Command Economy Definition, Characteristics, Pros and Cons

Views and People of Havana, Cuba
HAVANA, CUBA - DECEMBER 28: A city bus and classic cars fill the street during morning rush hour on December 28, 2015 in downtown Havana, Cuba. The island is one of the few remaining examples of command economy. David Silverman / Getty Images

In a command economy (also known as a centrally planned economy), the central government controls all major aspects of a nation's economy and production. The government, rather than the traditional free market economy laws of supply and demand, mandates which goods and services will be produced and how they will be distributed and sold.

The theory of a command economy was defined by Karl Marx in the Communist Manifesto as “common ownership of the means of production,” and it became a typical characteristic of communist governments.

Key Takeaways: Command Economy

  • A command economy—or centrally planned economy—is a system in which the government controls all facets of the nation’s economy. All businesses and housing are owned and controlled by the government.
  • In a command economy, the government determines what goods and services will be produced and how they will be sold according to a multi-year central macroeconomic plan.
  • In nations with command economies, health care, housing, and education are usually free, but the peoples’ incomes are controlled by the government and private investment is rarely allowed.
  • In the Communist Manifesto, Karl Marx defined command economy as “common ownership of the means of production.”
  • While command economies are typical of both communism and socialism, the two political ideologies apply them differently.

While command economies are capable of rapidly making sweeping changes in a country’s economy and society, their inherent risks, such as overproduction and stifling of innovation, have driven many long-time command economies like Russia and China to incorporate free market practices in order to better compete in the global marketplace.

Command Economy Characteristics

In a command economy, the government has a multi-year central macroeconomic plan which sets objectives like nationwide employment rates and what the government-owned industries will produce.

The government enacts laws and regulations to implement and enforce its economic plan. For example, the central plan dictates how all of the country’s resources—financial, human, and natural—are to be allocated. With the goal of eliminating unemployment, the central plan promises to use the nation’s human capital to its highest potential. However, industries must adhere to the plan’s overall hiring targets.

Potential monopoly industries such as utilities, banking, and transportation are owned by the government and no competition is allowed within those sectors. In this manner, monopoly prevention measures such as anti-trust laws are unnecessary. 

The government owns most, if not all of the country’s industries that produce goods or services. It may also set market prices and provide consumers with some necessities, including health care, housing, and education. 

In more tightly-controlled command economies, the government imposes limits on individual income.

Command Economy Examples

Globalization and financial pressure have led many former command economies to change their practices and economic model, but a few countries remain faithful to the principles of command economy, such as Cuba and North Korea.

Cuba

Under Raul Castro, Fidel Castro’s brother, most Cuban industries remain owned and operated by the communist government. While unemployment is virtually nonexistent, the average monthly salary is less than $20 USD. Housing and health care are free, but all of the homes and hospitals are owned by the government. Since the former Soviet Union stopped subsidizing Cuba’s economy in 1990, the Castro government has gradually incorporated some free-market policies in an effort to stimulate growth.

North Korean money, a background
North Korean currency, featuring Kim Il-Sung, DPKR's first leader. johan10 / Getty Images

North Korea

The command economic philosophy of this secretive communist nation focuses on meeting the needs of its people. For example, by owning all of the homes and setting their prices accordingly, the government keeps the cost of housing low. Similarly, health care and education in government-operated hospitals and schools are free. However, with the lack of competition leaving them little reason to improve or innovate, the government-owned industries operate inefficiently. Overcrowded transportation facilities and long waits for health care are typical. Finally, with their incomes strictly controlled by the government, the people have no avenue for building wealth.

Pros and Cons

Some advantages of a command economy include:

  • They can move quickly. Controlled by the government itself, industries can complete massive projects without politically motivated delays and fears of private lawsuits.
  • Since jobs and hiring are regulated by the government, unemployment is consistently minimal and mass unemployment is rare.
  • Government ownership of industries can prevent monopolies and their inherent abusive market practices, such as price gouging and deceptive advertising.
  • They can quickly respond to fill critical societal needs such as health care, housing, and education, which are typically made available at little or no charge.

Disadvantages of a command economy include:

  • Command economies breed governments which limit the rights of individuals to pursue their personal financial goals.
  • Due to their lack of free-market competition, command economies discourage innovation. Industry leaders are rewarded for following government directives rather than for creating new products and solutions.
  • Since their economic plans are unable to respond to changing consumer needs in a timely manner, command economies often suffer from over and under production resulting in shortages and wasteful surpluses.
  • They encourage “black markets” that illegally make and sell products not produced by the command economy.

Communist Command Economy vs. Socialist Command Economy

While command economies are typical of both communism and socialism, the two political ideologies apply them differently.

Both forms of government own and control most industries and production, but socialist command economies do not attempt to control the peoples’ own labor. Instead, the people are free to work as they wish based on their qualifications. Similarly, businesses are free to hire the best-qualified workers, rather than having workers assigned to them based on the central economic plan.

In this manner, socialist command economies encourage a higher level of worker participation and innovation. Today, Sweden is an example of a nation using a socialist command economy.

Sources and Further Reference

  • Command Economy.” Investopedia (March 2018)
  • Bon, Kristoffer G.; Gabnay, Roberto M. editors. “Economics: Its Concepts & Principles.” 2007. Rex Book Store. ISBN 9712346927, 9789712346927
  • Grossman, Gregory (1987): “Command economy.” The New Palgrave: A Dictionary of Economics. Palgrave Macmillan
  • Ellman, Michael (2014). “.”Socialist Planning Cambridge University Press; 3rd edition. ISBN 1107427320