A command economy is a system where the government controls all production, pricing, and distribution of goods and services. This type of economy operates on the principle that central planners can make more efficient decisions than individual consumers in determining what goods and services should be produced and how much they should cost.
This level of control necessarily entails restrictions on individuals, enterprises, and markets. Understanding what is prohibited in a command economy is crucial to grasping its basics.
In order to ensure that resources are distributed according to the needs of society rather than the desires of individual consumers, governments in a command economy could prohibit certain activities, including:
“Free choice of occupations by individuals; setting up small businesses without official permission; leaving employment without approval; discussing some topics publicly; selling unofficial products or goods with no quality guarantees; advertising or promoting non-official goods or services.”
These restrictions may seem draconian to those used to living in market economies where freedom of enterprise and consumer choice reigns supreme. However, supporters of command economies argue that they promote fairness and equality for all members of society.
If you’re interested in learning more about these restrictions and their effects, read on to discover the prohibitions that come with living in a command economy.
No Private Ownership Of Property
In a command economy, private ownership of property is prohibited. This means that all assets and resources are owned and controlled by the state or government. The purpose of prohibiting private property is to promote equality among individuals in terms of their access to resources.
Without privately owned properties, people are not allowed to buy or sell any property, including land and buildings. Instead, everything belongs to the government. For instance, if someone wants to start a business, they need permission from the government regarding where to build it. Individuals cannot make decisions about their homes or businesses without seeking approval from the government, which can lead to bureaucratic delays and inefficiency.
Government Control Over Resources
The primary characteristic of a command economy is the way the government controls economic activities, particularly the production and distribution of goods and services. A planned economy relies on central planning rather than market forces to determine what should be produced, how much should be produced, and at what price it should be sold.
This type of control has both advantages and disadvantages. On one hand, it allows for greater efficiency in resource allocation as every decision made is part of an overall plan. It ensures that the country’s needs are met and that there is no waste created through overproduction or duplication of effort. However, because the government directs these resources based on political priorities, this approach sacrifices creativity and innovation since consumers’ preferences do not influence what is produced.
No Incentive for Innovation
A major drawback of a command economy is its lack of incentive structure. Since the government decides what is produced and distributed, there is little room for creative ideas and innovations. There are no rewards for creating new products, investing in research, or developing more efficient methods for producing goods and services.
This absence of competition among producers stifles innovation by eradicating the motivation for entrepreneurs to generate new ideas and products. In a command economy, there is no personal profit motive that encourages people to take risks and invest in their businesses or innovations.
Potential for Corruption
Since central planners decide everything in a command economy, it opens up room for corrupt practices at multiple levels. With centralized control over resources and production comes an increased potential for privileged decision-making processes since resources are limited and power concentrated.
In the absence of market forces guiding economic behavior, corruption and cronyism also appear where government officials can make biased decisions that favor companies they have connections with, rather than those that merit them on efficiency metrics. This process may result in monopolies existing as readily available access to network channels ensures contracts derived from powerful lobbies’ deals. There’s also plenty of chances for unethical practices and black marketing given the lack of enforcement mechanisms (for regulating free markets) found present in Command economies.
“The failures of socialism indicate that the lack of a functioning price system likewise leads to inefficient allocation.” -Ronald Coase
No Market-Based Pricing System
A command economy is an economic system which is directed by a central government. Government organizations make decisions on how resources are allocated and determine what goods and services should be produced. Unlike market-based economies, prices aren’t based on supply and demand forces in the markets.
The absence of a market-based pricing system in a command economy means that there can be no transparent forces governing the price infrastructure. Prices tend to grow too low or too high because they aren’t tied to a market base.
Centralized planning board sets production targets for all sectors, leading to distortions in prices as the quantities requested do not match consumer wants – regulatory agencies thus limit income generation possibilities by limiting the ability to raise prices, thus slowing down growth.
In a command economy, governments control most aspects of the economy, including prices for goods and services. Price controls may take several forms such as minimum wage laws, rent control, price ceilings, etc. In a command economy, these types of controls are often widely used to set price levels artificially by making them much lower than their natural equilibrium level. The basic belief behind this form of interventionist public policy is that controlling prices mitigates inflation and makes necessities affordable for everybody.
