Understanding Command vs. Mixed Economy
Command and mixed economies are two different economic systems. In a command economy, the system is controlled by the government. A mixed economy is partly run by the government and partly as a free market economywhich is an economic system that includes no government intervention and is mainly driven by the law of supply and demand.
Command Economy
A command economy is an economic system where the government has control over the production and pricing of goods and services. Sometimes called a planned economy, in a command economy, the government decides which goods and services to produce, the production and distribution method, and the prices of goods and services. The government is the central planner.
Key Takeaways
- The government has control over a command or planned economy.
- In mixed economies, the government has some control, while the rest is up to supply and demand.
- Command economies are characterized by large surpluses and shortages, monopolies, and prices set by the government.
- Mixed economies are characterized by corporate profitability, the use of fiscal and monetary policies to stimulate growth, and the existence of a public and private sector.
Because the government sets and controls all aspects of business in a command economythere is no competition. Monopolies, which are owned by the government, are common. These may include financial services, utilities, or even companies within the transportation sector.
Command economies often make too much of one product and not enough of another because it is difficult for one entity (i.e., the government) to realize the needs of everyone in the country. So, a command economy often means large surpluses or shortages of products and services.
A shadow or black economy may develop to fulfill the needs not met by the government. The black economy violates a country’s rules and regulations because the economic activities take place illegally and participants avoid taxes. A shadow economy arises when governments make transactions illegal or by making a good or service unaffordable. People in the economy search for ways to get around government restrictions.
The command economy is unlike a free-market or capitalist economy. In a free-market economic system, manufacturing and production are based on the powers of supply and demand with little or no government intervention. Examples of command economies today include North Korea, Iran, Libya, and Cuba. China was a command economy before turning to a mixed economy with both communist and capitalist ideals.
Mixed Economy
A mixed economic system has features of both a command and a free-market system.because it is partly controlled by the government and partly based on the forces of supply and demand. Most of the main economies in the world are now mixed economies, which operate under a combination of socialism and capitalism, and governments in most mixed economies use fiscal or monetary policies to stimulate growth during economic slowdowns. This may come in the form of corporate bailouts, changes in interest rates, or other stimulus packages.
Generally, a mixed economic system includes a public and private sector. There is limited government regulation in a mixed economy, while there is heavy government regulation and control in a command economy. In the mixed economy, governments allow corporations to profit, but levels of profit might be limited by taxation or by imposing tariffs.
Governments in a mixed economy may decide to nationalize a company if they go against the interests of the public.
Suppose ABC, a toy manufacturer, is in a mixed economic system. The prices and production levels are subject to the discretion of the company and driven by the law of supply and demand. However, company ABC has been using too many of the natural resources in the state where it is located. The government is able to intervene because excesses use of vital resources goes against the good of the public. On the other hand, in a command economy, there is no company producing toys—the government would control the production and pricing of the toys.
Unlike the case of the command economy, a mixed economy may not have large surpluses or shortages. That’s because manufacturing and production is largely driven by supply and demand, so the distribution of goods and services happens where and when needed. Prices also are dictated by supply and demand rather than by the government, as in the command economy. The profitability of producers and innovation are also key elements of the mixed economic system.