What Is a Command Economy?

A command economy consists of an economic system in which the government, as opposed to private parties, dictates the production and distribution of goods and services.

Under this type of arrangement, politicians aren't simply interested in taxation and redistributing wealth in a socially productive manner; they're interested instead in total control. They say how much of a good is to be produced, what price will be charged for it, and who gets to distribute the good.

Most people associate command economies with communist countries like Cuba, North Korea, and the former Soviet Union.

Command economies came into vogue in the aftermath of the industrial revolution. One could even argue that they were in response to Adam Smith's theories about the division of labor and the importance of allowing the "invisible hand" of the market to govern the allocation of an economy's resources.

As Smith's theories gained transaction, and coupled with the rise of the modern factory, working conditions in Britain and elsewhere deteriorated. Factories expected their employees to work 10 to 16 hours per day for six days a week, child labor was common, and the safety record of large manufacturing operations alarmed outside observers.

It was in response to this that Karl Marx and Friedrich Engels penned The Communist Manifesto, which set the stage for the inauguration of command economies. Marx and Engels argued that society is defined by the struggle between the working class, or proletariat, and the owners of capital, or bourgeoisie. Because the latter sought to exploit the former, the answer was to take away their power and replace it with that of the state.

These ideas, while influential, didn't take hold until the Russian Revolution of 1917 brought the Bolsheviks, or communists, to power, who then founded the world's first socialist state. For the next seven decades, geopolitics largely revolved around their efforts, and the United States' response, to proliferate command economies around the globe.

Fast-forward to today, and it's safe to say that command economies have been largely discredited. The Soviet Union collapsed, propelling many of its former satellite states toward the free-market ideals of Europe. China is slowly relinquishing control over its economy to the free market. North Korea continues to wallow in poverty. And even Cuba seems to be on the precipice of reform, following its recent re-establishment of diplomatic relations with the United States.

The weakness, according to economists, lies in the so-called "knowledge problem." To allocate goods and services efficiently, the party responsible for doing so must be able to discern how much of a good to produce and what price to sell it for. But given the size and complexity of modern economies, these things are simply impossible to know. The net result is that shortages and surpluses were frequent occurrences when states like the former USSR dictated production and distribution.

While there's no telling what the future holds in terms of the economic organization of nations -- or, for that matter, the entire world -- it seems safe to say that command economies have been rightly relegated to the dustbin of history.

The article What Is a Command Economy? originally appeared on Fool.com.

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