Whereas in a
market economy, economic inputs and outputs are largely determined by the laws of
supply and demand, in a
command economy, the government attempt to determine production levels, prices, investment, consumption levels, and ratio of goods produced. In theory, this would allow the state to produce goods in quantity on command, but this rarely works in practice because an increasingly complex regulatory superstructure is required to keep production going, capital flowing, and consumers consuming at appropriate levels.
The classic examples of command economies were the USSR under Stalin and the People's Republic of China during Mao's Great Leap Forward. Both of these command economies failed dramatically, and it has since become conventional wisdom that command economies simply don't work. This is not strictly true, however. Command economies can become critical to success in times of war. All the major combatants in World War II for example, including the US and Great Britain, relied on heavily command economies. Command economies can also provide relief in times of deep financial crisis. Thus Roosevelt's New Deal temporarily ameliorated the effects of The Great Depression in 1930s America, and command economics were largely responsible for Japan's dramatic economic recovery following its devastation in World War II.