A command economy also known as a planned economy is the opposite of a free market system. Instead of businesses and property being privately owned, the government determines levels of production permissible and how much can be charged for goods and services.
The type of political system in place often influences the market that exists. Free markets often operate in capitalist systems, while command economies are often a byproduct of communist economies. That said, command economies are standard tools of both communism and socialism. In the real-world, most economies are somewhere between a pure free-market economy and a pure command-economy.
The Ins and Outs Of Command Economies
In command economies, governments devise a central economic plan. This plan outlines how resources are allocated, may set economic goals for each sector, and set national priorities. The goal of a command economy is to maximize a country’s capital, labor, and natural resources to ensure the needs of all people in a country are met. Incomes are also regulated and laws and regulations are set to ensure the plan is enforced.
The hope is that by controlling and sometimes monopolizing businesses, domestic competition in sectors the government controls is eliminated.
Examples of command economies include Iran, and Communist Cuba. Some countries like China, are a hybrid of a free market economy and command economy since the market is relatively free yet still significantly regulated by the government. Free or subsidized education, housing and healthcare may be common in command economies.
It’s also imperative to note that with command economies, demand and supply don’t affect price. This means goods and services may be more affordable for consumers. Since profit isn’t the end goal, command economies can sometimes improve accessibility.
Benefits of Command Economies
Command economies attempt to redistribute wealth and minimize income inequality. Because the government controls the resources, they may also have the ability to respond more quickly to emergencies. Another upside is healthy employment levels, seeing as the government controls all businesses. What this also means is that people are likely to find employment irrespective of their skillset.
Downsides
A free market often leads to competition, which can drive better quality goods and services. A lack thereof can mean low quality goods and services in addition to shortages.
It can be restricting for governments in command economies to determine income and jobs. People not being able to pursue their passions and be ‘fairly’ compensated can lead to low morale, creativity and a lack of innovation. For high performers, not being rewarded through increased compensation can also impact productivity. In extreme cases, the lack of freedom could lead to crime or illegal activity.
Command economies don’t tend to take supply and demand into consideration, which can also be a downside. A benefit of supply and demand is the ability to understand what people want and need. When governments determine production, they could end up making uninformed decisions about what is produced; this can lead to waste and shortages of high-demand products or services.
Usually the stated goal of a command economy is to protect the working class from overly greedy profit-seekers. Unfortunately for central planners, command economies have their own issues. By trying to circumvent the influences of supply and demand on prices command economies often create a myriad of inefficiencies, often producing too little of some goods and too much of others. While price changes in a free market will cause consumers and producers to react accordingly, adjustments in a command economy must go through the often cumbersome bureaucracy. Recent history suggests that markets and economies are too complex for central planners to navigate effectively. For instance, many would attribute the rapid economic growth in China to their relatively recent willingness incorporate free-market elements into their system.
Command Economy vs Free Market Economy
A free economy is the reason people can invest, companies have no ceiling on their growth, and people can choose their careers as well as build wealth. Ownership is also a huge element of a free economy that makes it appealing.
The downside of a free market, which we can see in today’s world, is that the welfare of people isn’t always prioritized and profit takes precedence over people. This can lead to corporate greed destroying natural resources, unethical labor practices, and increased income inequality.
That said, command economies can create a level ofnequality among people but the overall economy may suffer. Free market economies make social mobility possible as well as financial freedom.
