UNIT 1
NATURE OF ECONOMICS SYSTEM
An economic system, or economic order, is a system of production, resource allocation and distribution of goods and services within a society or a given geographic area. It includes the combination of the various institutions, agencies, entities, decision-making processes and patterns of consumption that comprise the economic structure of a given community.
As such, an economic system is a type of social system. The mode of production is a related concept. All economic systems have three basic questions to ask: what to produce, how to produce and in what quantities and who receives the output of production.
The study of economic systems includes how these various agencies and institutions are linked to one another, how information flows between them and the social relations within the system (including property rights and the structure of management).
The analysis of economic systems traditionally focused on the dichotomies and comparisons between market economies and planned economies and on the distinctions between capitalism and socialism. Subsequently, the categorization of economic systems expanded to include other topics and models that do not conform to the traditional dichotomy. Today the dominant form of economic organization at the world level is based on market-oriented mixed economies.
THE FUNCTIONS OF ECONOMIC SYSTEM:
Economic System everywhere may perform similar functions. These functions may be traditional or non-traditional. The traditional functions include the following:
a. What to produce
b. How to produce i.e. what method of factor combination to adopt in order to maximize the use of the resources
c. For whom to produce
d. How to distribute the goods and services produced.
Economists have realized the importance of economic growth and the attainment of full employment, if the system must achieve the best use of its scarce resources. Attainments of full employment and high economic growth have become the non-traditional functions.
CAPITALISM:
Economic System everywhere may perform similar functions. These functions may be traditional or non-traditional. The traditional functions include the following:
a. What to produce
b. How to produce i.e. what method of factor combination to adopt in order to maximize the use of the resources
c. For whom to produce
d. How to distribute the goods and services produced.
Economists have realized the importance of economic growth and the attainment of full employment, if the system must achieve the best use of its scarce resources. Attainments of full employment and high economic growth have become the non-traditional functions.
Merits of Capitalism:
The main merits and advantages of capitalism are as follows:
Production According to the Needs and Wishes of Consumers:
In a free market economy consumer needs and wishes are the upper most in the minds of the producers. They try to produce goods according to the tastes and liking of the consumers. This leads to maximum satisfaction of the consumers as obtained from his expenditure on the needed goods.
Higher Rate of Capital Formation and More Economic Growth:
People under capitalism have the right to hold property and pass it on in inheritance to their heirs and successors. Owing to this right, people save a part of their income so that it can be invested to earn more income and leave larger property for their heirs. The rate of capital formation increases when savings are invested. This accelerates economic growth.
There is Complete Freedom of Choice in a Capitalist Economy:
Economic freedom means the right to earn and retain property. It also means the freedom of enterprise and choice of occupation. This leads to the automatic channelization of the country’s man power resources in different vocations. There is no need to direct people or force them. Further, there is the freedom of contract which ensures smooth and flexible functioning of different production units.
Optimum Utilization of Resources Available:
The limited resources of the community are put to the most economical uses with as little waste as possible. There is keen competition among producers and entrepreneurs to produce and sell goods. Every producer and entrepreneur tries to use the productive resources at his disposal in the most economical manner in order to make maximum profit.
Efficient Production of Goods and Services:
Due to competition every entrepreneur tries to produce goods at the lowest cost and of a durable nature. Entrepreneurs also try to find out superior techniques of producing the goods consumers get the highest quality goods at the least possible cost because the producers are always busy in making their production methods more and more efficient.
Varieties of Consumer Goods:
Competition is not only in price but also in the shape design, colours and packing of products. Consumers therefore get a good deal of variety of the same product. They need not be given limited choice. It is said that variety is the spice of life. Free market economy offers variety of consumer goods.
In Capitalism there is no Need of Inducement or Punishment for Good and Bad Production:
A capitalist economy provides encouragement to efficient producers. The able an entrepreneur is, the higher is the profit he obtains. There is no need to provide any kind of inducement. The price mechanism punishes the inefficient and rewards the efficient on its own.
It Encourages the Entrepreneurs to Take Risks and Adopt Bold Policies:
Because by taking risk they can make higher profits, Higher the risk, more the profit.
They also make innovations in order to cut their costs and maximise their profits. Hence capitalism brings about great technological progress in the country.
