Definition and Concept of a command economy

A command economy is one in which all aspects of a specific nation’s economic system are controlled to some degree by a centralized body, usually the government.

Every step in the production process, from resource utilization to the volume produced to the wages earned for labor, is controlled by the government, and wealth is redistributed as deemed appropriate by the governing power.

As a result, one of the main characteristics of a command economy, also known as a planned economy, is that the individual pursuit of wealth is replaced by a concerted effort by all economic channels to improve society as a whole.

There are two types of economies prevalent in the world. Most countries prefer a market economy, which is characterized by a market for goods and services based on the laws of supply and demand and unrestricted by any kind of external control.

In contrast, in a command economy, every decision related to the economy is made by the centralized government, as in the former Soviet Union.

Very often, the characteristics of a command economy come to light when they are shown in contrast to those of a market economy. For example, production levels are decided in a market economy depends on what kind of demand exists for a particular product. In a command economy, the governing body decides what is produced and to which section of the country it should be allocated.

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Economics and Business Concepts


Price is another part of a command economy that falls under the authority of the government. Since profits are channeled back to the government, price levels are ideally set so that the country as a whole has some benefit.

This occurs when the government redistributes wealth throughout society, by deciding on wages for labor and by using money from government products to benefit citizens.

Of all the characteristics of this type of economy, perhaps the most general and definitive is the general subordination of the individual to the collective. If done correctly, a command economy can manage resources efficiently so that there is minimal waste and also keep prices at a level that benefits the vast majority of the population. Work can also be controlled to discourage high unemployment.

All these benefits come at the expense of certain individual freedoms related to the accumulation of personal wealth.