Command Economy Model

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A command economy is a type of economic system in which the government dictates the answers to the basic economic questions. That is, economic decision making is highly centralized in the hands of the government. Command economies were the norm in different parts of the world for thousands of years. In northern Africa, the Old Kingdom in Egypt (2660 BCE to 2180 BCE) had a command economy headed by a pharaoh. The pharaoh owned all land, collected taxes from peasant farmers, and required peasants to work on public projects such as temples, canals, and pyramids. In Asia, the Chou Dynasty in China (1122 BCE to 256 BCE) established a complex feudal economy. Under Chinese feudalism, the emperor owned the land but allowed trusted nobles to govern large portions of the empire in exchange for their allegiance and tribute payments. A similar feudal system was established in Europe as early at the eighth century CE.

During the twentieth century the communist countries of eastern and central Europe and East Asia created command economies. In these countries the Communist Party and an elite corps of central planners devised and implemented five-year plans to dictate the use of society's resources. Central planning dominated economic activity in the Soviet Union by the late 1920s, in the Eastern bloc countries (Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, and Romania) by the mid-1940s, and in the People's Republic of China by the 1950s. By owning and controlling all of the factors of production, the cumbersome communist planning bureaucracies discouraged entrepreneurship, individual initiative, and product innovation. The collapse of communism in most of the world during the late 1980s and early 1990s dismantled much of the state planning apparatus in these economies.

While there are no pure command economies in the world today, the basic features of a command economy can still be found in some countries. In the Republic of Cuba, for example, communist dictator Fidel Castro introduced Soviet-style central planning to control Cuba's economy after the existing government was toppled in the late 1950s. The Castro regime expropriated many businesses and reorganized agriculture into large stateowned farms. Business activity, including the wages of labor and the prices of products, was directed by Cuba's Central Panning Board. It was not until the collapse of its most important benefactor, the Soviet Union, in the early 1990s that Cuba began to institute limited market-oriented economic reforms. While these reforms recognized the value of private incentives, the vast majority of Cuba's human, capital, and natural resources remained firmly under the government's thumb during the early 2000s. Even after the reins of power were transferred from Fidel Castro to his brother Raul in 2006, the

Labor-intensive agricultural production in Cuba, processing tobacco

Labor-intensive agricultural production in Cuba, processing tobacco. (Peter Manzelli/U.S. Department of Agriculture)

communists retained a monopoly on political power and exerted considerable control over economic activity.

Market Economy Model

A market economy is a type of economy that relies on the private sector—individuals and business firms—to answer the basic economic questions, and to own and control the factors of production. In a market economy decentralized decision making by individuals and firms determines what, how, and for whom to produce. At the heart of a market economy are private property and the economic freedoms of the marketplace. An invisible price system, rather than the government or customs, allocates resources in market economies.

The most basic freedoms in a market economy are the freedom of choice and the freedom of enterprise. Consumers enjoy the freedom of choice, which allows people to spend their money as they wish. By casting their “dollar votes” either for or against certain products, consumers answer the basic question of what to produce. Producers, in turn, have the freedom of enterprise, which encourages firms to use scarce resources in the most profitable ways. The market mechanism, which Adam Smith called the invisible hand, permits the forces of supply and demand to determine prices and allocate resources in free and competitive markets. The prices of goods, coupled with people's incomes, answer the third basic economic question of for whom to produce. Stated simply, a person's share of what is produced is determined by that person's ability to pay.

There are no pure market economies in the world. Yet in recent years a number of market-oriented economies around the world have been viewed as “free” based on criteria such as the amount of government regulation in the economy, the rule of law and private property rights, the size of government and tax burden, the ability to freely trade with other countries, and other conditions that generally support the basic freedoms of the marketplace. One widely recognized measure of economic freedom is found in Economic Freedom of the World (EFW), an annual report published by a consortium of economic think tanks such as the Fraser Institute in Canada and the Cato Institute in the United States. In the 2011 edition of EFW, the Hong Kong Special Administrative Region (SAR) topped the ranking as the most-free economy in the world, followed by Singapore, New Zealand, Switzerland, and Australia.5 A second recognized measure of economic freedom is the Index of Economic Freedom, which is published annually by the Heritage Foundation and the Wall Street Journal. The 2012 Index of Economic Freedom also ranked the Hong Kong SAR as the world's freest economy, followed by Singapore, Australia, New Zealand, and Switzerland.[1]

Mixed Economy

A mixed economy combines features from both the market model and the command model. In common usage, the term “mixed economy” refers to economies that are primarily market oriented, or capitalist, but that accept certain government interventions in the economy. Mixed economies stress decentralized private sector economic decision making, where individuals and firms own and control most of the factors of production and are responsible for answering the basic economic questions of what, how, and for whom to produce. Mixed economies borrow features from the command model, especially in the realms of business regulation, the provision of social programs, and stabilization policy. Technically, all economies are mixed economies, most leaning toward the market model and a few leaning toward the command model.

  • [1] Heritage Foundation and the Wall Street Journal, “Country Rankings,” 2012 Index of Economic Freedom
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