Some negative consequences of price controls include:- — Shortages: Setting prices below market-clearing causes shortages where suppliers are unwilling to provide supplies — Black Markets: When government regulations prevent goods from being sold at legal prices, black market sellers arise who charge exorbitant rates — Reduced Quality: Regulated firms have little incentive to undertake quality improvements or invest efficiently. This leads to lower-quality products.
One key feature of a command economy is the artificial scarcity created by the government. The government decides what goods and services will be produced through its top-down control approach. As a result, many resources are misallocated from their more efficient uses to unproductive ones.
Artificial scarcity is the process of keeping prices artificially high so that demand for commodities remain under check. This phenomenon leads to strategically withholding supply to create artificial shortages which can, in turn, drive up prices.
“The command economy with tight regulation often results in unhealthy competition leading to scarce pickups in price.” – Ooi Tiangjun
Unsustainable Economic Model
In today’s interconnected world, rapid technological growth has resulted in long-distance trade and cross-border investments between countries. Due to limited information available, it becomes challenging for the central planning board to allocate resources efficiently in comparison to market-based economies where access channels provide valuable and transparent data.
A command economy runs on a centralized economic model, which results in inefficiencies due to silos’ creation. An unsophisticated economic system can only function optimally under improved professionals’ quality but not an exodus of experience demographics outside this sphere.
“A failure such as blackouts, transportation blockages, or broken infrastructure caused by lack of maintenance will stifle production just as easily as any organized strike.” – Vince Cable
Reduced Quality of Goods and Services
Oligopoly firms have little need for customer satisfaction since profit maximization is their primary goal. They operate in the implicit understanding among competitors that there won’t be competitive innovation to steal business away because nobody wants disruption to existing markets.
Command economies lead to reduced incentives for workers since businesses face no intense competition. Consequently, consumer disappointments come hand in hand with frustrations in centrally-planned industries, reducing goods and services’ quality.
“Quality has to be caused, not controlled.” – Philip Crosby
No Competition Among Firms
In a command economy, there is no competition among firms as all economic decisions are made by the central government. This lack of competition can lead to inefficiencies and decreased incentives for businesses to innovate and improve their products or services.
According to Nobel Prize-winning economist Friedrich Hayek:
“Competition is valuable only because, and so far as its results are unpredictable and on-the-spot adaptation to unforeseeable circumstances is possible.” -Friedrich Hayek
Without competition, there is little pressure for firms to lower prices or improve product quality. As a result, consumers may be left with limited options, leading to potentially high costs and poor choices in the marketplace.
In a command economy, state-owned enterprises often dominate the market and operate as monopolies in various industries.
As John Stuart Mill stated in his book Principles of Political Economy:
“The only way to prevent large firms from dominating industry and exploiting consumers is through open and free competition.” -John Stuart Mill
When a monopoly exists, the firm has no fear of losing customers to competitors and as such, they do not feel compelled to operate efficiently. There is also a tendency for monopolies to engage in anti-competitive practices to further solidify their hold on the market.
Furthermore, monopolies can have detrimental effects on society by hindering innovation and progress. With no incentive to improve or create new products, technological development stagnates, resulting in potential long-term economic repercussions.
No Pressure for Efficiency
In a command economy, there is no profit motive for firms as everything is controlled by the government. Without the pressure to operate efficiently, firms may engage in unproductive behavior such as hoarding resources or engaging in activities that provide little benefit to society.
As Peter F. Drucker, a renowned management consultant and author stated:
“Efficiency is doing things right; effectiveness is doing the right things.” -Peter F. Drucker
In absence of market competition, state-owned enterprises do not need to demonstrate efficiency nor effectiveness in their production processes as long as they meet government-set quotas. This can result in significant waste, inefficiencies, and mismanagement, leading to economic stagnation and reduced growth for the country.
Decreased Consumer Choice
A command economy often results in decreased consumer choice due to limited options available in the marketplace.
