command economy

Economy planned and directed by government, where resources are allocated to factories by the state through central planning. This system is unresponsive to the needs and whims of consumers and to sudden changes in conditions (for example, crop failure or fluctuations in the world price of raw materials).

For example, in the former USSR, state planners decided what was to be produced. They passed orders down to factories, allocating raw materials, workers, and other factors of production to them. Factories were then told how much they should produce with these resources and where they should be sent. If there was a shortage of goods in the shops, then goods would be rationed through queuing.

In theory, the time and money spent on advertising and marketing in a free-market economy can in a command economy instead be devoted to producing something useful. However, historical experience in the 20th century suggests that planned economies have not produced as high growth as free-market or mixed economies. In practice most economies tend to be mixed, combining free-market policies with some state intervention.