A command economy is an economic system where the government makes all decisions about what to produce and how to distribute goods and services. This type of system is also sometimes referred to as a planned economy.
Generally, there is a central authority that makes all decisions about the economy. This authority may be a single person, a group of people, or even an entire government agency.
The government in a command economy owns all of the resources and means of production, such as land, factories, and businesses. It also sets prices for goods and services and determines how these things will be produced and distributed.
The government, which is usually socialist or communist, may decide what goods or services will be produced, how they will be produced, and who will receive them. This type of economy is different from a free-market economy, where businesses and consumers make these decisions.
Command Economy Definitions
A few scholars’ definitions of command economies are provided below:
- “A command economy is one in which the coordination of economic activity … is undertaken through administrative means — commands, directives, targets and regulations — rather than by a market mechanism.” (Ericson, 2006)
- “An economy in which the decisions of the central authorities … exert the major influence over the allocation of resources and the distribution of income.” (Lipsey et al., 2007)
Command Economy Examples
1. The Soviet Economy (1922-1991)
The USSR is one of the most famous examples of a command economy. The Soviet economy was based on the state ownership of all property and the centrally planned allocation of resources. Its economy was built upon a Marxist-Leninist ideology.
This economy was created after the Bolshevik Revolution in 1917 and lasted until 1991, when the Soviet Union dissolved.
One of the worst side-effects of the central planning was the Holodomor famine of 1932, where rationing was cut to rural areas of Ukraine while rations were still provided to inner-city party sympathizers, causing widespread death from starvation in Ukraine.
2. Maoist China (1949–1976)
China ran a highly planned economy up until the 1980s, when it began to reform. Today, it has moved away from a pure command economy to what is known as a “mixed” economy, which combines elements of both free-market and command economies.
However, the Chinese government still plays a very significant role in economic decision-making. It has been described as authoritarian capitalism, wherein free markets are allowed to operate, but only under the graces of the government. The government is not shy to severely intervene and curtail individual liberties if it believes intervention is in the best interests of the state.
3. North Vietnam (1946-1975)
The North Vietnam economy was a command economy controlled by a communist dictatorship.
Despite the higher GDP and standard of living in the capitalist south, the communists won the Vietnamese war in 1975 and attempted to bring the command economy to the South.
However, from the Third Five Year Plan in the period of 1981 to 1985, the economy shifted to what’s known as a socialist-oriented mixed economy. Under this economic system, the government still maintains strong authoritarian control, but permits free enterprise to the extent that it stimulates growth.
This shift worked, leading to rapid rises in quality of life and the standard of living for Vietnamese people. Nevertheless, the economy still has many facets of socialism.
4. Myanmar (1960s)
Myanmar, also known as Burma, has had various forms of a centrally planned economy in the past 75 years.
In the 1960s, Burma doubled down on central planning with its policy called The Burmese Way to Socialism. This program included the nationalization of key industries, the collectivization of agriculture, and the imposition of strict controls on foreign investment and trade.
The goals of the program were to reduce economic inequality and build a self-sufficient economy that would be less vulnerable to foreign influence.
However, the Burmese Way to Socialism ultimately proved to be a failure. The country’s economy stagnated, and living standards declined. In parts of Myanmar, a traditional economy still operates which relies on bartering rather than currency.
5. Iran (1978-2004)
A true command economy would be 100% centrally planned. Iran’s does not go that far, but with 60% of the economy being centrally planned, it is one of the closest examples of a command economy that exists in the Middle East in the 21st Century.
Article 44 of the Iranian constitution states that the state must control minerals, banking, insurance, power generation, dams, radio, and television. This was intended to protect a command economy in the most important sectors for national interest.
However, a 2004 amendment allowed 80% of these sectors to be privatized, which has been taking place ever since.
6. North Korea (1953-Present)
While other communist nations of the 20th Century have slowly moved toward a mixed economy system, North Korea has remained steadfastly committed to being a command economy.
The economy is managed by fifteen committees who set strategic directions and put in place managers to run factories. The government rations food (currently 312 grams per person per day) and denies the right to run a small business.
The exception to this rule was some minor reforms in 2010 that allowed farmers to keep some of their crops, which the farmers would then sell.
Due to the dramatic failure of the North Korean economy, black market trading is rife.
7. East Germany (1945 to 1989)
After WW2, East Germany was administered by the Soviet Union. The Soviets implemented a centrally planned system that gave the government control over all aspects of the economy.
The command economy was intended to create a more efficient and equitable society, but it ultimately led to stagnation and decline.
East Germans looked westward to their German brethren in the capitalist West who were experiencing rapid increases in wealth thanks to the ‘economic miracle’ occurring there.
Caving to internal pressure, the East German government began to liberalize its economy in 1989, and after reunification with West Germany in 1990, the command economy was abolished entirely.
8. Communist Cuba (1959-Present)
Cuba’s economy has been described as a “command” or “centrally planned” economy. The Cuban government owns nearly all businesses and land in the country and makes all major decisions about the economy, such as what will be produced and how it will be distributed.
Cuban communism began in 1959 after the Cuban Revolution. The new rulers nationalized the economy and initiated strict central planning. Today, after some liberalization, the government still employs about 76% of the workforce directly, and rations about 80% of the food on the island.
Despite the poverty and lack of economic freedom, Cuba consistently rates very highly on education and healthcare metrics.
9. Laos (1975 – 1986)
Laos operated under a command economy between 1975 and 1986. This period spanned from the overthrow of the monarchy through to the “new economic mechanism” in 1986. This allowed for prices to be set by the market rather than the government.
Further reforms occurred in 1989 when the Laos government allowed for private enterprise in exchange for financial support from the World Bank.
Nevertheless, the communist government still has a strong stake in the government and plays a central role in directing the overall direction of economic development.
10. Wartime Economies
During war times, governments often use extraordinary powers to compel sectors of the economy to work for the war effort. For example, the government may take over factories to produce military supplies or compel citizens to work in jobs that support the war effort.
While not true command economies, these wartime economies exhibit many characteristics of command economies, such as government control over resources and centrally planned production.
One industry that was nationalized during World War 2 was the American automobile industry. The government took control of car factories in order to produce military vehicles for the war.
The command economy of socialist and communist nations tends to perform very poorly in comparison to capitalist economies.
Most attempts at creating command economies have entirely failed. Generally, either a government overthrow or a move to a socialist-oriented mixed economy takes place. In the final two decades of the 20th Century, most communist command economies were dismantled.
Nevertheless, North Korea stands as one example of a command economy that, while being more or less a complete failure, still stands due to the stubbornness of its dictatorial government.