Command economy This is a type of economy in which a centralized power controls the bigger part of the economic system. This type of economy creates a healthy supply of resources and rewards to people at prices that are affordable.

1. Command Economy Facts
2. Command Economy Disadvantages
3. History Of Command Economy

The term command administrative economy, or often administrative command economic system, was adopted in the late 1980s as a descriptive category for the Soviet type of economic system. Throughout its history, the Soviet Union had a mobilization economy, focused on rapid industrial expansion and growth and the development of economic and military power, under the direction of the Communist Party and its leadership. This command administrative economy evolved from the experiences of earlier Soviet attempts to develop a viable socialist alternative to the capitalist market system that prevailed in the developed Western world. Thus it was built on the lessons of the nonmonetized pure 'command economy' of Leninist War Communism (1918–1921), Lenin's experiment with markets under the New Economic Policy (NEP, 1921–1927), Josef Stalin's 'great Socialist Offensive' (1928–1941), war mobilization (1941–1945) and recovery (1946–1955), and the Khrushchevian experiment with regional decentralization of economic planning and administration (1957–1962). This economic system reached its maturity in the period of Brezhnev's rule (1965–1982), following the rollback of the Kosygin reforms of 1967–1972. It provides a concise summary of the nature of the economic system of 'Developed Socialism' under Brezhnev, against which the radical economic reforms of perestroika under Mikhail Gorbachev were directed.

The concept of the command administrative economy is an elaboration of the analysis of the command economy, introduced to the study of the Soviet Union by Gregory Grossman in his seminal (1963) article, 'Notes for a Theory of the Command Economy.' The term became common in the economic reform debates of the late Soviet period, even in the Soviet Union itself, particularly after its use by the General Secretary of the Communist Party of the Soviet Union, Mikhail Gorbachev, at the reform Party Plenums of January and June 1987, in his critique of the functioning of the Soviet economic system. The term highlights the fact that in such an economic system, most economic activity involves the administrative elaboration and implementation of commands from superior authorities in an administrative hierarchy, with unauthorized initiative subject to punishment.

The defining feature of such an economic system is the subordination of virtually all economic activity to state authority. That authority was represented in the Soviet Union by the sole legitimate political body, the Communist Party of the Soviet Union, which necessarily then assumed a leading, indeed determining, role in all legitimate economic activity. This authority was realized through a vast administrative hierarchy responsible for turning the general objectives and wishes of the Party and its leadership into operational plans and detailed implementing instructions, and then overseeing and enforcing their implementation to the extent possible. This involved centralized planning that produced five-year developmental framework plans and one-year operational directive plans containing detailed commands mandatory for implementation by all subordinate organizations. These plans were elaborated in increasing detail as they were allocated down the hierarchy, eventually becoming direct specific commands to individual firms, farms, stores, and other economic organizations.

The task of directive-based centralized planning in this system was made feasible by aggregation at higher levels and by the delegation of elaboration of details of the plan to subordinate levels in the administrative hierarchy. Thus administrative organs at each level of the hierarchy (central, republic, regional, local, and operational [e.g., firm, farm, etc.]) were responsible for planning, supervision, and enforcement, and engaged in active bargaining with other levels in the hierarchy to develop an agreed plan of activity that in general met the needs and desires of the highest authorities. The result of this administrative process bore the force of law and was not subject to legitimate alteration or deviation by subordinate units, although higher authorities did have the power to alter or reallocate the assignments of their subordinates.

To work properly, this system of administratively enforced implementation of commands requires limiting the discretion and alternatives available to subordinates. Thus the system, within the areas of activity directly controlled by the state, was essentially demonetized. Although money was used as a unit of account and measure of activity, it ceased to be a legitimate bearer of options in the state sectors; it failed to possess that fundamental and defining characteristic of 'moneyness'—a universal command over goods and services. Rather it played a passive role of aggregating and measuring the flow of economic activity, while plans and their subsequent allocation documents determined the ability to acquire goods and services within the state sector. Similarly, prices in the command administrative economy failed to reflect marginal valuations, but rather became aggregation weights for the planning and enforcement of the production and distribution of heterogeneous products in a given planned category of activity. Thus in the logic of the command administrative economy, money and prices become mere accounting tools, allowing the administrative hierarchy to monitor, verify, and enforce commanded performance.

