What is a Command Economy?

//What is a Command Economy?
What is a Command Economy? 2017-10-01T07:44:01+00:00

Definition: A command economy, also known as a planned economy, is an economy that empowers the state to make economic decisions about the type of goods that will be produced, the quantity, and the price.

What Does Command Economy Mean?

What is the definition of command economy? Unlike the free market that takes into account the interaction between consumers and business to determine the demand and supply of goods and services, in a planned economy, the state controls the production, the distribution and the allocation of national resources, thus limiting the role of the private sector.

Furthermore, a controlled economy is not allocating the national resources based on growth potential but based on anti-corruption and anti-consumerism concepts, thus limiting the growth of the national economy. Consequently, the means of production cannot respond to the changing demand for goods and services, thus causing a shortage or a surplus across various sectors of the economy.

Let’s look at an example.

Example

In command economies, such as the communist or ex-communist societies of the Eastern European Block and the former Soviet Union, production and distribution were determined by the state and its central-planning bodies with respect to the use of specific quantities of raw materials and specific distribution channels for the final output. The workforce was fully employed, and wages were arbitrarily predetermined.

Without an effective market-clearing mechanism, the consequences of such practices were both huge surpluses of undistributed goods, and huge shortages of products that consumers desired but they were not produced in adequate quantities. The imbalance of demand over supply caused huge queues for limited quantities of goods and services.

China is another example of a command economy. However, over the last two decades the country strives to transition to a mixed economy that carries both communistic and capitalistic elements. More specifically, decentralization represents for China as well as for the Eastern European Block economies a key component of the reorganization of the state in the transition from command to free market economies. The transfer of responsibilities to local governments has economic consequences because it affects government organizations.

Summary Definition

Define Command Economy: Command economy means an economic system that the state controls the production and prices of goods and services.