Command Economy

Definition

A command economy is an economic system where the government makes all the decisions regarding the production and distribution of goods and services. In this type of economy, the central authority determines what to produce, how much to produce, and the prices of goods and services, often aiming to achieve specific social or economic objectives. This can lead to efficient resource allocation in certain cases but may also result in shortages and inefficiencies due to lack of competition and consumer choice.

5 Must Know Facts For Your Next Test

1. In a command economy, the government owns the means of production, which can include factories, land, and resources.
2. Command economies often prioritize social welfare over profit, aiming to provide basic needs for all citizens regardless of individual economic contribution.
3. Examples of command economies include the former Soviet Union and North Korea, where central planners dictated economic output.
4. Because there is little competition in a command economy, innovation can be stifled, leading to outdated products and technologies.
5. Command economies can struggle with efficiency as they may not respond quickly to changes in consumer preferences or resource availability.

Review Questions

• How does a command economy differ from a market economy in terms of decision-making processes?
  • In a command economy, decision-making is centralized with the government controlling all aspects of production and distribution. This contrasts with a market economy, where decisions are driven by supply and demand dynamics in a decentralized manner. In a market economy, individual consumers and businesses make choices that influence what goods are produced based on their preferences and purchasing power, fostering competition and innovation.
• Evaluate the advantages and disadvantages of a command economy compared to a mixed economy.
  • A command economy can provide certain advantages like guaranteed employment and equitable distribution of resources. However, it often lacks the efficiency seen in mixed economies where both market forces and government intervention play roles. Mixed economies can better respond to consumer needs through competition while still ensuring basic needs are met through government policies. The drawbacks of command economies typically include inefficiencies and lack of innovation due to limited competition.
• Discuss how historical examples of command economies have impacted global perceptions of this economic system.
  • Historical examples like the Soviet Union and Maoist China have shaped global perceptions by highlighting both the potential for rapid industrialization and the failures associated with mismanagement. These economies initially demonstrated significant growth but ultimately faced severe challenges such as shortages, corruption, and lack of individual freedoms. As these systems collapsed or reformed into more market-oriented approaches, the world observed the consequences of strict governmental control versus more open market dynamics, leading to a generally skeptical view of command economies today.

Related terms

Central Planning: The process by which a central authority, typically the government, creates a plan for economic activity, including what goods to produce and how resources should be allocated.

Market Economy:

An economic system where supply and demand determine the production and pricing of goods and services, with minimal government intervention.

Mixed Economy:

An economic system that incorporates elements of both command and market economies, allowing for both government intervention and free market principles.