As economist Milton Friedman once said:
“The great virtue of a free-market system is that it does not care what color people are; it does not care what their religion is; it only cares whether they can produce something you want to buy.” -Milton Friedman
In a free-market economy, businesses compete to offer the best quality products at the lowest prices, which gives consumers unparalleled access to varied goods. In contrast, a command economy often succumbs to shortages and long queues, leaving citizens with little to choose from. The failure to respond swiftly to new trends and consumer preferences can create mass dissatisfaction among citizens.
For example, when the Soviet Union was still intact, there were persistent shortages of basic supplies even though the populace had money to buy them. This happened because central planners made poor decisions about allocating resources on an industrial scale causing shortages of critical items like foodstuffs and ordinary goods. It led to people standing in line for hours to purchase the basics, such as sugar, bread, and milk. Such shortages also occur in command economies with price controls where stores are unable to compete for goods due to regulated pricing.
A command economy may seem like an appealing concept on paper, but upon execution, it often leads to inefficiencies, monopolies, lack of consumer choice, and reduced innovation.
No Consumer Choice
In a command economy, the government has complete control over what goods and services are produced. This means that consumers do not have any say in what is available to them, as everything they can choose from has been predetermined by the government.
Under a command economy system, the government may choose to produce only certain types of goods or services because they align with their political agenda. For instance, certain industries may be prohibited or discouraged due to environmental concerns, labor disputes or other reasons decided by the ruling authority.
This lack of choice can lead to dissatisfaction among consumers who may feel powerless. It also means that people might sometimes resort to using black markets when there is a high demand for goods and services that are restricted or unavailable under a command economy.
Government-Selected Goods and Services
The fundamental idea behind a command economy is that the state should have absolute control over the production and distribution of goods and services. In essence, the government acts as the central planner, deciding how much of each good will be produced and at which price point it should be sold.
For example, if the government deems healthcare to be an essential service, it would allocate resources towards this industry rather than invest more into other sectors like technology or entertainment. The decisions regarding allocation and distribution are typically based on political objectives rather than market forces, which often results in inefficient use of resources and wasted potential.
Furthermore, in a command economy, the government decides which firms receive subsidies, tax breaks, and other benefits. While these policies could provide stability to selected industries, they can also cause other issues such as decreased competition within markets and reduced innovation. Also, since market prices don’t exist under the command economy, setting fair prices thus becomes a matter of speculation. Often times, governments may set prices too low for some essential commodities, causing people to hoard or illicitly distribute them on the black market.
No Differentiation Among Products
When government entities dictate which goods and services a nation produces, there is often no differentiation between products that fill similar needs. For instance, if all car manufacturers in the country must paint their vehicles blue because it was decided that this color suits everyone’s tastes, customers would not be able to choose a different hue – regardless of individual preferences or style choices.
The absence of competition means that innovation may take a backseat. When companies are only producing what they’ve been assigned to produce, they become less focused on developing something new and exciting, whereas consumers will have fewer options because producers won’t feel compelled to create diversification in their products line up. In essence, since consumers don’t vote with their wallets, the incentive to create quality over quantity becomes opaque at best and perfunctory at worst.
“Command economies eliminate consumer sovereignty, rendering your own personal needs irrelevant.” -Bruce Caldwell
Under a command economy, much of what aspects of an individual’s life are controlled by a government entity charged with allocating resources and instituting policies. This can lead to detrimental effects on economic development such as inefficient allocation of human resources, inequality, inferior product quality and lowered overall welfare.
No Free Trade
One of the main characteristics of a command economy is that it prohibits free trade. This means that the government controls all aspects of the production and distribution of goods and services, so there are no private businesses or individuals who can buy or sell on their own terms.
This lack of free trade has several consequences for the economy and its people. Firstly, without competition between producers, there is little incentive to innovate or improve existing products. As a result, economic growth is usually slow and stagnant.
