There are three basic economic structures that exist for a society. One allows the free market to dictate pricing, production, investments, and income. Another allows for the government to dictate these items. The third is a hybrid between these two ideas.
When the government can centrally determine what pricing, production, investments, and income should be produced, then this is called a “command economy.”
Examples of this form of government include the Soviet Union before is dissolution in 1991, North Korea, Cuba, and China before it began to allow economic reforms in 1978.
There are several advantages and disadvantages of a command economy to consider.
What Are the Advantages of a Command Economy?
1. Operations are consistent within a command economy.
Within the structure of a command economy, the businesses which do function are operating at the behest of the government. Their structures are dictated by the government, so there is consistency within the operational structures of each business. Instead of attempting a market takeover or trying to dominate a market share, the businesses work to produce the goods the society needs to function.
2. It creates a flexible industrial sector.
Industries are directly operated or controlled by the government in a command economy, so their resources can be applied to whatever project needs to be completed. This creates a flexibility within the industrial sector that other economy formats cannot match. If there is a massive project that needs to be completed, the government can quickly transfer the resources that are necessary to get the job finished.
3. The exact demands of a society can be met.
Within the structure of a command economy, the government seeks to maximize its efficiency. To do this, it will attempt to meet the exact demands that people have. By limiting over-production of items, there is less waste that occurs within the society. This creates more resources for the government to use in other areas. This may limit personal choice, but it also reduces the chances of a shortage occurring when production rates are based on accurate resources.
4. Any resource can work with any other resource.
Can you imagine Apple and Samsung working together to produce technologies? Or Ford and General Motors working together to create automobiles? In a free market economy, businesses compete with one other to produce better products. In a command economy, any resource can be dictated to work with any other resource. This makes it easier to produce products on a larger scale because all resources, not just individualized business resources, are actively working to benefit society.
5. It offers socioeconomic equality for much of the population.
Wealth inequality in the United States is considerably higher than in any other wealthy nation. The wealthiest 10% of US households capture 76% of the wealth. According to the Washington Post, 35% of US net worth belongs to the top 1% of the population in terms of wealth. In a command economy, this level of inequality does not exist, though the individuals within the government do typically have more wealth availability than the rest of the population.
6. Acute demands can be quickly met.
Within a command economy, the full resources of the government can become active at any given time. If an emergency occurs, such as a natural disaster, then it becomes possible to meet the general needs of the population with a greater speed than in other economy structures. This makes it possible for households to recover from an emergency quicker.
What Are the Disadvantages of a Command Economy?
1. It is a governmental structure which reduces personal freedoms.
Because all economic structures are at the beck and call of the government, personal freedoms are limited within a command economy. In many instances, people can work one type of job and must do so because the government demands it. Refusal could mean jail time… or worse. Their income is dictated by the government as well. People are forced to pursue the greater good of the government instead of their own greater good.
2. It limits innovation.
There is no need for production to seek out research and development within a command economy because the government dictates everything. People must accept what the government gives them. This means there is no need to make products better tomorrow than they are today. Businesses are in the same position because the government often dictates who gets to work for them. The result is lower motivation to create a high-quality product or offer a helpful service.
3. It encourages illegal activities.
Within a command economy, people cannot always get what they need to meet the basic needs of living. To get these items, an underground market flourishes so that goods or services that are needed can be received outside of government control. This is the only way that outside goods, which may be better than domestic goods, can be received by a population in this type of economy.
4. It eliminates the competition.
Within a command economy, the government owns and controls everything. Competition is discouraged, if it is even allowed. Any private business would constantly be under the threat of a government takeover of their operations and have no options to recover their assets should that occur. Venezuela seized an auto plant from General Motors in 2017 and it cost the company $100 million.
5. It reduces communication.
Rationing occurs within a command economy on a frequent basis because the structures of this type of economy limit communication. The government doesn’t know what the population needs, so they mass-produce products based on what they believe is necessary for survival. The goal is to support the government first, so the products produced are based on what benefits the government the most. This results in an unbalanced set of goods that is virtually worthless.
6. It reduces exports.
The lack of communication doesn’t stop at the local population level. Governments operating a command economy struggle to speak with neighboring nations as well. This limits the export opportunities because there is no knowledge about what those other nations need.
7. It creates incentives that people don’t see as an incentive.
The incentive in a command economy is that a household gets to survive. Put in a hard day of work for the government in some way and you’ll get enough to help you make it to another day. There is no incentive for people to better themselves because any improvements or recognition go directly to the government.
The advantages and disadvantages of a command economy show that a lack of competition can be problematic. It may be a society that equalizes income and production to create more socioeconomic equality, but it also means that equality is defined by the centralized government.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.