What type of economic system if the government has the full authority to decide of what goods to produce?

A command economy is a structure established by the government in which all the means of production are owned and controlled by the government which serves as the central authority. A command economy can also mean a planned economy where the government has the absolute authority to determine means of production include what is produced, how they are produced. In a command economy, the government determines all investments and incomes, it also determines the amount at which the goods that are produced are sold. Communist societies such as Cuba, Soviet Union and North Korea use command economy.

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How does the Command Economy Work?

The means of production are publicly owned in a command economy. The types of goods produced and the rates they are sold are also controlled by the government. Unlike free markets where production and prices of goods and services are determined by demand and supply, command markets are controlled by a central authority (the government). The government manages the market or economy in a command market as against what we have in free markets where the government has little or no intervention in means of production and prices of market. Instead of market forces or mechanisms, centralized authority are prominent in command market, this market features no competition since the government has total control. 

What are some features of Command Economies?

There are other salient features of command economies aside from the overwhelming intervention of government that replace market forces or mechanisms. This type of economy empower governments of countries practice it in terms of financial strength and making economic decisions. Monopoly markets is a salient feature of command markets, government adopt this system to cater for its needs and meet national economy goals. Command market also features governments of states playing principal role in planning and regulating goods and services produced in markets and how much they are sold. Laws and regulations are established by the government and domestic competition of free market in any form is not allowed in command economies. 

What are some negative consequences of Command Economies?

There are certain downsides of command economies such as the absence of competition in markets which can lead to deceleration in some industries. 

• Prices of goods and services are set based on the needs of the government resulting in inefficiency of output and demand. 
• Also, because the command economy is controlled by a central authority, this central authority might not be able to efficiently manage market mechanisms due to limited knowledge in the market. 
• Inability of the government to efficiently decide on what goods and what quantity to produce can cause shortages or surpluses in command economies. 
• Difficulty in responding to the dynamic nature of demand is another drawback of command economies. 

What are some benefits of Command Economies?

Despite that there are diverse prevailing drawbacks of a command economy, there are some arguments in favor of the economy. 

• One of the arguments in favor of a command economy is that the allocation of resources (prices) and control of the means of production are tailored towards social welfarism. That is, government allocate prices strictly to cater for social needs. 
• Another argument is that command economies tend to control employment levels better than countries that practice free market. This means that government of command economies create employment opportunities when the need arises.

What are some types of Command Economies?

According to general belief, socialism and communism are attributed to command economies. 

In fact, socialism is regarded as a type of command economic system, this is because majority of the means of production (such as capital goods and lands) are controlled by the state government. Also, some people hold the position that economic planning and communism are similar to socialism but the fact is they are not equivalent. 

Socialism entails the engagement of the states in the central planning regarding the production of goods and services but not a prevalent control is exercised by the government in command economies.

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Learning Objectives

• Describe characteristics of market economies, including free and competitive markets
• Describe characteristics of a planned, or command, economy

Figure 1. Perhaps a picture of a planned economy?

In the modern world today, there is a range of economic systems, from market economies to planned (or command) economies.

Market Economies

A market is any situation that brings together buyers and sellers of goods or services. Buyers and sellers can be either individuals or businesses. In a market economy, economic decision-making happens through markets. Market economies are based on private enterprise: the means of production (resources and businesses) are owned and operated by private individuals or groups of private individuals. Businesses supply goods and services based on demand. Which goods and services are supplied depends on what products businesses think will bring them the most profit. The more a product is demanded by consumers or other businesses, the higher the price businesses can charge, and so the more of the product will be supplied. Consumer demand depends on peoples’ incomes. A person’s income is based on his or her ownership of resources (especially labor). The more society values the person’s output, the higher the income they will earn (think Lady Gaga or LeBron James).

Examples of free-market economies include Hong Kong, Singapore, and to a large extent, New Zealand, and the United States.

Free Markets 

In a market economy, decisions about what products are available and at what prices are determined through the interaction of supply and demand. A competitive market is one in which there is a large number of buyers and sellers, so that no one can control the market price. A free market is one in which the government does not intervene in any way. A free and competitive market economy is the ideal type of market economy, because what is supplied is exactly what consumers demand.

Price controls are an example of a market that is not free. When government intervenes, the market outcomes will be different from those that would occur in a free and competitive market model. When markets are less than perfectly competitive (e.g., monopolistic), the market outcomes will also differ.

Planned (or Command) Economies

Figure 2. Ancient Egypt’s command economy forced people to work on the building the pyramids.

Command economies operate very differently. In a command economy, economic effort is devoted to goals passed down from a ruler or ruling class. Ancient Egypt was a good example: a large part of economic life was devoted to building pyramids (like the one at the left), for the pharaohs. Medieval manor life is another example: The lord provided the land for growing crops and protection in the event of war. In return, vassals provided labor and soldiers to do the lord’s bidding. In the last century, communist countries have employed command economies.

In a command economy, resources and businesses are owned by the government. The government decides what goods and services will be produced and what prices will be charged for them. The government decides what methods of production will be used and how much workers will be paid. Some necessities like health care and education are provided for free, as long as the state determines that you need them. With the collapse of the former Soviet Union in the 1990s, command economies fell out of favor as an economic system. Currently, only North Korea and Cuba have command economies.

The primary distinction between a free and command economy is the degree to which the government determines what can be produced and what prices will be charged. In a free market, these determinations are made by the collective decisions of the market itself (which is comprised of producers and consumers). Producers and consumers make rational decisions about what will satisfy their self-interest and maximize profits, and the market responds accordingly. In a planned economy, the government makes most decisions about what will be produced and what the prices will be, and consumers react passively to that plan.

Most economies in the real world are mixed; they combine elements of command and market systems. The U.S. economy is positioned toward the market-oriented end of the spectrum. Many countries in Europe and Latin America, while primarily market-oriented, have a greater degree of government involvement in economic decisions than in the U.S. economy. China and Russia, while they are closer now to having a market-oriented system than several decades ago, remain closer to the command-economy end of the spectrum.

The following Crash Course video provides additional information about the broad economic choices that countries make when they decide between planned and market economies. The narrators talk fast, so you’ll need to listen closely and possibly watch the video a second time!

You can view the transcript for “Economic Systems and Macroeconomics: Crash Course Economics #3” here (opens in new window).

Economic systems determine the following:

• What to produce?
• How to produce it?
• Who gets it?

In a planned economy, government controls the factors of production:

• In a true communist economy, there is no private property—everyone owns the factors of production. This type of planned economy is called a command economy
• In a socialist economy, there is some private property and some private control of industry.

In a free-market (capitalist) economy, individuals own the factors of production:

• Businesses produce products.
• Consumers choose the products they prefer leading the companies that produce them to make more profit.

Even in free markets, governments should

• Maintain the rule of law
• Create public goods and services such as roads and education
• Step in when the market gets things wrong (e.g., setting minimum wage, establishing environmental standards)

command economy:  an economy where economic decisions are passed down from government authority and where resources are owned by the government competitive market:  is one in which there is a large number of buyers and sellers, so that no one can control the market price free market:  a market in which the government does not intervene in any way market economy: an economy where economic decisions are decentralized, resources are owned by private individuals, and businesses supply goods and services based on demand

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