“Command economies often create an over-reliance on outdated technologies and resources…And given the lack of experimentation with new ideas and processes that accompanies these setups, economies procured through central planning risk stalling out — unless they can find an external source of more advanced imports.” – Diego Pinzon for Medium
Reduced Economic Growth
The prohibition of free trade brings about reduced economic growth in a command economy. Since the government has complete control over what goods are produced and how they are distributed, there is little room for market-driven demand/supply growth dynamics. For instance, if there is high demand for a particular product but the government restrictions do not allow it to be produced locally or imported from abroad, then that demand would remain unsatisfied. And as a result, the economy’s growth potential remains unfulfilled.
Moreover, the managers of state-owned enterprises aren’t rewarded based on consumer preferences, profits, or outputs, but simple adherence to the regime’s goals. Bureaucratic rules replaced flexible mechanisms and discretionary behaviours that spur innovation and productivity. “Thus”, says William Davies in his book Nervous States,”the Soviet system under Communist rule was highly resistant to enterprise-level aspirations—workers were disincentivised from taking risks or seeking to exceed targets’.”
“Command economies do not function on a profit basis; hence, the production and distribution of goods and services can never be maximised…The outcome is an economy that doesn’t work to its full potential. The growth rate slows down rapidly than in market-driven economics” – Tabassum Ijaz Malik for TaskQue
Increased Dependence on Domestic Production
In a command economy, people are more dependent on domestic production rather than imports. Since the government controls all aspects of the economy’s production, consumer choice is often limited to what the state provides. As a result, many countries with this type of system experience shortages and uneven quality among products because there’s less incentive for producers to efficiently invest resources.
This dependence on domestic production creates supply chain bottlenecks and less accessible pricing, leading much-needed goods and services unattainable by the general public. Because isolated economic activity becomes inefficient, these governments then think of implementing social policies that provide subsidies or incentives which could lead to increased inefficiencies elsewhere in the framework. According to Nurmukhammad Yusupov for Economic Research Institute: “A lack of competition tends to push prices artificially higher and pushes back efficiency improvement”.
“In North Korea, they have bananas, but they’re extremely expensive and only available in certain stores,” said a former resident of Chongjin, one of North Korea’s largest cities north of Pyongyang. “Few people eat them”. – Kang Mi-Jin for the Washington Post
Potential for International Conflict
The prohibition of free trade also increases the potential for international conflict. This happens because other countries may attempt to bring in their own goods or services into a non-free trading nation to gain greater access to the market. Meanwhile, such attempts can be seen as a threat by the government of that nation, which results in tension and conflict.
The emphasis on political goals instead of economic efficiency for domestic corporations can lead to international states’ accidents. Therefore, geopolitical competition becomes more dominant than economic cooperation. Such a type of relationship makes both parties more likely to adopt aggressive behaviour towards each other since neither has integrated their economies together.
“Geopolitics plays an incredible role in command economics due to its autarkic nature,” wrote Oren Cass, founder of American Compass. “Despite commands or directives from the Party that it is better not to mix nationalistic rhetoric with commerce, they find themselves having to do so”
A command economy prohibits free trade and entangles itself in inefficient bureaucracy delaying optimum production growth. Its approach leads to increased dependence on domestic productions which creates supply chain bottlenecks and limitations that may be sought through social policies leading to inefficiencies elsewhere in the framework. Finally, this autonomous style brings those who adopt it into scenarios where political interests supersede economic ones, often resulting in international conflicts where proactive collaboration could have generated opportunities instead of open hostilities.
No Freedom Of Employment
In a command economy, the government controls all aspects of production, including employment. There is no freedom for individuals to choose their own profession or workplace as it is determined by the state. Jobs are allocated based on the needs of the economy rather than individual skills or preferences.
According to The Balance, “In a command economy, there’s little room for worker autonomy. If you’re told to work in a certain job, you will do so regardless of your qualifications or personal desires. This can lead to job dissatisfaction and low morale among workers forced into positions they don’t want.”
The lack of employment freedom restricts creativity and hinders the growth of industries. It also leads to inefficiency as people may not be working in jobs that best match their skillset.
