COMMAND ECONOMY

A command economy is one based on centralized decision making by government authorities rather than private individuals, and such decisions are not dictated by market conditions. The centrally planned economy requires a formal administrative hierarchy staffed on many bureaucratic levels. Basic decisions are grounded in ideologies and political imperatives. Key decisions involve all aspects of a firm's activity and are issued by commands, directives, and regulatory guides based on a national plan of inputs and outputs. The government determines what will be produced, production targets, investment in plant equipment, coordination between firms, use of natural resources, and how products will be distributed to the populace. Capital and national resources are property of the state rather than private persons. Prices and wages are centrally controlled and frequently remain at fixed levels for long periods of time.

Advantages of a command economy may be: (1) maximum mobilization of resources toward an urgent national objective, such as rapid industrialization of an underdeveloped economy or in times of war; (2) coordinated economic activity reducing wasteful duplication; (3) production of needed and desirable commodities; (4) reducing unemployment and idle capacity; and, (5) protection of the economy from the outside world.

Disadvantages of a centrally planned economy stem from the enormous amount of information required to achieve efficiency and the necessity of coordinating large numbers of components and decision makers at each level of the economic process. The supply of reliable information to all factions is generally not efficient enough to allow a high level of coordination or flexibility. Rigidity, exacerbated by a large organization or bureaucracy, leads to resource allocation which does not necessarily match resource availability, a nation's requirements, or consumer wishes. Manifestations include persistent shortages of some goods combined with surpluses of others. Throughout the decision process problems of accountability, self-serving behaviors, decisions made on inappropriate parameters, interference by party and other authorities, and divergent interests complicate the procedure. To alleviate inefficiencies, underground economies develop and lead to widespread corruption.

The Union of Soviet Socialist Republics (USSR) and Eastern European nations served as models of highly centralized command economies until the collapse of many of these Communist-styled governments in 1989 and 1990. Dissatisfaction with the failure of planned systems to deliver goods was partially to blame for the upheaval. Those economies have since moved to more decentralized systems based on competition and market demands. The People's Republic of China remained an example of a command economy in the 1990s.