The theory of communism may be summed up in one single sentence: abolish all private property.It is true, without careful economic planning, there can be no progress and no development of a country. Every country follows a specific type of economic system that influences its planning, and a command economic system is one of them. Today, we find the command economic system implemented mostly in communist countries such as Cuba and North Korea, and as was observed in the former Soviet Union.
― Karl Marx.
A command economy is an economy where only the government is responsible for regulation of supply and prices, and not the market forces. It is the government who decides what goods and services are to be produced, when they are to be produced, how they are to be produced, as well as how they are to be distributed. Such economies are also known as 'centrally-planned economies', as it is the central authority, i.e., the government, who makes these decisions.
In a command economy, economic decisions regarding production and distribution are taken through laws, directives, and regulations that specify what is to be done, how and when. A command economy is the opposite of a free-market economy, where the market forces are responsible for regulating the price and the supply of goods and services.
This type of economy has its share of pros and cons, just like every other type of economic system that prevails in the world today. The next sections will cover the advantages and disadvantages of the command economy system.
Strengths of a Command EconomyA command economy is favored by several people, as the government is seen as the ideal authority to take care of the country in the best possible way as well as lead to economic growth and development along with social welfare. These are the strengths of a command economy, as pointed out by advocates.
Effective mobilization of resourcesSince it is the central authority that decides the course and manner of production, resources are effectively and quickly mobilized on a larger scale as compared to other economic systems. The government implements short-term goals that help to effectively and quickly design the economy and its progress.
Prevention of monopolyMonopolistic competition and monopoly both have the capacity to exist and rule an economy where production and price are regulated by market forces. As it is a central authority who regulates the supply and price of goods and services in a command economy, it is possible to prevent the power that is otherwise abused by different industries in the market.
Easy adjustment of the production rateSince it is not market forces that govern production and distribution, the rate and availability of production can be controlled easily by the government, depending on the needs of the population of that country, so as to meet the exact demands of the people. This ensures that there is no excess production in the economy, and production costs are restricted to only what is absolutely necessary.
Focuses more on social welfareAchieving maximum social welfare is one of the primary objectives of a command economy. Since there is no chance of striving only for individual benefit or profit, production is undertaken with the view that society as a whole should be able to reap the success of a business, and not just a few select individuals. This fosters a sense of community in society, as well as encourages a reduction in income inequality.
Capable of handling major problemsSince all the important economic decisions are in the hands of the government, the command type of economic system has the ability to handle any major problems that may befall that country. The central authority can easily increase the rate of production in the sectors that are not hit by the disaster or are comparatively less affected, and reduce the production load on the sectors that are affected. This ensures that the flow of goods and services in the market remains more or less stable even during the tough times.
Ensures a stable economyA unique feature of the command economy is that since it is not controlled by the forces of demand and supply, it is not prone to sudden depressions or inflation like many other economic systems. Supply and price are always strictly controlled in a command economy, and are never left to the forces of demand for any good or service. Thus, the economy remains stable.
Uses production to control the economyIn a command economy, the government uses production to control the economic situation of the country. Production in certain areas can be increased or decreased according to the needs and wants of the population. This leads to a rise in the overall standard of living in the country, as production is used as an advantage, and different communities can benefit according to their separate wants and needs, which then the government is aware of.
Strives for high employment levelsSince the government is aware of the wants and needs of the population of that country, the rate and manner of production is also structured so as to adhere to these needs, a primary one being employment. A command economy strives to ensure maximum employment in the country so that the basic needs of every individual can be met.
Weaknesses of a Command EconomyThough the structure and functioning of a command economy seems very attractive, simple, and effective in theory, it is not always so. This very structure and functioning results in quite a few cons of a command economy, as was pointed out by critics.
Lack of coordinationThough on paper it seems very easy to ensure perfect coordination between industries, in practice, it is quite hard to do so. Often, there is an imbalance in the goods produced in the economy, and the government cannot possibly keep itself constantly updated about the demand for each and every good and service that is required in a country. This results in excess production of one good, and a lack of another. It is not humanly possible to ensure perfect coordination between industries as well as between demand and supply for balanced production.
Discourages InnovationAnother problem with a command economy is that the government does not encourage any entrepreneurship or innovation from the population, as it is the sole authority to decide what has to be produced when, how, and why. This results in very little motivation for hard work, and for good quality work that can otherwise benefit the economy.
Restricts FreedomA command economy decides the career of individuals based upon what the government feels is needed more in the economy. Individual choices are overlooked and citizens, for a large part, do not have the opportunity to choose their own job or career according to their personal likes and dislikes. Rather, they have to pick an occupation that is aligned with the production demands of the country at that time. This is unfair, as it restricts individual freedom and is a serious threat to liberty. Workers don't have much of a choice about where they can work, and if they can change their jobs or not.
Results in the growth of the black marketCommand economies produce only those goods and services which the government feels are required by the country as a whole for effective development. Hence, not all goods and services which are otherwise produced freely in other economic systems may be available in a command economy. This gives an unintentional but very powerful boost to the black market, which offers the population those goods and services that are not produced in the domestic market.
Discourages competitionSince it is the government who owns all the industries and production units in a command economy, it highly discourages competition among workers. No firm tries to top the other in an industry, as workers are aware that in the end, the price is going to be regulated by the government and not by the demand for their products or services. Hence, this discouraged competition leads to a serious lack of motivation for workers to strive to do better. Competition at some level is actually required in an economy, which ensures good quality production.
Problems regarding exportsA command economy often faces problems regarding exports as it does not allow market forces to govern the supply and prices of its goods and services. Since the government fixes these prices as well as supply levels, it can be difficult to determine which goods and services should be exported, at what price, and in what quantity so as to get maximum returns. It can get very hard for a command economy to assess and handle competition at the global level.
Less focus on consumer wantsThe central authorities in a command economy tend to focus more on consumer needs and not consumer wants. Consumer needs are basic and common to every section and community in that country, while consumer wants may differ from person to person. There is less focus on consumer wants, which leads to an overall lowering of the standard of living as compared to a free-market economy.
Cannot use price as a measure of demandEconomists tend to use price as a very common and popular measure of demand for goods and services by a country from a macroeconomic point of view. In a command economy, the government fixes the price of all goods and services available in the market, not according to demand but according to its own rules and regulations. Hence, price cannot be used as a tool to measure demand for any good or service.
Every economic system is prone to its advantages and disadvantages, as what seems perfect in theory may be very difficult to implement in practice. Today, many countries in the world who had earlier adapted to a command economic system are slowly moving towards the mixed type of economic system. Though we cannot crown any particular economic system as the best, we can safely conclude that it requires precise planning and proper implementation of those plans for an economy to function smoothly.