Command Economy Facts

The command administrative system in the Soviet Union controlled the overwhelming share of all productive activity. But the experience of war communism, and the repeated attempts to mobilize and inspire workers and intellectuals to work toward the objectives of the Soviet Party and State, showed that the detailed planning and administration of commands were rather ineffective in dealing with the consumption, career, and work-choice decisions of individuals and households. The variety and variability of needs and desires proved too vast to be effectively managed by directive central planning and administrative enforcement, except in extreme (wartime) circumstances. Thus money was used to provide individual incentives and rewards, realizable through markets for consumer goods and services and the choice of job and profession, subject to qualification constraints. But prices and wages were still extensively controlled, and the cash money allowed in these markets was strictly segmented from, and nonconvertible with, the accounting funds used for measuring transactions in the state production and distribution sectors. This created serious microeconomic disequilibria in these markets, stimulating the development of active underground economies that extended the influence of money into the state sector and reallocated product from intended planned purposes to those of agents with control over cash.

The command administrative economy proved quite effective at forcing rapid industrialization and urbanization in the Soviet Union. It was effective at mobilizing human and material resources in the pursuit of large-scale, quantifiable goals. The building of large industrial objects, the opening of vast and inhospitable resource areas to economic exploitation, and the building and maintenance of military forces second to none were all facilitated by the system's ability to mobilize resources and focus them on achieving desired objects regardless of the cost. Moreover, the system proved quite adept at copying and adapting new technologies and even industries from the Western market economies. Yet these very abilities, and the absence of any valuation feedback through markets and prices, rendered the operation of the system extremely costly and wasteful of resources, both human and material.

Without the ability to make fine trade-offs, to innovate and to adjust to changing details and circumstances largely unobservable to those with the authority in the system to act, the command administrative economy grew increasingly inefficient and wasteful of resources as the economy and its complexity grew. This became more obvious, even to the rulers of the system, as microeconomic disequilibria, unfinished construction, unusable inventories, and disruptions of the 'sellers' market,' together with a burgeoning second economy (Grossman, 1977), grew with increasing rapidity through the 1970s and 1980s. These consequences, together with the repeated failure of partial and incremental reforms to improve the situation and a growing gap in technology from the levels of the developed West, inspired the radical economic, and indeed political, reforms of Mikhail S. Gorbachev that soon afterward brought an end to the Soviet Union and its command administrative economy.

See also: economic growth, soviet; market socialism

bibliography

Command Economy Disadvantages

Ericson, R. E. (1981). 'A Difficulty with the Command Allocation Mechanism.' Journal of Economic Theory 31(1):1–26.

Ericson, R. E. (1991). 'The Classical Soviet-Type Economy: Nature of the System and Implications for Reform.' Journal of Economic Perspectives 5(4):1–18.

Grossman, G. (1963). 'Notes for a Theory of the Command Economy.' Soviet Studies 15(2):101–23.

Grossman, G. (1977). 'The 'Second Economy' of the USSR.' Problems of Communism 26(5):25–40.

Kornai, J. (1992). The Socialist System. Princeton, NJ: Princeton University Press.

Shmelev, N., and Popov, V. (1989). The Turning Point: Revitalizing the Soviet Economy.New York: Doubleday.

Wiles, P. J. D. (1962). The Political Economy of Communism. Cambridge, MA: Harvard University Press.

Richard E. Ericson

In a command economy (also known as a centrally planned economy), the central government controls all major aspects of a nation's economy and production. The government, rather than the traditional free market economy laws of supply and demand, mandates which goods and services will be produced and how they will be distributed and sold.

The theory of a command economy was defined by Karl Marx in the Communist Manifesto as “common ownership of the means of production,” and it became a typical characteristic of communist governments.

Key Takeaways: Command Economy

• A command economy—or centrally planned economy—is a system in which the government controls all facets of the nation’s economy. All businesses and housing are owned and controlled by the government.
• In a command economy, the government determines what goods and services will be produced and how they will be sold according to a multi-year central macroeconomic plan.
• In nations with command economies, health care, housing, and education are usually free, but the peoples’ incomes are controlled by the government and private investment is rarely allowed.
• In the Communist Manifesto, Karl Marx defined command economy as “common ownership of the means of production.”
• While command economies are typical of both communism and socialism, the two political ideologies apply them differently.

