Key Takeaways
- A command economy is entirely controlled by the government, including production and pricing.
- In mixed economies, the government intervenes at times, but the private sector largely drive growth.
- Command economies often face large surpluses or shortages due to centralized planning.
- Mixed economies balance public and private sectors, allowing for corporate profitability alongside regulation.
- North Korea exemplifies a command economy with full governmental control, while the UK illustrates a mixed economy.
Command vs. Mixed Economy: An Overview
Command and mixed economies are two different economic systems that shape how societies produce and distribute goods. In a command economy, the government controls most economic decisions, including what’s produced and how resources are allocated, while a mixed economy blends government oversight with private enterprise and market-driven supply and demand. The degree of government involvement in each system directly influences prices, competition, and consumer choice.
Understanding Command Economy
Sometimes called a planned economy, a command economy is an economic system where the government maintains control over the production and pricing of goods and services.
The government decides which goods and services to produce, the production and distribution methods, and the prices of goods and services. The government is the central planner and decision-maker.
Disadvantages of Command Economies
Because the government sets and controls all aspects of business in a command economy, there is no competition. Monopolies, which are owned by the government, are common. These monopolies may include financial services, utilities, and 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.
Black Market Risks in Command Economies
A shadow economy or black market may develop to fulfill the needs not met by the government. The shadow 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 a good or service unaffordable. People in the economy search for ways to get around government restrictions.
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.
Fast Fact
Governments in a mixed economy may decide to nationalize a company if it operates contrary to the interests of the public.
Exploring Mixed Economies
A mixed economic system has features of both a command economy and a free-market system. It is controlled to some degree by the government but growth is driven by the forces of supply and demand and the involvement of the public and private sectors.
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 stimulus packages.
Generally, government regulation in a mixed economy is limited, compared to the heavy government regulation and control in a command economy. Corporations are allowed to profit, but levels of profit might be affected by taxation or tariffs.
Practical Examples of Mixed Economies
Suppose the ABC Company, a toy manufacturer, exists in a mixed economic system. The prices and production levels and manufacturing methods are controlled by ABC but can be affected by consumer behavior (demand) and producer supply.
It turns out that ABC has been using too many of the natural resources in the state where it is located. The government decides to intervene by imposing certain restrictions because excessive use of vital resources goes against the public good.
Unlike the case of the command economy, a mixed economy may not have large surpluses or shortages. That’s because production is driven largely by a producer’s supply of a product and demand for it by consumers, so the manufacturing and distribution of goods and services rolls out as needed.
Prices also are dictated by supply and demand rather than by the government. The right of a company or individuals to profit and the freedom to develop innovations and bring them to market are also key elements of the mixed economic system.
Most of the main economies in the world are now mixed economies, which operate under a combination of socialism and capitalism.
Real-World Examples of Command and Mixed Economies
North Korea’s Command Economy
North Korea ranks as the least economically free country in the Heritage Foundation’s 2023 Index of Economic Freedom. All of its economic activity is completely controlled by its governing political party. The country exists on the edge of bankruptcy.
Per the definition of a command economy, North Korea plans, establishes, and controls production levels for the majority of products and services. Industries owned by the state are responsible for almost all of the nation’s gross national product.
Entrepreneurial activity is practically nonexistent. A majority of the country’s population lives in poverty. And it is unlawful to leave the country (or travel domestically) without the government’s permission.
The United Kingdom’s Mixed Economy
A leading global economy, the United Kingdom ranks as the 28th most economically-free nation in the aforementioned 2023 Index of Economic Freedom. As in a mixed economy, its economic activity is driven primarily by private enterprise, with some government involvement in areas of healthcare and social welfare.
The service sector, and most notably banking, insurance, and business services, are major areas for the nation’s GDP growth. At the same time, the country is trying to rein in government spending and public debt to improve the quality of its public finances.
With its firm belief in free markets, the UK has signed three new trade agreements since its departure from the European Union and continues to pursue additional treaties.
What Type of Economy Is Most Common Today?
The mixed economy, in which private enterprise and government involvement are present, is the most common.
What Advantages Does the Mixed Economy Offer?
Among others things, a mixed economy supports the individual freedom to work as desired and achieve as much as possible. It reinforces consumer choice and fair prices through supply and demand. It also favors the private ownership of businesses and industries.
Is the Government a Problem in a Mixed Economy?
Sometimes. An important aspect of the government/private enterprise mix is getting the right amount of government control or intervention at the right time so that economic activity isn’t affected negatively.
The Bottom Line
A command economy features extensive government control over nearly every aspect of economic activity, including production and the prices at which goods are sold. It’s seen in systems where state planning replaces market choice. A mixed economy balances government intervention with market forces, using tools like fiscal and monetary policy while allowing private businesses and consumers to drive most economic decisions. Recognizing how these systems differ matters because it affects how individuals invest, how businesses operate, and how opportunities and risks emerge across different countries.