What Is a Command Economy? Show
The Balance A command economy is a system in which a central government makes all economic decisions. Either the government or a collective owns the land and the means of production. A command economy is one based on complete control by the government. A variety of administrative efforts, such as commands, laws, and national goals, are used to coordinate complex social and economic systems. In other words, command economies are authoritarian economic structures in which a political or social hierarchy is solely responsible for making decisions about the economy. The decisions made by these leaders are followed by players throughout the economy, all the way down to individual laborers. How Command Economies WorkIn a modern, centrally planned command economy, the government creates a central economic plan. The government may establish a five-year plan, for example, that sets economic and societal goals for every sector and region of the country. Shorter-term plans convert the goals into actionable objectives. The government allocates all resources according to the central plan. It tries to use the nation's capital, labor, and natural resources in the most efficient way possible. Command economies aim to use each person's skills and abilities to their highest capacity. By doing so, a command economy also seeks to eliminate unemployment. The central plan sets the priorities for the production of all goods and services. That includes quotas and price controls. The goal is to supply enough food, housing, and other basics to meet the needs of everyone in the country. The central plan also sets national priorities on issues like mobilizing for war. The government owns monopoly businesses in industries deemed essential to the goals of the economy, including finance, utilities, and automotive sectors. That means a key feature of a command economy is a lack of domestic competition in any sectors that are under government control. The government creates laws, regulations, and directives to enforce the central plan. Businesses follow the plan's production and hiring targets. They can't respond on their own to free-market forces. Examples of Command EconomiesConsider these examples of command economies:
Some centrally-planned economies, like China and Russia, have begun adding aspects of the market economy, and this creates a mixed economy. Other economies, like North Korea and Cuba, remain economically restrained. Development of the TheoryViennese economist Otto Neurath developed the concept of a command economy after World War I. Neurath proposed it as a way to control hyperinflation. The phrase “command economy” comes from the German word "Befehlswirtschaft.” It described the fascist Nazi economy. While the word stems from Nazi Germany, centrally planned economies existed long before that. Any time a government imposes control over industries rather than letting market forces dictate economics, then that's an example of a command economy. Even the U.S., which traditionally values free-market economics, has used some features of command economies, such as directing materials to war efforts during World War II. Economic Freedoms Around the WorldBelow you can see national rankings by the level of economic freedom, from the freest to the most controlled. Pros and Cons of a Command EconomyCons
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Key Takeaways
Frequently Asked Questions (FAQs)What is the primary characteristic of a command economy?The central feature of a pure command economy is government control. Rather than letting market forces dictate the production of goods and services, the government determines economic priorities and controls production and pricing. How does a command economy differ from a mixed market economy?A mixed-market economy combines some aspects of a command economy and a market economy. Some aspects of the economy are under government control, while others are freely determined by market forces. The United States is an example of a mixed economy. Who makes the decisions in a command economy?In a command economy, the government or some other central authority controls all aspects of the economy. In what system does the government control all of the means of production including private property?Socialism is, broadly speaking, a political and economic system in which property and the means of production are owned in common, typically controlled by the state or government. Socialism is based on the idea that common or public ownership of resources and means of production leads to a more equal society.
What is it called when the government controls production?In a command economy, the government (or some other central authority) controls and steers major aspects of economic production. The government decides the means of production and owns the industries that produce goods and services for the public.
In which economic system does the government control all economic decisions?Another modern economic system is the command economy, where the government controls all economic decisions, in sharp contrast to the market economy. The government sets the price for goods and services and controls the means of production.
Which economic system allows for some private property but allows the government to control production?Mixed economies typically maintain private ownership and control of most of the means of production, but often under government regulation.
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