A command economy, also called a centrally planned economy, is one where the state decides what is produced, in what quantities, at what prices and for whom, instead of leaving those decisions to markets. North Korea is the only country that still runs something close to a full command economy. Cuba keeps most of the system but has opened growing gaps for private business. China, Vietnam and Laos are governed by communist parties but have moved to mixed economies, where markets set most prices and the state keeps control of key industries.
The Soviet Union built the model, and at its peak it covered about a third of the world's population. What follows explains how central planning works, where it survives and why nearly every country that used it has given it up.
What Planners Decide Instead of Prices
In a market economy, prices do the coordinating. If something is scarce, its price rises, which tells producers to make more and buyers to use less. A command economy replaces that signal with a plan. The Soviet version was run by Gosplan, the State Planning Committee, founded in 1921. From the mid-1930s it worked from a large new building on Okhotny Ryad, a few hundred metres from the Kremlin, which now houses Russia's State Duma and still carries the Soviet coat of arms on its facade. From 1928 it produced five-year plans that set output targets for whole industries. Ministries broke those down into quotas for individual factories, and the state fixed prices, wages and the allocation of raw materials.
The main tool was the "material balance". For each important product, planners listed every source, such as mines, factories and imports, and every user, and tried to make the two columns match. With tens of thousands of products, each depending on others, the task was vast. When a steel target was raised, the coal, iron ore, railway wagons and workers needed to meet it all had to be found somewhere in the plan as well.
North Korea: The Last Near-Complete Example
North Korea still has central planning, state ownership of almost all enterprises and a state distribution system, the Public Distribution System, that is supposed to provide food rations. In practice, the system broke down during the famine of the mid-1990s, which killed at least hundreds of thousands of people; estimates run from about 240,000 to more than 3 million. As rations stopped arriving, households started trading in informal markets called jangmadang. More than 400 such markets now operate with official tolerance, and most families depend on them for a large part of their income.
The government has swung between accepting the markets and cracking down on them. In 2002 it raised official prices and wages to bring them closer to market levels. In 2009 it revalued the currency and limited how much old money could be exchanged, which wiped out traders' cash savings. The Kaesong Industrial Complex, where South Korean companies employed North Korean workers just north of the border, was the main joint experiment with outside business until it closed in 2016. North Korea is therefore a command economy on paper, with a semi-legal market economy underneath that most people rely on to survive. The government of North Korea explainer covers the political system that sits on top of it.
Cuba: Planning Under Strain
Cuba nationalised almost all business after the 1959 revolution and ran a Soviet-style plan backed by Soviet subsidies, mainly through buying Cuban sugar above the world price. When those ended in 1991, the economy shrank by around a third within three years, a crisis the government called the "Special Period". Tourism, remittances and joint ventures with foreign companies were allowed in to fill the gap.
Change has been slow and uneven. In 2011 the Communist Party approved guidelines that allowed Cubans to buy and sell homes and cars and widened self-employment. In January 2021 the government merged its two currencies, ending the convertible peso that had run alongside the ordinary peso since 1994. The move was followed by severe inflation. In February 2021 it opened almost every occupation to private work, and from September 2021 it allowed small and medium private companies, known as mipymes, for the first time since 1968. The state remains the largest employer and still plans and prices most goods, but Cuba now has a private sector that planners have to work around.
The most visible survivor of the old system is the libreta de abastecimiento, the ration book introduced in 1962. It still entitles every household to a monthly quota of rice, beans, sugar, cooking oil and other staples at heavily subsidised prices, but in recent years the quotas have covered only part of a month's needs. Shortages in state shops are what push Cubans to private sellers and to remittances from relatives abroad.
China, Vietnam and Laos: Planning Without Command
China began moving away from command planning in 1978 under Deng Xiaoping. The first change was in farming: the household responsibility system let families sell whatever they grew above a quota. In 1980 China created special economic zones, beginning with Shenzhen next to Hong Kong, where foreign investment and market pricing were allowed first. In the countryside, township and village enterprises, owned by local governments but run for profit, grew rapidly during the 1980s. Prices were then freed step by step, with a "dual-track" system in which goods sold within the plan had fixed prices and anything produced beyond it sold at market prices. China still publishes five-year plans, and the 15th covers 2026 to 2030. But these are now guidance plans, which set priorities and steer investment rather than setting output for individual factories. State-owned companies still dominate banking, energy, telecoms and heavy industry.
Vietnam made the same shift with its Đổi Mới (renovation) reforms of December 1986, launched when inflation was running in the hundreds of percent. Laos adopted its New Economic Mechanism the same year. Both are one-party states with mixed economies, and Vietnam has since become one of the fastest-growing economies in Asia. Our list of communist countries explains how the five remaining communist states differ.
Why Central Planning Ran Into Trouble
The central problem is information. In 1920 the economist Ludwig von Mises argued that without market prices, planners could not calculate whether one way of producing something was cheaper than another. In 1945 Friedrich Hayek added that the knowledge an economy runs on is spread across millions of people and cannot all be collected in one office. The Hungarian economist János Kornai described the result in 1980 as a "shortage economy". Firms hoarded materials in case of shortages, queues became normal, and goods nobody wanted piled up alongside goods nobody could find.
Targets also distorted behaviour. A plan measured in tonnes encouraged heavy products, and one measured in units encouraged small ones. At its worst, planning combined with political pressure caused disaster. China's Great Leap Forward of 1958 to 1962 set impossible grain and steel targets and led to a famine that killed tens of millions.
Command economies could achieve fast results where the goal was simple and measurable. The Soviet Union industrialised rapidly in the 1930s, largely at its peasants' expense, launched Sputnik in 1957 and put the first person in orbit in 1961. The difficulty lay in everyday consumer goods, which depend on millions of individual choices that a planning office cannot track.
Reform Attempts and the Exit From Planning
The Soviet leadership knew the system had problems and tried several times to fix it without giving up planning. The Kosygin reform of 1965 judged factories on sales and profit rather than gross output alone. It faded within a few years because ministries kept the real control. Mikhail Gorbachev's Law on State Enterprise of 1987 gave factories more independence but kept state prices. The result was worse shortages, because firms could now raise wages and choose their output while prices still could not signal what was scarce. By 1991 the Soviet economy was contracting sharply, and the union dissolved at the end of that year.
Eastern Europe left in a hurry. Poland freed most prices overnight on 1 January 1990 under finance minister Leszek Balcerowicz, a policy that became known as shock therapy. Output fell sharply at first. Poland then became one of the first post-communist economies to return to growth, in 1992. Czechoslovakia privatised much of its industry through vouchers distributed to citizens. Yugoslavia had already experimented since the 1950s with "self-management", in which workers' councils ran enterprises within a looser plan, and it sat between the Soviet model and a market economy until the federation broke apart.
Where Planning Shows Up in Market Economies
Market economies also use command methods in emergencies. During the Second World War, the United States' War Production Board stopped civilian car production in 1942 and directed factories to build tanks and aircraft. Britain's food rationing continued until 1954. France ran indicative planning through the Commissariat général du Plan, founded by Jean Monnet in 1946, with targets that guided investment without ordering it. Many market economies also keep state-owned companies in oil, railways or utilities.
That is why economists treat economic systems as a spectrum rather than two boxes. At one end is North Korea's plan with markets underneath. At the other are open market economies with regulation and public services. Most countries sit somewhere between, as our overview of the four types of economies sets out.