Command Economic Systems

Definition

A command economic system is an economic system where the government, rather than the free market, determines what goods and services will be produced, how they will be produced, and how they will be distributed. The government makes all the major economic decisions in a command economy.

5 Must Know Facts For Your Next Test

1. In a command economy, the government owns or controls the major means of production, such as factories, farms, and natural resources.
2. The government in a command economy sets prices, production quotas, and wages, rather than letting the free market determine these factors.
3. Command economies often struggle with inefficiencies, shortages, and a lack of incentives for innovation and productivity.
4. Examples of command economies include the former Soviet Union, China under Mao Zedong, and North Korea.
5. The transition from a command economy to a market-based economy, such as in the former Soviet bloc countries, can be challenging and often involves significant economic and social upheaval.

Review Questions

• Explain the key features of a command economic system and how it differs from a market-based economy.
  • In a command economic system, the government, rather than the free market, makes all the major economic decisions. The government determines what goods and services will be produced, how they will be produced, and how they will be distributed. This is in contrast to a market-based economy, where production, investment, and resource allocation are determined by supply and demand in the free market. Command economies often struggle with inefficiencies and a lack of incentives for innovation, while market-based economies tend to be more dynamic and responsive to consumer preferences.
• Describe the role of centralized planning and state-owned enterprises in a command economic system.
  • Centralized planning is a key feature of a command economic system, where the government makes all the major economic decisions about production, investment, and resource allocation. The government also typically owns and controls the major means of production through state-owned enterprises, rather than allowing for private ownership and market competition. This centralized control and lack of market forces can lead to inefficiencies, shortages, and a lack of incentives for innovation and productivity in a command economy.
• Analyze the potential challenges and drawbacks of transitioning from a command economy to a market-based economy.
  • Transitioning from a command economy to a market-based economy can be a complex and challenging process. It often involves significant economic and social upheaval, as the government must relinquish its control over the means of production and allow for the free market to determine prices, investment, and resource allocation. This transition can lead to disruptions in the supply of goods and services, as well as unemployment and social unrest as state-owned enterprises are privatized or shut down. Additionally, the development of the necessary institutions and infrastructure to support a market-based economy, such as a robust financial system and legal framework, can be a slow and difficult process. Careful planning and management are required to ensure a successful transition and mitigate the potential negative impacts on the population.

Related terms

Centralized Planning: The process in a command economy where the government makes all the major economic decisions about production, investment, and resource allocation.

State-Owned Enterprises: Businesses that are owned and controlled by the government in a command economy, rather than being privately owned.

Rationing:

The government's method of distributing scarce goods and services in a command economy, usually through the use of ration cards or coupons.