What Is A Command Economy?

By Alex Yiannoutsos on December 17 2019 in Economics

The Soviet Union was characterized by a Command Economy.

The government is responsible for finding the best balance to maximize economic growth while looking out for the well-being of its citizens. One method is known as the command, or planned, economy. This refers to government ownership over all means of production, quotas, and incomes. More specifically, the government decides what and how much a country will produce, then sets the price for these goods to sell and export. The country's leadership will also determine how many workers are needed in each field and how much they deserve to be paid. Essentially, all economic decisions are made by a central authority rather than the market. The theory behind this is simple: the government knows best. Every country's leadership has a set of goals for society. Whether it be producing more steel for infrastructural development or vaccinating all citizens, the government uses economic tools to achieve these aims. In a Command Economy, it is assumed that decision makers are experts and as such, capable of making Economic decisions that maximize outcomes like profit or social welfare. This kind of economy is closely associated with communism and socialism ideologies, where means of production are communally owned. Many countries followed this model during World War II and the Cold War like the Soviet Union. However, countries that historically had Command Economies like China and Cuba, increasingly liberalized to form more mixed economies. 

Characteristics of a Command Economy

In a command economy, the government determines short and long-term economic goals. For example, the Soviet Union established five-year-plans under Stalin that spurred industrialization aimed at eventually outpacing the United States. These long-term goals are further broken down into smaller increments to ensure that necessary milestones are being met along the way.

To do this, the government allocates natural resources necessary for production processes. Under this system, the government is seen as the expert. It is capable of allocating resources efficiently and minimizing unemployment by placing workings in jobs that match their skills. The Soviet Union sought to guarantee every able-bodied citizen a job that corresponded with their education and skills if this occupation was useful for society as a whole. Although wage systems evolved overtime, the government set wages according to the Marxist doctrine "Equal pay for equal work". Rather than utilizing the Capitalist system that monetized hours worked, communist leadership sought to pay laborers according to their contributions to society. In reality, constraints like war, unions, political disagreement, and economic necessity pushed governments to use different compensation systems.

Once goods are produced, they must be sold to compensate for the costs incurred in production. In a command economy, the government determines the price and distribution quotas. Ideally, the number of goods produced, such as housing or food, should be enough to provide for every citizen and achieve economic goals. Unfortunately, the Soviet Union was often plagued by shortages.

Countries face a diverse set of needs. This requires upkeep of diverse industries such as agriculture, technology, and finance to name a few. The government owns or, in other words, holds a monopoly over all enterprises in a command economy. Therefore, the only industries that function are those that the government determines are necessary to promote the state's economic objectives and there is no competition between them. In practice, upholding this monopoly is difficult as international influences and products often find their way past government controls.

Finally, laws and regulations are implemented to enforce the government's economic objectives. For example, Stalin's regime reverted Soviet law back from Gorbachev's "New Economic Policy" that liberalized the market, outlawing private ownership of businesses and property.

Advantages of a Command Economy

According to proponents of the command economy, the government is most effective at manipulating massive quantities of resources to achieve economic aims such as industrialization. Doing so could overcome market failures that lead to inefficient allocation of goods, unemployment, and ultimately reduce social welfare. Optimally, the government is more equipped to channel income and growth back into society to distribute wealth and overcome inequality. The Soviet Union successfully rivaled the United States' space program during the Cold War because the government was able to efficiently funnel extraordinary amounts of resources into the program.

Disadvantages of a Command Economy

A planned economy impedes innovation. Without competition, businesses owned by the government have no incentive to research or develop new technologies unless expressly stated and invested by the government. This is because doing so would incur a cost, but without the ability to set prices, alter quantities, or advertise, companies would not have the capacity to recoup the losses. Similarly, it stifles productivity. Laborers have nearly no ability to change their wages and thus respond by producing the bare minimum to retain their job. Working harder would require more energy without any benefit. Additionally, the government is not always efficient. Despite the assumption that the government possesses near-perfect information, it is unable to accurately estimate people's preferences. Therefore, command economies must often resort to rationing. This situation facilitates a black market that further undermines the effectiveness of the planned economy.

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