V (1) Modern economic systems

I] Centrally planned economy:

The centrally planned economy is by no means confined to ancient and medieval times. In modern times, authority is used as the most powerful instrument not only for solving economic problems – consumption, production, distribution and exchange – but also enforcing economic change i.e. from a backward economy to a modern industrially and technically advanced one.

The centrally directed economy earlier was based on customs conventions and traditions and economic change was slow.

The present centrally planned economy is based on deliberate economic decisions that bring about a radical economic change – USSR, China, East European countries. At present only China is a centrally directed economy.

Features of centrally planned economy:

1.The state on the central authority has absolute control over the economy and deliberately and consciously makes all economic decisions  relating to various problems of the country e.g. what, how to produce, how much to produce, how to distribute it etc. so that there is systematic effort to achieve economic progress.

2. There is no system of private property. Income from private property is not allowed.  Income can only be earned through work. The state or the central authority owns all the means of production i.e. collective ownership of land, capital and other resources.  Though the state does not own the labour it completely controls it.

3. A comprehensive survey of all the resources, capacities and needs of the economy are made by statistical agencies.

4. The state or the central planning authority determines all the short term and long term aims (goals) and objectives on the basis of this survey i.e. the economic, social and political goals to bring about economic development. The very purpose behind planning is to achieve these objectives and therefore it involves major policy decisions. There is no exploitation because it is a welfare state.

5. There is a permanent organisation known as the centralised planning authority that prepares a plan on the basis of the decided aims and objectives.

It is a team of experts competent to take the right decisions. It represents the country as a whole.  It co-ordinates the various agencies engaged in the formulation and implementation of different programmes. Therefore it provides effective control and implementation (agencies also deliver resources to various enterprises and collect their products for distribution according to the central direction).

6. There is comprehensive planning which covers every aspect of the citizens life i.e. totalitarian planning.

This plan covers financial and physical details. It covers all the sectors in the country.

It decides how to allocate resources between various competing ends. It settles the minutest details of how much and how to cultivate land for producing food grains. It decides the quality and quantity of agricultural production.

How to utilise economically the available labour in all the sectors of the economy, how to allocate jobs to workers, their wages, education, training for talents aptitude and capacity.

How to achieve balanced sectoral growth and it determines the savings, investment and capital formation in the country – makes maximum and proper utilisation of resources to achieve the aims.

7. State or the C.P.A. assigns jobs to the workers. They have no freedom in the choice of occupation. The workers have to work in public enterprises or collective farms. Most of them are industrial employees or wage-earners. They cannot start a business.

8. Producers have to abide by the decisions of the C.P.A. If individuals do start a production, it is only with the permission of the C.P.A.  The agencies of the C.P.A. provide the unit with resources and collect the produce for distribution and therefore there is no profit motive.

9. After the decisions regarding the production are made, prices are fixed in such a way that the necessary demand is created for the same.

10. Prices are fixed by the C.P.A. Prices are suppressed and administered therefore there is no important role for the price mechanism in the allocation of resources. Prices are used by the state as tools for planning.

11. Production is utility oriented and distribution is need-based.

12. Money plays a passive role. It serves only as a unit of account and measures relative values in the system.

Credit, money and profits are used for controlling enterprises. They are not the basis of transactions.

13. Workers are paid in terms of money and are required to spend it on the goods and services produces, which are sold at government fixed prices. Therefore the money paid as wages flows back to the Government as consumption expenditure.

14. Production, consumption, savings, investment, capital, formation decisions are taken by the government through economic plans (individuals cannot invest or undertake production without government consent.)

15. The government demands obedience from the citizen. Those who do not obey or do not co-operate with the government those who criticise the government are punished.

16. This system therefore is based on social preference rather than individual preference.

17. The economic plans also imply a time-limit i.e. the programmes have to be i9mplemented within a specified time. This time-limit is essential because otherwise it would not be possible to achieve the desired aims and objectives.

18. Merits of this type of planning are

a) Consistent coherent and balanced plans can be made to develop the economy.

b) The plan is implemented through systematic control and therefore no waste in the use of resources.

c) Production plans can be more exact and therefore rapid economic growth is possible.

d) The distribution of income is also planned and therefore there is a greater equality in the distribution of income and wealth.

e) Plan targets are achieved.

f) No exploitation – no cyclical variation.

g) No poverty therefore better standard of living.

h) No unemployment.

i) Economic stability.

j) More economic use of resources therefore maximum social welfare.

k) No monopoly.

l) The social needs of the people are catered to.

19. Demerits are :-

a) There is no private property.

b) There is no freedom of enterprise – the managers of industrial enterprise have to work according to government orders.

c) There is no freedom of consumption or occupation i.e. consumers can consume what is allotted to them through rationing i.e. what is supplied by the government.  Workers can work only in those factories or industries or sectors where they are just ordered to do whether they are fit or not.

d) Planning is rigid and no changes can be made without affecting the whole plan therefore it is expensive.

e) Fulfilling targets may become difficult because of unpredicted events.

f) Officials would be interested in achieving the aims and objectives rather than minimising the cost of production and therefore become inefficient.

g) Waste of resources likely due to overproduction of some goods and underproduction of others and therefore the welfare of the masses will be affected.

h) Overall and complete control by the government may lead to selfdom.

20. Conclusion

In order to reduce the misallocation of resources there was a tendency among the communist countries to introduce some sort of a “price mechanism” by providing freedom of consumption and occupation and also greater freedom is given to the managers of public enterprises to manage them efficiently. At present China is the only socialist country in the world.


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