Command economy

Advertisement from the German Democratic Republic, telling people to eat carp on New Year's Eve

A German poster from World War I, telling people to use less soap, because it is made from the scarce oils and fats. Ideas include to not hold the soap under water, and do not throw away small pieces of soap

A command economy or planned economy is where the big decisions are made at the center by the government. In an economic system the main decisions are, for example, allocating resources like labour, capital and minerals. Prices, too, are controlled. In a command economy, these decisions are taken by a central body, usually the government.

This system contrasts that of a market economy where all the economic actors involved make decisions. The benefit of a planned economy is that the planners (supposedly) know all about what is happening, and can make a better decision than in the market economy. Countries at war sometimes command their people to make things the war needs; the major powers in World War II did this.

Friedrick von Hayek, a 20th-century economist, thought that it is not possible for the planning body to have perfect information. For this reason, the decisions taken by this body will be wrong, as it is not possible to foresee all possible events. Once the decision has been taken there is only a small margin to vary the production; this means that a planned economy cannot adapt to a change as rapidly as a market economy. According to Ludwig von Mises, there is no competition, and there are no reasons to innovate or to look for different solutions to a problem, in a planned economy.

Related pages

• Five-year plans for the national economy of the Soviet Union