A command economy (also called a planned economy) is a type of economic organization of a society in which the government owns most of the means of productions and makes all the major decisions regarding production.
Inherent in the philosophy behind the command economy is the premise that free market capitalism is doomed to create imbalances in the economy in the form of income and wealth disparity, environmental degradation, worsening of class struggle, economic crises, political turmoil and corruption, etc. The objective of a command economy is very noble, i.e. emancipating the general population from insecurities related to their most basic needs i.e. food, clothing, shelter, etc. In a command economy, no one can accumulate wealth (in the form of land and capital) because it is owned by the government and belong to the whole society.
Examples of countries whose economic organization is predominantly based on command economic structure include the erstwhile Soviet Union, North Korea, China, Cuba, etc.
Even though command economies have faced significant failures, some of their features have positive appeal in certain situations:
- During extraordinary times, such as war, etc., command economies can ensure allocation of resources to the most vital sectors.
- It can help countries who are stuck in the vicious circle industrialize themselves rapidly; however, such rapid expansion can’t be sustained indefinitely.
- A command economy can benefit from immense economies from scale; however, this advantage is severely restricted from lack of innovation.
- Because the government employs all the people, it can maintain a low level of unemployment thereby helping the poorest people meet their most acute needs i.e. food, clothing, etc.
Command economy is (rightly) despised by many people because:
- It makes the human being a cog in the giant economic machine by infringing on his personal liberty, culture, likes and dislikes to assign him a robotic role from which he can’t escape. This point is illustrated by Friedrich Hayek in ‘The Road to Serfdom’.
- Lack of proper incentives deter the innovative spirit because people don’t see any benefit accruing to them from their invention of new technologies.
- Planning is hard even for a single enterprise let alone for millions of people. This results in inefficient allocation of resources i.e. forcing people to do jobs at which they don’t excel at and producing goods which they don’t like.
- Black markets pop up because people’s consumption patterns can’t be met through the planned and regimented production.
- Significant red tape exists in command economies because the managers become risk averse and may prefer to ‘look busy do nothing’.
- Democratic principles don’t work in executing such a mammoth plan and hence power must be concentrated in hands of the very few people which can lead to widespread abuse.
- The choice of products would be severely restricted because centralized planners would tend to harvest economies of scale.
Command Economy vs Market Economy vs Mixed Economy
A command economy is the exact opposite of a market economy. It is also significantly different from the mixed economy.
The market economy is an economic structure in which the government acts as a referee while the interplay of demand and supply settles the question of allocation of resources. Market economy is generally more efficient than a command economy and stimulates innovation and economic growth; however, it can potentially result in income and wealth disparity, monopolies, wastage of resources, etc.
A mixed economy, which is the third type of economic organization, attempts to offer the best of both worlds i.e. it adopts the free market mechanism for the allocation decision (a feature of market economy) while also allowing the government a greater role in trying to stop the market forces from running amok (a feature of command economy).
Written by Obaidullah Jan, ACA, CFA and last modified on