Restricted Career Opportunities
In a command economy, most industries are owned and managed by the government – with little chance for private ownership. Therefore, opportunities for career advancement and entrepreneurship are limited.
Entrepreneurship in particular suffers in command economies since starting a business requires approval from the government and strict adherence to regulations set forth by the state. As a result, many individuals are discouraged from pursuing new ideas and making innovative choices. Without an efficient market mechanism in place, risk-taking and innovation become stifled.
Oxfam International explains, “Command economies reduce the incentives and rewards for innovation and progress. The nature of these economies limits the output of goods and services to those that have been prescribed by policymakers. This approach typically results in shortages of some products, while others go unsold because there is no demand for them”.
No Room for Entrepreneurship
In a command economy, there is virtually no exertion of competition as the government owns most industries. Private businesses also tend to be heavily regulated and can only exist if they align with the policies of the government.
This lack of competition is a major impediment for entrepreneurs since there is little to no demand for new products or services. Innovators have limited options, stifling economic growth and development in these economies.
According to Investopedia, “Command economies are characterized by state-owned enterprise monopolies, where the state ownership precludes the existence of competitive forces such as those found under capitalism. The absence of competitions tends to restrict suppliers from cutting costs and improving quality.”
In command economies, innovation suffers due to the emphasis on collective goals rather than individual rights and freedoms. Central planning tends to focus on what works now rather than exploring creative solutions for future possibilities.
The Cato Institute explains, “Innovation, the lifeblood of market-based capitalist systems, cannot flourish when outcomes are predetermined through central planning. For example, internet penetration rates are generally higher in markets that allow entrepreneurial activity because individuals can develop new communications technologies without asking permission first.”
Moreover, since most institutions are publicly owned and controlled, those who own the enterprises – i.e., the general public – have little incentive to generate more revenue. There isn’t a need to achieve greater profit, which leads to stagnant output and inhibits technological progress.
- The prohibition of employment freedom, restricted career opportunities, a lack of entrepreneurship, and stifled innovation are some of the main problems associated with command economies. These economies limit personal liberties while subordinating individual choice to serve collective objectives set forth by policymakers. Therefore, overall prosperity and well-being may be compromised in favor of the perceived broader societal needs.
Frequently Asked Questions
What types of businesses are prohibited in a command economy?
In a command economy, businesses that compete with government-owned enterprises are typically prohibited. Private businesses may be allowed, but only if they adhere to strict government regulations and guidelines. Industries such as banking, telecommunications, and transportation are often state-owned to maintain control over key economic sectors.
Are individuals allowed to own private property in a command economy?
In a command economy, private property ownership is limited or non-existent. Land, factories, and other means of production are owned and controlled by the state, with individuals only allowed to own personal possessions such as clothing and furniture. Housing may also be state-owned, with individuals being assigned a place to live based on their occupation and social status.
What restrictions are placed on the prices of goods and services in a command economy?
In a command economy, the government sets the prices of goods and services based on production costs and social needs. Prices are often kept artificially low to make goods affordable for everyone, which can lead to shortages and long waiting lists for popular items. The government may also use subsidies and price controls to encourage production in certain sectors or discourage consumption of certain goods.
Can individuals make their own economic decisions in a command economy?
In a command economy, individuals generally have limited economic freedom. The government controls the means of production, sets prices, and determines resource allocation, leaving little room for individual decision-making. Employment opportunities, housing, and education are often assigned by the state, with little consideration given to individual preferences or skills.
What role does the government play in the distribution of goods and services in a command economy?
In a command economy, the government plays a central role in the distribution of goods and services. The state controls the means of production, decides what is produced, and determines who gets access to goods and services. Distribution is often based on social need rather than market demand, with the government using quotas, rationing, and other methods to ensure that everyone has access to basic necessities.
Are there any limitations on the types of jobs individuals can have in a command economy?
In a command economy, individuals may have limited job choices as the government determines which industries are important and which jobs are needed. The state may assign individuals to specific occupations based on their skills, education, and social status, rather than allowing them to choose their own career paths. Some jobs may be restricted to certain groups or require government approval, while others may be banned altogether.