It Provides the Best Atmosphere for Inventions:
Entrepreneurs are always on the look-out for new ideas to be applied to production. They try to beat each other in innovations. This leads to rapid expansion, greater employment and income. The investors are suitably rewarded with their royalties, through the copy right. Similarly, innovators enjoy the benefits of their research, through the system of patents and trade-marks.
It Provides a Good Deal of Flexibility:
This type of economy can automatically change with the circumstances. During war time market regulations are adopted to provide for the war machine. As soon as there is peace, the economy reverts to the free functioning of markets.
De-Merits of Capitalism:
The capitalist economy has been showing signs of stress and strain at different times. Some have called for a radical reform of the free-market economy. Others like Marx have considered capitalism economy to be contradictory in itself. They have predicted the ultimate doom of capitalist economy after a series of deepening crisis.
The main de-merits or dis-advantages of capitalist economy are as follows:
Inequality of Distribution of Wealth and Income:
The system of private property acts as a means of increasing inequalities of income among different classes. Money begets money. Those who have wealth can obtain resources and start big enterprises. The property less classes have only their labour to offer. Profits and rents less classes have only their labour to offer. Profits and rents are high.
Wages are much lower. Thus the property holders obtain a major share of national income. The common masses have their wages to depend upon. Although their number is overwhelming their share of income is relatively much lower.
Class Struggle as Inevitable in Capitalist Economy:
Some critics of capitalism consider class struggle as inevitable in a capitalist economy. Marxists point out that there are two main classes into which capitalist society is divided. The ‘haves’ which are the rich propertied class own the means of production. The “have not’s” which constitute the wage earning people have no property.
The ‘haves’ are few in number. The ‘have not’s are in majority. There is a tendency on the part of the capitalist class to exploit the wage-earners. As a result there is a conflict between the employers and the employees which leads to labour unrest. Strikes, lockouts and other points of tension. All this have a very bad effect on production and employment.
Social Costs are Very High:
A capitalist economy industrialises and develops but the social costs of the same are very heavy. Factory owners running after private profit do not care for the people affected by their production. The environment is polluted because factory wastes are not properly disposed of. Housing for factory labour is very rarely provided with the result that slums grow around big cities.
Unnecessary Multiplicity and too Much of Competition:
Consumers have to pay a high price for their freedom of choice and provision of variety. There is sometimes too much competition leading to unnecessary high costs of production because competitors bid the prices of resources too high. There is wasteful advertisement. Sometimes sub-standard goods are highly advertised and the consumer is deceived.
Instability of the Capital Economy:
A capitalist economy is inherently unstable. There is recurring business cycle. Sometimes there is a slump in economic activity. Prices fall, factories close down, workers are rendered unemployed. At other times business is brisk, prices rise, fast, there is a good deal of speculative activity. These alternating periods of recession and boom lead to a good deal of wastage of resources.
Unemployment and Under-employment:
A capitalist economy has always some unemployment because the market mechanism is slow to adjust to the changing conditions. Business fluctuations also result in a large part of the labour force going unemployed during depressions. Not only this, workers are not able to get full time employment except under boom conditions.
Working Class does not have Adequate Social Security:
In a capitalist economy, the working class does not have adequate social security, commodity, the factory owners do not provide for any pension, accident benefits or relief to the families of those who die in employment. As a result, widows and children have to undergo a good deal of suffering. Governments are not in a position to provide for adequate social security in over populated less developed countries.
Slow and Unbalanced Growth:
A free market economy may work automatically but the rate of growth is rather slow. Moreover as the economy progresses, there is no all round development. Some areas develop much faster while others remain backward. In¬dustries may expand fast while there may be poverty in agriculture.
No Bargaining Capacity of Labourers hence Exploitation:
In a capitalist economy, workers are often paid a wage rate below their productivity. This is because; they do not have the bargaining power to get their due from the rich capitalist. Women and children are often paid a very low wage rate. There is no equal pay for equal work.
Growth of Monopolies with their Evils:
A capitalist economy is competitive only in theory. In practice, the few competitors often arrive at an understanding and exploit the consumer. Sometimes the bigger firms buy or eliminate the smaller firms to establish their supremacy in particular lines or production. They charge high prices and do not have any compulsion to improve efficiency of production. Thus, the much talked about efficient working of a capitalist economy becomes a myth.
