In a command economy, the government sets the country's standards for the production, distribution, and pricing of commodities. In this arrangement, money management is handled by the government as well. This approach is used in communist countries including the former Soviet Union, Cuba, and North Korea.

Main Points

  • When a nation's government determines output, prices, investments, processes, and the amount of things produced, this is known as a command economy.
  • Government control, a lack of competition, authority, budget allocation, priority, resource mobilization, and a distinctive vision from the nation's ruling body are all characteristics of this form of economic system.
  • Command economies are practiced in nations like Cuba, China, the Soviet Union, North Korea, etc.
  • Government hegemony, the black market (corruption), a lack of understanding, a decline in creativity, etc. are some drawbacks of a command economy.


In a free economy, the market determines the commodities and services that are in demand and sets supply, the method of production, and the price. Such a market often runs in accordance with client preferences, elements including supply and demand, product price, and services that are typically offered in a market. However, under a command economy, governmental authorities plan, manage, and regulate the production, process, price, and quantity (supply) of goods and services.

Many command economies have been attempting to incorporate elements of capitalism into their economies in recent years, creating mixed economic systems that are assisting them in achieving economic growth.


#1: Government oversight

A country's government develops a centralized economic plan that lasts, on average, five years. This plan focuses on social and economic goals for the country, taking into account factors like sectors and regions, while the budget is planned and managed annually to track goal completion and make necessary policy changes as needed.

#2: Budget and Resource Allocation

The government also develops policies, distributes funding to various sectors, and tracks growth after establishing targets for five years. The government makes use of natural resources, and capital depends on the goals, plans, and advancements of every sector. Additionally, the government rejects efforts to lower unemployment in a nation.

#3: Setting priorities

The government develops a plan for the production, procedure, cost, and volume of goods and services produced in a nation based on the circumstances. For instance, the government can decide that providing everyone with enough food, clothing, and shelter is a national priority, and they can then develop a plan and allot the resources required to work toward that objective.

#4: No Interaction

Private businesses lack competition since practically all economic activities are governed by the government. For instance, a country's government has authority over important industries like finance, transportation, information technology, and utilities.

#5: Authority

In such an economy, the government establishes policies, rules, laws, targets, prices, and quantities as part of a centralized economic plan because it is the only entity with the capacity to make significant choices. Therefore, even if there is a private sector, all businesses must go by the laws and rules established by the government and are not free to do as they like.

Illustrations of Command Economy

Soviet Union: From 1930 to 1991, the command economy was used in all of the USSR's member states. All significant national choices were decided by the government.

China: After the Second World War, China lived in a communist society where the administration developed a strategy for economic expansion.

Even though the nation now has a mixed economy, the government still develops five-year plans with goals for economic development.

Cuba: Since the 1959 revolution, Cuba has operated under a command economy. In order to spur growth, Cuba is currently transitioning to a mixed economy.

Dictatorship: These are nations where the power is vested in a single individual. They also operate in a command economy, in which the government has extensive control over many commercial sectors. For instance, a dictatorship is in place in various Middle Eastern nations like Egypt, Iran, Libya, etc.

Command Economy Benefits

Mobilization of Resources: Because the government is in total control in a mixed economy, it may act quickly to decide how to use resources, launch significant projects, and make adjustments to further economic and social objectives.

No Interruptions: Because government decisions and programs are under its control, they cannot be slowed down by individual lawsuits.

Unique Vision: It operates in accordance with the government's unique vision, and everyone in the economy contributes to achieving that purpose. As a result, the nation more effectively meets its social and economic goals.

Direct Resource Utilization: To track growth, the government administers the budget via a single fiscal year and selects how to use resources through a five-year plan.


Complete Government Control: In this economy, all decisions are made by the government, and everyone is required to abide by them. In this process, the system's capability is frequently disregarded and people are compelled to act on them.

The growth of the shadow economy and black market: When consumer demands in this economy are not met, markets function through these sectors, offering goods and services that the government does not give at a premium. Such markets encourage the flow of money and income that is illegal, which weakens the entire economic and social system.

Lack of understanding: In command economies, many governments struggle to keep up with changes in market demands, making it difficult for them to match prices and customer wants.

Discourage Innovation and Competition: Because the global market depends on innovation, competition, and the adoption of new technologies, it discourages innovation and competitiveness, which slows down the economy. To this end, meeting consumer demand in both the domestic and international economies is a constant struggle.


A command economy operates under centralized control, which prevents crucial elements like supply and demand from influencing the process, volume, and cost of goods and services produced in a nation. Additionally, it hampers innovation and competition, two crucial components of the current global economy.

Despite the government's emphasis on resource allocation, many nations with command economies have fallen short of their goal of achieving long-term economic and social prosperity. However, there are some benefits to a command economy where the government may act quickly to meet market demands and pursue its economic objectives.

After the fall of the Soviet Union in 1991, many economies throughout the world began to incorporate elements of capitalism, giving rise to the idea of mixed economies, which encourage competition and innovation. While the majority of industries are now governed by supply and demand, some goods and services are still subject to government control.

Answers to Frequently Asked Questions

How is a command economy expanded?

In a command economy, government authorities choose national economic goals, such as when and how to encourage economic growth, allocate resources, and distribute the output. It frequently takes the form of an extended strategy.

Do command economies ultimately fail?

Marx believed that because command economies are ineffective and unethical, based their economic choices on corrupt interpersonal ties, they will eventually collapse rather than lead to capitalism.

A monopoly exists in a command economy?

In a command economy, the government runs every sector of the economy. It suggests that every area of production, utilities, finance, and transportation is centralized.

What kind of flexibility does a command economy have?

In a command economy, changing and adapting swiftly is quite simple. Contrary to a capitalist society, there are no challenges to overcome. They are not required to ask for congressional approval or deal with legal issues.


Katheryn is a corporate attorney and finance specialist, conducting research daily to get you closer to financial security and freedom (even if you're just getting started). Her +600 articles published in Collaborative Research Group have already helped thousands of readers on the internet. .

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