27/12/2019 Command Economy: Advantages and Disadvantages

ECONOMY GOVERNMENT & POLICY

Command Economy: Advantages and

Disadvantages
How a command economy compares to a free market economy

By GREG DEPERSIO | Updated Jun 27, 2019

A command economy is one in which a centralized government controls the means of

production. This has has both advantages and disadvantages when compared to a free
market economy.

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27/12/2019 Command Economy: Advantages and Disadvantages

An Overview
In a command economy, the government determines what is produced, how it is produced,
and how it is distributed. Private enterprise does not exist in a command economy. The
government employs all workers and unilaterally determines their wages and job duties.

There are benefits and drawbacks to command economy structures. Command economy
advantages include low levels of inequality and unemployment, and the common good
replacing profit as the primary incentive of production. Command economy disadvantages
include lack of competition and lack of efficiency.

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The Advantages of a Command Economy

Less Inequality
Because the government controls the means of production in a command economy, it
determines who works where and for how much pay. This power structure contrasts sharply
with a free market economy, in which private companies control the means of production
and hire workers based on business needs, paying them wages set by invisible market forces.

In a free market economy, the law of supply and demand dictates that workers who have
unique skills in high-demand fields receive high wages for their services, while low-skill
individuals in fields that are saturated with workers settle for meager wages, if they can find
work at all.

Low Unemployment Levels

Unlike the invisible hand of the free market, which cannot be manipulated by a single
company or individual, a command economy government can set wages and job openings
to create the unemployment rate and wage distribution that it sees fit.

Common Good Versus Profit Priority

Whereas the motivation for profit drives most business decisions in a free market economy,
it is a non-factor in a command economy. A command economy government, therefore, can
tailor products and services to benefit the common good without regard to profits and
losses. For example, most true command economy governments, such as Cuba, offer free,
universal healthcare coverage to their citizens.

The Disadvantages of a Command Economy

Lack of Competition Inhibits Innovation
Critics argue that the inherent lack of competition in command economies hinders
innovation and keeps prices from resting at an optimal level for consumers. Although those
who favor government control criticize private firms that esteem profit above all else, it is
undeniable that profit is a motivator and drives innovation. At least partly for this reason,
many advancements in medicine and technology have come from countries with free market
economies, such as the United States and Japan.

Inefficiency
Efficiency is also compromised when the government acts as a monolith, controlling every
aspect of a country's economy. The nature of competition forces private companies in a free
market economy to minimize red tape and keep operating and administrative costs to a
minimum. If they get too bogged down with these expenses, they earn lower profits or need
to raise prices to meet expenses. Ultimately, they are driven out of the market by

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competitors capable of operating more efficiently. Production in command economies is

notoriously inefficient as the government feels no pressure from competitors or price-
conscious consumers to cut costs or streamline operations. They also may be slower to
respond – or even completely nonresponsive – to consumer needs or changing tastes.

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Related Terms
Centrally Planned Economy
A centrally planned economy is an economic system in which decisions are made by a central
authority rather than by market participants. more

Command Economy Definition

A command economy is a system where the government determines production, investment, prices
and incomes. more

Capitalism Definition
Capitalism is an economic system whereby monetary goods are owned by individuals or companies.
The purest form of capitalism is free market or laissez-faire capitalism. Here, private individuals are
unrestrained in determining where to invest, what to produce, and at which prices to exchange goods
and services. more

What Is Socialism?
Socialism is an economic and political system based on public or collective ownership of the means of
production, which emphasizes equality rather than achievement. more

Why Comparative Advantage Matters

Comparative advantage refers to an economy's ability to produce goods and services at a lower
opportunity cost than trade partners. more

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Multinational Corporation (MNC)

A multinational corporation has its facilities and other assets in at least one country other than its
home country. more

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