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What is a command economy? Definition and meaning

A command economy is an economy where the supply of goods and services, and also their prices, are regulated by central government and not market forces.

The government has planners who determine which goods and services are produced or supplied, as well as their distribution. Communist countries like Cuba or North Korea today, and the Soviet Union and its satellite states in Eastern Europe until the late 1980s, are examples of command economies.

It is also known as a controlled economy, planned economy, or centralized economy. A market economy, laissez-faire economy, or free market is the opposite. In a command economy prices are determined by the government, while in a free market one they are determined by market forces – supply and demand.

At the two ends of the spectrum there are two polar opposite approaches to how a nation’s economy works. The top-down, centrally-planned economy of socialism or communism – the command economy – and the decentralized economy of the free market – the market economy. Most nations that claim to have a free market economy have, in fact, more of a mixed economy.

What is a command economyIn a command economy, the government determines what goods should be produced, how much, and at what price they should be sold. It is the opposite of a market economy.

Economists say that the most fundamental difference between the market and command economies is the existence of private property in the free market and its absence in the command economy (at the extreme end of the spectrum).

Is centrally-planning an economy impossible?

Proponents of a command economy say it is better because in contrast to the unplanned market economy – according to them – it is planned and fairer for everybody.

However, time has demonstrated that this view is mistaken, and that the market economy is actually very rationally planned and regulated by consumer demand through the price system.

Attempting to plan a whole economy with about 300 civil servants in a central committee has always been shown to be inefficient and over the long-term unsustainable, because the task is so immense. The world’s top economists say there is no way that a group of planners can know all the needs and conditions of resource availability, and localized knowledge spread across a nation’s economy.

Market economy versus command economyMarket economies and command economies are very different. Most democracies, especially in Europe, that have parties that claim to support socialism, are not at the end of the spectrum, i.e. they believe in some market economy features – a mixed economy.

The command economy is a collectivized system in which all work is for the benefit of each worker’s quotal share of total production. There are no individual incentives, i.e. harder working employees or those who do extra hours are not paid more.

The market economy always finds a way

Two of the most common features of a command economy are shortages, rationing, and lack of choice. That is why the black market thrives in such an environment.

In the former Soviet Union, ex-communist Eastern European nations, and Cuba today, the black market is extensive. When there are shortages, the queues to get basic goods are too long, or a product is simply never available, people resort to the black market for their supplies.

The black market is not centrally controlled, it is an example of the free market finding a way regardless of the environment around it.

Which system works better?

The Berlin Wall, the border between North and South Koreas full of soldiers and land mines, are/were there to stop citizens from migrating from a command to market economy, and not the other way round.

If you look at the movement of people moving in and out of Cuba – excluding the United States, which is a first world nation – virtually everybody is moving to get out of its command economy. On the coast of the Mexican Yucatan Peninsula, which is about 90 miles from Cuba, hundreds of Cubans escape by boat each year and never return to their country. Not one Mexican does the same the other way round.

Berlin Wall and Korean border(Top) The North-South Korean border and the (bottom) Berlin Wall – both examples of how command economies have to stop their citizens from migrating abroad.

If we compare the quality of life of the people in former West Germany and East Germany, and current North Korea and South Korea, the quality of goods and services as well as their availability, plus the standard of living of citizens and their average lifespans is/was considerably superior on the market economy side, i.e. West Germany and South Korea.

As with Cuba and Mexico, the movement of people from the two Germanies and Koreas has always been from the command to market economy side, and never the other way round.

Black market cubaA black market food vendor. The black market, known as the ‘bolsa negra’ locally, is a vital fixture of the Cuban economy, touching virtually every citizen on the island and providing goods and services that are otherwise unavailable in the state-run marketplace.

For some reason, which experts still disagree on, command economies gradually lose their democratic features and end up being dictatorships. Not one European market economy (or mixed economy) has become a command economy over the past fifty years, while virtually all the once command economies are market economies (or mixed economies) today.

According to Collins Dictionary, a planned economy is:

“An economy in which business activities and the allocation of resources are determined by government order rather than market forces.”

Quotes using the words ‘communism’ or ‘socialism

“For us in Russia, communism is a dead dog, while, for many people in the West, it is still a living lion, ” (Aleksandr Solzhenitsyn, 1918-2008 – a Russian novelist, historian, and short story writer).

“Socialism is a philosophy of failure, the creed of ignorance, and the gospel of envy, its inherent virtue is the equal sharing of misery,” (Winston Churchill, 1874-1965 – Prime Minister of the United Kingdom from 1940 to 1945 and again from 1951 to 1955).

“Communism is a monopolistic system, economically and politically. The system suppresses individual initiative, and the 21st century is all about individualism and freedom. The development of technology supported these directions,” (Lech Walesa – labor activist and co-founder of Solidarity, the Soviet block’s first independent trade union. President of Poland 1990-1995. Awarded the Nobel Peace Price in 1983).

“Let’s not talk about Communism. Communism was just an idea, just pie in the sky” (Boris Yeltsin, 1956-2007 –  first President of the Russian Federation).

“The goal of socialism is communism,” (Vladimir Lenin, 1870-1924 – a Russian communist revolutionary, politician, and political theorist).

“The theory of Communism may be summed up in one sentence: Abolish all private property,” (Karl Marx, 1818-1883 – a Prussian philosopher, economist, sociologist, journalist, and revolutionary socialist).

“Communism doesn’t work because people like to own stuff,” (Frank Zappa, 1940-1993 –  an American musician, songwriter, composer, record producer, actor and filmmaker).

“It is well known that my husband and Lady Thatcher enjoyed a very special relationship as leaders of their respective countries during one of the most difficult and pivotal periods in modern history. Ronnie and Margaret were political soul mates, committed to freedom and resolved to end Communism,” (Nancy Reagan, 1921-2016 – an American actress and the wife of the 40th President of the United States, Ronald Reagan).

“The problem with socialism is that you eventually run out of other peoples’ money,” (Margaret Thatcher, 1925-2013 – Prime Minister of the United Kingdom from 1979 to 1990).

Socialism is a term that so many politicians and leaders have used throughout modern history, that it is difficult to know exactly what it means. Tony Blair and Josef Stalin both called themselves socialists – but they had virtually nothing in common. Modern socialists, especially in Western European political parties, believe in the free market and free democratic elections, but want to make sure there are safety nets (a welfare state) for vulnerable individuals.

Video – What is a Command Economy?

This video explains most of the features present in a command economy in an easy-to-understand way.