Key characteristics of a command economy such as central government control and public ownership have appealed to thinkers and leaders who believe that the function of a government in the economy should center on owning and controlling the means of production. Hence, this economic system has been utilized in communist and socialist states. However, considering how most of these states failed when it comes to achieving their full economic potential, its drawbacks have been documented and acknowledged.
Pros: The Advantages of Command Economy
Those who argue for an economic system based on the principles of central government control and public ownership have also argued against the disadvantages of capitalism and market economies. For them, the best way for a country to promote and protect its economic welfare is for it to have a government that has full and unquestionable authority over the different facets of its macroeconomic and microeconomic affairs.
Take note of the following purported advantages:
• Lessening Inequality: Capitalism has been criticized for widening the gap between the rich and the poor. Nevertheless, one of the supposed advantages of a command economy is that it can lessen socioeconomic inequality because the government and not private individuals or entities owns and controls the means of production while also controlling the allocation of critical economic resources, determining how much wage to give, and distributing income equally across the labor force.
• Promotes Industrialization: A government that has full control over the economic affairs of the country it leads can decide what industries or sectors to pursue or what products in specific markets its country can specialize in. This entails allocating the economic resources at its disposal without the need to attract and anticipate the investment appetite of individual and institutional capitalists.
• Lower Unemployment: Another argument for this economic system is that it naturally lowers the unemployment rate because the government has full control and authority over the labor force. To be more specific, the government can create employment through its state-owned industries and sectors and by determining its production goals while also setting wages and overseeing wage distribution.
• Controlled Production: The government can also prevent overproduction and flooding the markets with excess supplies by controlling production outputs based on the exact demands of the population or the markets it targets. In addition, through careful planning, it can also lessen the chances of shortages. Note that excesses and shortages of supplies affect prices and destabilize the inflation rate.
• Resource Mobilization: Another advantage is the supposed better utilization of resources for large-scale mobilization. Remember that the government in this economic system has the sole responsibility of allocating resources. This is critical for large-scale projects or programs such as big-ticket infrastructure projects, the creation of industries or sectors, or even response to disasters or emergencies.
Cons: The Disadvantages of Command Economy
Note that Cuba and North Korea have economies largely based on a command economic system. However, compared with countries based on market economies, these two countries lag in terms of progress and innovation. China had a similar economic system until it transitioned to a mixed economic system beginning in 1978. These facts highlight the problems and limitations of an authoritarian management of the economy.
Take note of the following purported disadvantages:
• Inhibits Innovation: One of the advantages of a market economy is that it promotes innovation by allowing individuals and institutions to compete while also protecting private ownership or private property rights. However, in countries in which governments solely dictate the direction of their economies, innovation is dampened because there is no incentive to compete and property rights are limited or inexistent.
• Management Inefficiency: Another disadvantage of a command economy is that it leads to inefficiencies, particularly in managing economic affairs. The government has limited capabilities when compared to the diverse firms operating in a free market economy. Furthermore, because there is no pressure to compete and innovate or respond to the demands of the consumers, it often delivers the bare minimum.
• Restricted Freedom: This economic system is also based on transactional leadership and authoritarian leadership. Hence, as such, it has the notable disadvantages of each. Participation from the people is restricted to labor. Both the property rights of these individuals and their self-actualization are also limited. Furthermore, their right to redress their grievances against the government is suppressed.
• Undeveloped Talent: Critics have also argued that the lack of incentive to innovate and the restrictions on rights and freedom in this system prevent individuals from aiming and realizing their full potential. Individuals are fundamentally uninspired to gain skills and knowledge or improve their capabilities in an economy that confines what they can do within the greater economic goals and objectives of the government.
• Information Vacuum: The interaction between demand and supply in a free market produces information in a decentralized manner. This information is needed to respond to consumer demand or set production goals and objectives at the microeconomic level. However, in a command economy, there are no supply and demand forces to guide the government, thus resulting in an information vacuum.