The goal of a command economy is for governments - not private enterprises - to manage country economies.

In a command economy (also known as a planned economy), government central planners determine what goods and services will be produced, the amount of goods and services produced, and at what cost to the consumer.

In more stringent command economies, government officials also dictate public investments allowed by the free market. Additionally, command market governments can also order mandates on incomes earned by citizens.

Competition largely doesn't exist in a command economy. All decisions are made by the government and all businesses are controlled by the government.

In more severe instances, command economies are and have been prioritized by communist countries, such as North Korea and Cuba, or more recently, in socialist countries like Venezuela, which is drowning in debt and inundated by poverty. Historically, China and Russia have also tried their hands at a command economy, but have more recently steered their country's economies toward a blend of socialism and capitalism (and free markets) and away from pure communism.

In contrast, free-market economies in countries like the U.S., Japan and Germany stem from direct democracies where government is important (especially on key issues like regulation and taxes), but largely takes a "hands off" approach to commerce. Instead they give way to companies to make their own decisions on how to best handle their businesses.

Key Factors in a Command Economy

Command markets often have the following elements in common.

  • The government takes total control over a nation's economy, including deciding the amount of supply of a given product or services, and what that product or service costs to consumers.
  • The government has total control over the country's critical resources (think agriculture, oil and gas, and healthcare services, for example).
  • All companies in a command economy, whether state-owned or privately owned, are controlled by the government.

Example of a Command Economy

For a good look at a country that practices a command economy, consider North Korea.

TheStreet Recommends

This communist nation practices a command market philosophy - one where the economic needs of the people are prioritized, while striving to maintain a sustainable economic system. In North Korea, for example, residential housing prices are low, as the government owns all of the country's homes and sets real estate prices accordingly. In addition, key public services like health care and education are free, or come at minimal cost.

The downside of a command economic model in a country like North Korea includes inefficiently run industries like the transportation sector, where the lack of competition curbs the need for improved services, and leads to long waiting periods for services like health care. Also, as the North Korean government controls salaries and incomes, consumers seeking to build wealth have no economic avenue for doing so.

Benefits of a Command Economy

Proponents of command economies believe that the central planning economic model places people first, and not profits first. That, in theory, reduces economic inequality and keeps the public on the same economic level.

Command economy proponents also say their economic model does away with the potential for industry monopolies. Technically, that's true, as all market industries are controlled by the government. That said, the central planning model is a monopoly of its own, with no competition from any other potential decision-makers in a command economy model.

Advocates also believe that command economies offer more balance in terms of putting people to work and sharing the wealth accumulated equally among the citizenry.

Disadvantages of a Command Economy

Aside from a lack of competition, which has held back government-run economies, command economies are hampered by the lack of business skills of central planning bureaucrats. Decisions made by command economy governments have historically lead to product and service shortages and surpluses, as central planners have struggled to estimate the number of goods produced over a specific time period.

In addition, prices for goods and services in a command economy aren't market-based, they're revenue based (i.e., prices are established to meet government revenue needs).

This pricing model is inefficient, often failing to meet the demands of consumers that can lead to weak economic outcomes. Also, consumers may be negatively impacted in a command economy by not having a say in what goods or services are produced, and what price they must pay for the goods and services that are produced.

Contrast that to a free market economy, as practiced in the U.S., where consumer demand is the single biggest driver of economic production and business pricing decisions.

Command Economies vs. Free Market Economies

Aside from consumer demand and pricing considerations, command economies and market economies differ in other ways.

For example, key differences in the division of labor separate the two economic models. In free markets, workers are hired on the basis of supply and demand - the more a product or service is in demand by consumers, the more workers are needed. In contrast, in a command economy, labor is assigned not by consumer demand, but by government intervention, to ensure citizens have a job whether a business or industry needs that worker or not.

By and large, however, the key difference between free markets and command economies is who makes the decisions on the production of goods and supply of services, and who makes the call on how much a product or service costs.