How Does a Command Economy Work?

A command economy is one in which all economic decisions are planned by a centralized authority. The governments who practice this form of economics control the overall economy by creating laws and regulations that control both state-owned and privately owned businesses.

A command economy ignores the free market laws of supply and demand, instead opting to direct production to meet governmental goals. This extends even to production goals as well as hiring practices. Command economies operate by setting specific long-term plans for where the government wishes the economy to go. This plan is then cut into smaller short-term plans, each with a goal that the government wishes to meet.

The idea behind a command economy is to control the economy in such a way as to always produce strong economic growth and to use raw materials in the most efficient manner. In a command economy, many of the most important industries in the nation are nationalized so that the government has direct control over them.

A command economy is generally highly efficient in the use of resources to meet the long-term goals of the government. Unemployment is often low because labor, becomes one more resource to be used efficiency. The basic needs of the labor force are also often met, while profits are directed towards government projects.

Disadvantages of a command economy, however, are that there is little opportunity for its citizens to move up the economic ladder, social programs tend to suffer as governmental programs flourish, and innovation is slowed, as incentives to create are stalled by the need to adhere to set production goals.