A command economy is an economic system in which the government, or the central planner, determines what goods and services should be produced, the supply that should be produced, and the price of goods and services. Some examples of countries that have command economies are Cuba, North Korea and the former Soviet Union.
Government Controls Production in Command Economy
In a command economy, the government controls major aspects of economic production. The government decides the means of production and owns the industries that produce goods and services for the public. The government prices and produces goods and services that it thinks benefits the people.
A country that has a command economy focuses on macroeconomic objectives and political considerations to determine what goods and services the country produces and how much it will produce. It generally has macroeconomic goals that the government wants to meet, and it will produce goods and services to do so. The government allocates its resources based on these objectives and considerations.
For example, suppose a communist country with a command economic system has macroeconomic objectives of producing military items to protect its citizens. The country is in fear that it will go to war with another country within a year. The government decides it must produce more guns, tanks and missiles and train its military. In this case, the government will produce more military items and allocate much of its resources to do this. It will decrease the production and supply of goods and services that it feels the general public does not need. However, the population will continue to have access to basic necessities. In this country, the government feels military goods and services are socially efficient.
How Do Command Economies Control Surplus Production and Unemployment Rates?
Historically, command economies don’t have the luxury of surplus production; chronic shortages are the norm. Since the days of Adam Smith, economists and public figures have debated the problem of overproduction (and underconsumption, its corollary). These issues were largely resolved by 19th century economist Jean-Baptiste Say, who demonstrated that general overproduction is impossible when a price mechanism exists.
To see the principle of Say’s law clearly, imagine an economy with the following goods: coconuts, jumpsuits and fish. Suddenly, the supply of fish triples. This does not mean that the economy will be overwhelmed with goods, workers will become desperately poor or that production will cease to be profitable. Instead, the purchasing power of fish (relative to jumpsuits and coconuts) will drop. The price of fish falls; some labor resources may be freed up and shift to jumpsuit and coconut production. The overall standard of living will rise, even if the allocation of labor resources looks different.
Command economies also have not had to deal with unemployment, because labor participation is compelled by the state; workers do not have the option of not working. It’s possible to eradicate unemployment by handing everyone a shovel and instructing them (under threat of imprisonment) to dig holes. It’s clear that unemployment (per se) is not the problem; labor needs to be productive, which necessitates that it can freely move to where it is most useful.
What Makes Command Economies Fail?
Command economies took most of the blame for the economic collapse of the Soviet Union and current conditions in North Korea. The lesson taken from…