A command economy, or a planned economy, is where the big decisions are made at the centre by the government.
In an economic system the main decisions are, for example, allocating resources like labour, capital and oil. Prices, too, are controlled. In a command economy, these decisions are taken by a central body, usually the government. This system contrasts that of a market economy where all the economic actors involved take decisions. The benefit of a planned economy is that the planning body has (supposedly) perfect information, and can make a better decision than in the market economy. Countries at war sometimes command their people to make things the war needs.
Friedrick von Hayek, a 20th-century economist, pointed out that it is not possible for the planning body to have perfect information. For this reason, the decisions taken by this body will be wrong, as it is not possible to foresee all possible events. Once the decision has been taken there is only a small margin to vary the production; this means that a planned economy cannot adapt to a change as rapidly as a market economy. According to Ludwig von Mises, there is no competition, and there are no reasons to innovate or to look for different solutions to a problem, in a planned economy.
Communism is a type of government system that would use a command economy. Countries with command economies include Burma, Cuba, Iran, Liberia, and North Korea. Formerly, the Soviet Union and China were command economies, and are now mixed economies where the government still has a major influence.
Command economy Facts for Kids. Kiddle Encyclopedia.