead to a lack of economic dynamism and a slower rate of economic growth compared to market economies.
• Evaluate the challenges faced by countries transitioning from a command economy to a market-based system, and the strategies they have used to manage this transition.
  • The transition from a command economy to a market-based system can be a complex and challenging process. Countries like China and Russia have faced significant challenges, including the need to privatize state-owned enterprises, liberalize prices, and develop the necessary legal and institutional frameworks to support a market economy. These transitions have often been accompanied by economic disruptions, such as high inflation, unemployment, and social unrest. Strategies used to manage the transition have included gradual, incremental reforms, the preservation of some state control over key industries, and the implementation of social safety nets to cushion the impact on the population. The success of these transitions has varied, and the long-term outcomes have depended on the specific policies and institutions put in place to support the development of a well-functioning market economy.

Related terms

Centralized Planning: The process by which a central authority, such as the government, makes decisions about the production, investment, and distribution of goods and services in an economy.

Planned Economy: An economic system where the government, rather than the free market, determines the production, investment, and distribution of goods and services.

Socialist Economy: An economic system where the means of production, such as factories and land, are owned and controlled by the state or the community as a whole, rather than by private individuals.