Command Economy

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Definition of a Command Economy:

A command economy is an economic system in which a centralized authority controls production, prices, and distribution of goods and services. 

Detailed Explanation:

Cuba and North Korea have command economies where a centralized authority controls the production and distribution of goods and may even dictate where citizens work. The government owns companies and the resources used in the production process. Proponents of command economies believe that the government knows what is in the best interest of its citizens better than the citizens themselves and view capitalists, who adhere to capitalism, as selfish. Proponents of command economies believe that the government alone can provide security and stability by guaranteeing health care, housing, and jobs.

However, command economies result in massive inefficiencies. Central planners establish production and distribution quotas, leading to shortages or surpluses if the quotas differ from the quantity demanded at the government’s price. It is difficult for a central planner to determine the demand and price of millions of goods and services in an economy. Delays in identifying and reestablishing quotas exacerbate the problem. Manufacturers wait for instructions from the central planner, and black markets flourish as citizens seek goods and services from other sources.

In a market economy, producers receive signals via price adjustments based on supply and demand to increase or decrease production. The profit motive spurs them to respond accordingly.

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