The commanded economy is a system in which all economic decisions are made by the central government. The government or a group is the actual owner of land and means of production.
How does a commanded economy work?
In a modern centrally planned economy, the government prepares a central economic plan. The government can approve a five-year plan, for example, which defines the economic and social objectives for each sector and region in the country. It translates short-term plans into executable goals.
The government allocates all resources according to the central plan. It tries to use the capital, labor, and natural resources of the country in the most effective way possible.
The central plan sets the priorities for producing all goods and services. This includes quotas and price controls. The aim is to provide enough food, housing, and other basic needs to meet the requirements of everyone in the country. The central plan also establishes national priorities in matters such as mobilization for war.
The government owns monopolistic companies in industries deemed essential for the goals of the economy, including financial services, utilities, and the automotive sector. This means that a key feature of the commanded economy is the absence of local competition in any sectors controlled by the government.
The government creates laws, regulations, and directives to enforce the central plan. Companies follow the production and employment goals specified in the plan. They cannot independently respond to free market forces.
Examples of commanded economies
Here are examples of commanded economies:
Belarus
This former Soviet state is still considered a commanded economy. The government owns 80% of the companies in the country and 75% of the banks as of 2022.
China
After World War II, Mao Zedong established a society governed by communism. He imposed a precisely planned economy. Current leaders are moving towards a market-based system. They still create five-year plans to set economic goals and objectives.
Cuba
Fidel Castro’s revolution in 1959 led to the establishment of communism and a planned economy. The Soviet Union supported Cuba’s economy until 1990. The government is gradually introducing market reforms to stimulate growth.
Iran
The government controls a large part of the economy through a mix of direct and indirect state control. This control has led to inefficiency and stagnation, exacerbated by sanctions from the international community. These sanctions ended in 2015 under the nuclear trade agreement, before being reinstated by the United States in 2018 after President Trump withdrew from the agreement.
Libya
The Libyan economy is almost entirely dependent on the oil and gas sector, and most Libyans work for the government.
North Korea
North Korea has been one of the most centrally planned economies in the world for decades. The U.S. government considers North Korea’s industrial capital to be nearly impossible to reform due to mismanagement, lack of investment, and shortages of materials. North Korean citizens face ongoing issues with hunger and famine.
Russia
In 1917, Vladimir Lenin and the Russian Revolution established the first communist commanded economy. The Soviet Union was also the longest lasting commanded economy, from the 1930s until the late 1980s. Since the fall of the Soviet Union, the Russian state has transferred ownership of larger companies to oligarchs.
Note: Some centrally planned economies like China and Russia have begun to add aspects of a market economy, creating a mixed economy. Other economies like North Korea and Cuba remain economically constrained.
Advantages and disadvantages of a commanded economy
Advantages
Speed: One of the main advantages of planned economies is that the government can quickly mobilize economic resources on a large scale. They can implement massive projects, create industrial strength, and achieve social goals. They are not hindered by lawsuits from individuals or environmental impact statements.
Unity: Commanded economies can transform entire communities to align with the government’s vision. The new administration can nationalize private companies and impose laws on citizens as needed to ensure the entire country moves together toward a defined goal. Workers may receive new jobs based on the government’s assessment of their skills and how they fit best with other aspects of the economy.
Disadvantages
Neglect
Consumer Preferences: This swift enlistment often means that leading economies marginalize other community needs. For example, the government tells workers what jobs they should perform, which discourages them from moving. The goods produced do not always depend on demand from consumers. However, citizens find ways to meet their needs and desires, which often leads to the existence of a shadow economy or black market that buys and sells things not produced by the leading economy. Leaders’ attempts to control this market undermine their support.
Resource Depletion: One characteristic of leading economies is that they often produce a lot of one thing and very little of another. It is difficult for central planners to obtain up-to-date information on consumer needs. It is also challenging to meet the needs of international markets, so leading economies struggle to produce the right exports at globally competitive prices.
Discouragement of Innovation: Leading economies reward business leaders for following directives. This system does not allow for the risks required for the creativity of new solutions.
Frequently Asked Questions
What is the key characteristic of a command economy?
The main feature of a pure command economy is government control. Rather than allowing market forces to determine the production of goods and services, the government sets economic priorities and controls production and pricing.
How does a command economy differ from a mixed economy?
A mixed economy combines some aspects of command economy and market economy. Some aspects of the economy are under government control, while other aspects are freely determined by market forces. The United States is an example of a mixed economy.
Who makes decisions in a command economy?
In a command economy, the government or another central authority controls all aspects of the economy.
Source: https://www.thebalancemoney.com/command-economy-characteristics-pros-cons-and-examples-3305585
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