A command economy is one in which a centralized government controls the means of production. This has has both advantages and disadvantages when compared to a free market economy.
In a command economy, the government determines what is produced, how it is produced, and how it is distributed. Private enterprise does not exist in a command economy. The government employs all workers and unilaterally determines their wages and job duties.
There are benefits and drawbacks to command economy structures. Command economy advantages include low levels of inequality and unemployment, and the common good replacing profit as the primary incentive of production. Command economy disadvantages include lack of competition and lack of efficiency.
The Advantages of a Command Economy
Because the government controls the means of production in a command economy, it determines who works where and for how much pay. This power structure contrasts sharply with a free market economy, in which private companies control the means of production and hire workers based on business needs, paying them wages set by invisible market forces.
In a free market economy, the law of supply and demand dictates that workers who have unique skills in high-demand fields receive high wages for their services, while low-skill individuals in fields that are saturated with workers settle for meager wages, if they can find work at all.
Low Unemployment Levels
Unlike the invisible hand of the free market, which cannot be manipulated by a single company or individual, a command economy government can set wages and job openings to create the unemployment rate and wage distribution that it sees fit.
Common Good Versus Profit Priority
Whereas the motivation for profit drives most business decisions in a free market economy, it is a non-factor in a command economy. A command economy government, therefore, can tailor products and services to benefit the common good without regard to profits and losses. For example, most true command economy governments, such as Cuba, offer free, universal healthcare coverage to their citizens.
The Disadvantages of a Command Economy
Lack of Competition Inhibits Innovation
Critics argue that the inherent lack of competition in command economies hinders innovation and keeps prices from resting at an optimal level for consumers. Although those who favor government control criticize private firms that esteem profit above all else, it is undeniable that profit is a motivator and drives innovation. At least partly for this reason, many advancements in medicine and technology have come from countries with free market economies, such as the United States and Japan.
Efficiency is also compromised when the government acts as a monolith, controlling every aspect of a country's economy. The nature of competition forces private companies in a free market economy to minimize red tape and keep operating and administrative costs to a minimum. If they get too bogged down with these expenses, they earn lower profits or need to raise prices to meet expenses. Ultimately, they are driven out of the market by competitors capable of operating more efficiently. Production in command economies is notoriously inefficient as the government feels no pressure from competitors or price-conscious consumers to cut costs or streamline operations. They also may be slower to respond – or even completely nonresponsive – to consumer needs or changing tastes.