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Do you know what Cuba and North Korea have in common? Of course, communism, but what else? The answer would be a command economy. Both countries are dependent on and controlled by the government to the point where they can't make regular decisions such as where to work: the government tells them where they are going to work. But what's the difference between a command economy and communism? Are they the same thing? To learn about communism versus a command economy, the advantages and disadvantages of a command economy, and more, keep going!
The economic system established by society, such as command economy, market economy, or mixed economy, has a significant impact on resource allocation. Each system has its own set of institutional structures as well as a mechanism for allocating limited resources and dispersing output.
A command economy is a type of political economy in which a centralized governing body determines the allowable levels of output and the amounts that may be demanded for products and services.
A market economy is a type of economic system in which two forces, supply and demand, govern the creation of products and services.
To learn more about this topic, check out our explanation of - Market Economy
A mixed economy is a system that allows private property and provides for some economic freedom concerning the use of capital, but on the other hand it also permits governments to intervene in economic activity to achieve social goals.
Head on over to our explanation of a Mixed Economy to learn more details!
Governments are responsible for regulating command economies. In general, this consists of the following characteristics:
Government Control. Source: Pixabay
The figure above illustrates the reality of citizens living in command economies: people in command economies are no more than marionettes to the government. Not only do governments get to decide how much of certain products to produce and what jobs people will work, but under a command economy, the government also ultimately decides other factors such as how much food everyone receives and what style of house they live in. Individuals have really no authority to make decisions, either democratically or economically.
The state controls land, labor, capital, and all other sources of production in communism. A command economy, on the other hand, is one in which the government decides what things must be manufactured, how much will be manufactured, and how much the items should be sold for. It also governs investments and earnings. Sounds similar right? Well, the command economy is an essential component of every communist society. But are they the same thing?
Communism is an economic system in which individuals do not own land, industries, or machinery. These items are instead owned by the government or the entire community and everyone is expected to share the riches they generate.
A command economy is analogous to a tree trunk, whereas communism is comparable to a branch on that tree.
In both cases, the government has absolute control over the enterprises of the country, the resources, and the economic activities. There are, nevertheless, slight distinctions between them.
In communism, for example, everyone owns the land and the money simultaneously, and the produce is dispersed equally. In truth, pure communism has never really been attained. Instead, aspirational versions of it have been observed in the former Soviet Union, Cuba, and China. Private ownership is not permitted in communism. People's salary is determined only by need, not by their accomplishments or performance.
A command economy, on the other hand, is an umbrella term for any controlled economic system.
It is always beneficial to understand the origins of an economic system. But do you know how far back command economies run? The Old Kingdom of Egypt 2200 BC and the Incan empire in the 1500s both had some type of a command economy which are recognized as the oldest known use of these types of economies!
As far as market economies are concerned, you may vote on things you like by buying them. Products that people enjoy tend to stay, whereas those that people don't like tend to go. In a command economy, on the other hand, people get what they are given. As a result, if the government decides to say no to particular items, such products will no longer exist within the command economy.
Having said that, a command economy has both benefits and drawbacks. We'll take a look at some of these next.
1. It prohibits monopolization
Because the government regulates all market forces, it's simply not possible for a monopoly to reign in a command economy. Apart from the government, no supplier will be granted the authority to set the market. Monopolization occurs in other economies but not in a command economy.
A monopoly is when there is a single seller that dominates the market.
Don't walk, run to read our Monopoly explanation!
2. There's an increase in industrial power
The command economy generates industrial power to achieve large-scale projects while achieving critical social objectives.
3. It modifies manufacturing rates and the availability of finished items
It is feasible to change production rates to match the specific wants of the society. So, even though there will be fewer options than in other countries, a command economy reduces the likelihood of shortages occurring.
4. It enables greater resource mobilization
Because of the command economy's distinct composition, production is carried out as smoothly and effectively as is possible. As a result, all resources are deployed on a massive scale, ensuring rapid advancement.
5. It places a high value on social welfare
Social welfare is prioritized in a command economy. In actuality, one of its overarching objectives is to ensure optimal social welfare. Because of the feeling of community fostered by the lack of wealth disparity, the community itself takes on manufacturing and benefit, resulting in fewer conflicts or divisions.
1. It limits freedom
Because this form of economic system is linked to communist regimes, it is unsurprising that it takes away people's liberty and places complete authority in the government's hands alone. People cannot pick their occupations based on their abilities and inclinations; instead, they are forced into certain careers by the government. People have minimal freedom of choice because all employment are linked with demands at the moment. This main disadvantage of a command economy might result in dissatisfied citizens.
2. It stifles inventive breakthroughs
A command economy, in contrast to a free market, does not stimulate change or innovation. Because the government regulates the markets, it does not prioritize or foster innovation in general. This is due to the fact that it regulates all areas of production and allows little space for individuals to improve it, resulting in a workforce which is less driven to develop better-quality goods or services.
3. It causes the black market to flourish
Some items and services are not available in the command economy due to government limitations, hence people might flock to black markets to find what they are looking for.
4. There isn't any competition
Market competition is one of the primary sources of progress, yet there is minimal competition in a command economy. The government controls all industries and neither encourages nor actively seeks to eliminate competition. In this sort of market, the benefits of competition are not visible.
5. The quantity of goods becomes unbalanced
Some things will almost certainly be mass-produced, whilst others would not be sufficient to meet economic demands. It is hard for the government organization in charge of the economy to gather up-to-date details concerning consumer wants, therefore rationing becomes the norm most of the time.
Consider the following examples of command economies:
China
Following World War II, Mao Tse Tung established a communist-ruled society. He imposed a rigidly managed economy. The present leaders are attempting to transition to a market-based system. They are still developing five-year plans that establish economic aims and objectives.
Cuba
Fidel Castro's revolution of 1959 which established Communism is another good example of a command economy. Until 1990, the Soviet Union financed Cuba's economy. To stimulate growth, the government is gradually implementing market reforms.
North Korea
It has one of the world's leading, most communist regimes and has had this communist economy for decades. North Korea's economy is virtually beyond repair owing to corruption, lack of investment, and resource shortages. North Koreans continue to experience hunger and malnutrition.
A command economy is a type of political economy in which a centralized governing body determines the allowable levels of output and the amounts that may be demanded for products and services.
North Korea, Cuba, China, etc.
A command economy is analogous to a tree trunk, whereas communism is comparable to a branch on that tree. Communism is a controlled system while a command economy is more of an umbrella term for any controlled system.
North Korea is one of the most well-known command economies in the world. The economy is so far gone that it is, at this point, basically beyond repair.
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