While command economies are capable of rapidly making sweeping changes in a country’s economy and society, their inherent risks, such as overproduction and stifling of innovation, have driven many long-time command economies like Russia and China to incorporate free market practices in order to better compete in the global marketplace.

Command Economy Characteristics

History Of Command Economy

In a command economy, the government has a multi-year central macroeconomic plan which sets objectives like nationwide employment rates and what the government-owned industries will produce.

The government enacts laws and regulations to implement and enforce its economic plan. For example, the central plan dictates how all of the country’s resources—financial, human, and natural—are to be allocated. With the goal of eliminating unemployment, the central plan promises to use the nation’s human capital to its highest potential. However, industries must adhere to the plan’s overall hiring targets.

Potential monopoly industries such as utilities, banking, and transportation are owned by the government and no competition is allowed within those sectors. In this manner, monopoly prevention measures such as anti-trust laws are unnecessary.

The government owns most, if not all of the country’s industries that produce goods or services. It may also set market prices and provide consumers with some necessities, including health care, housing, and education.

In more tightly-controlled command economies, the government imposes limits on individual income.

Command Economy Examples

Globalization and financial pressure have led many former command economies to change their practices and economic model, but a few countries remain faithful to the principles of command economy, such as Cuba and North Korea.

Cuba

Under Raul Castro, Fidel Castro’s brother, most Cuban industries remain owned and operated by the communist government. While unemployment is virtually nonexistent, the average monthly salary is less than $20 USD. Housing and health care are free, but all of the homes and hospitals are owned by the government. Since the former Soviet Union stopped subsidizing Cuba’s economy in 1990, the Castro government has gradually incorporated some free-market policies in an effort to stimulate growth.

The command economic philosophy of this secretive communist nation focuses on meeting the needs of its people. For example, by owning all of the homes and setting their prices accordingly, the government keeps the cost of housing low. Similarly, health care and education in government-operated hospitals and schools are free. However, with the lack of competition leaving them little reason to improve or innovate, the government-owned industries operate inefficiently. Overcrowded transportation facilities and long waits for health care are typical. Finally, with their incomes strictly controlled by the government, the people have no avenue for building wealth.

Pros and Cons

Some advantages of a command economy include:

• They can move quickly. Controlled by the government itself, industries can complete massive projects without politically motivated delays and fears of private lawsuits.
• Since jobs and hiring are regulated by the government, unemployment is consistently minimal and mass unemployment is rare.
• Government ownership of industries can prevent monopolies and their inherent abusive market practices, such as price gouging and deceptive advertising.
• They can quickly respond to fill critical societal needs such as health care, housing, and education, which are typically made available at little or no charge.

Disadvantages of a command economy include:

• Command economies breed governments which limit the rights of individuals to pursue their personal financial goals.
• Due to their lack of free-market competition, command economies discourage innovation. Industry leaders are rewarded for following government directives rather than for creating new products and solutions.
• Since their economic plans are unable to respond to changing consumer needs in a timely manner, command economies often suffer from over and under production resulting in shortages and wasteful surpluses.
• They encourage “black markets” that illegally make and sell products not produced by the command economy.

Communist Command Economy vs. Socialist Command Economy

While command economies are typical of both communism and socialism, the two political ideologies apply them differently.

Both forms of government own and control most industries and production, but socialist command economies do not attempt to control the peoples’ own labor. Instead, the people are free to work as they wish based on their qualifications. Similarly, businesses are free to hire the best-qualified workers, rather than having workers assigned to them based on the central economic plan.

In this manner, socialist command economies encourage a higher level of worker participation and innovation. Today, Sweden is an example of a nation using a socialist command economy.

Sources and Further Reference

• “Command Economy.” Investopedia (March 2018)
• Bon, Kristoffer G.; Gabnay, Roberto M. editors. “Economics: Its Concepts & Principles.” 2007. Rex Book Store. ISBN 9712346927, 9789712346927
• Grossman, Gregory (1987): “Command economy.” The New Palgrave: A Dictionary of Economics. Palgrave Macmillan
• Ellman, Michael (2014). “.”Socialist Planning Cambridge University Press; 3rd edition. ISBN 1107427320