Definition
A command economy is an economic system in which the government, through central planning, makes the major decisions about production and distribution. Officials set output targets, assign resources, fix prices, and direct labor, rather than leaving those choices to the interplay of supply and demand.
It is the principal alternative to a market economy. Most real-world systems are mixed, combining market activity with state direction; the pure command economy is best understood as one end of a spectrum.
Why it matters
How it works
In a command economy, a central plan replaces the price mechanism. Planners must gather vast amounts of information about needs and capacities, then issue directives that ripple through every enterprise. When the plan is accurate the system functions; when it is not, shortages and surpluses appear with no automatic correction.
The core difficulty, identified by critics of central planning, is informational. Prices in a market economy aggregate dispersed knowledge and adjust continuously; a planner cannot replicate that. Weak personal incentives compound the problem, which is why most former command economies have shifted toward market-based allocation.