SOCIALISM:
Socialist Economy
In the 1840s a new type of economic theory emerged in the literary circles known as “The Communist Manifesto”. Written by Karl Marx with Fredric Engels it propounded a new and unique concept of an economy of a country. This came to be known as a socialist economy. Let us learn about it some more.
In a socialist economy, the setup is exactly opposite to that of a capitalist economy. In such an economy the factors of production are all state-owned. So all the factories, machinery, plants, capital, etc. is owned by a community in control of the State.
All citizens get the benefits from the production of goods and services on the basis of equal rights. Hence this type of economy is also known as the Command Economy.
So basically in a socialist economy, private companies or individuals are not allowed to freely manufacture the goods and services. And the production occurs according to the needs of the society and at the command of the State or the Planning Authorities. The market and the factors of supply and demand will play no role here.
The ultimate aim of a socialist economy is to ensure the maximization of wealth of a whole community, a whole country. It aims to have an equal distribution of wealth amongst all its citizens, not just the welfare of its richest companies and individuals.
Features of a Socialist Economy
1] Collective Ownership of Resources
In a socialist economy, the entire foundation is based on socio-economic objectives. The welfare of the people takes precedence over the profit motive and so all major factors and resources of production are in the ownership of the state itself. Only small farms and trading firms are kept under private ownership.
2] Central Economic Planning
In a socialist economy, there is always a central planning committee. This is the authority who will decide what is to be produced using the state resources. They will also decide the quantity and the method of production. The ultimate aim of such authority is to fulfill the socio-economic aims of the State.
3] No Choice for Consumers
Every coin has two sides. So in a socialist economy, every citizen is guaranteed basic goods like food, clothing, shelter, etc. But the consumers do not have absolute freedom of choice. They cannot demand the products they wish, they must choose from the products the state manufactures.
Since there is no free market, there is no concept of preference or demand and supply. Also while every citizen will get work, he is not able to freely choose his occupation.
4] Equal Distribution of Income
This is one of the main features of a socialist economy. The setup does not allow one person to accumulate a lot of wealth. So the gap between the rich and the poor is much narrower. And all their citizens enjoy equal opportunities and facilities like education, public healthcare, etc. So there is no discrimination between different classes of people.
5] Absence of Market Forces
The motive here is the welfare of the people. Since there is no profit motive price mechanism will not influence any product decisions. The pricing structure in a socialist economy is ‘administered pricing’ which is set by the planning commission on the basis of their socio-economic objectives.
Demerits of a Socialist Economy
Socialism is a breeding ground for corruption, red-tapism, and favouritism. The State and the Central Planning Authority hold too much of the power which they often abuse for their personal gains.
It essentially restricts the freedom of its citizens. They do not have a choice in the products they wish to buy, or the jobs they want to do. Their freedom is further curtailed by the inability to own any private property.
Every citizen has the guarantee of a job. So socialism does not promote hard work or any creativity in its citizens.
Administered prices are not the most efficient. They are not based on market forces. Thus the economic and scientific allocation of resources is impossible in this system.
Sometimes under socialism, we end up creating state monopolies which can get very dangerous with time
MIXED ECONOMY:
Did you know that all economies of the world are in essence mixed economies! Capitalism and socialism are both two ends of the spectrum. In the real world, we take the middle road. Combining features of both the capitalist economy and the socialist economy we arrive at a mixed economy. Let us look at some features and advantages.
As the name suggests a mixed economy is the golden combination of a command economy and a market economy. So it follows both price mechanism and central economic planning and oversight.
The means of production are held by both private companies and public or State ownership. And while market forces decide the price, demand, supply, etc there is some government oversight to prevent monopolization and discrimination.
The idea behind a Mixed Economy is to tackle the demerits of both a capitalist economy and a socialist economy and come up with a unique system. It appreciates the concept and the freedom of private ownership of properties and resources.
But at the same time, it understands the disadvantage of unchecked capitalism. Hence it proposes government oversight and economic planning so there is no discrimination against the poorest citizens.
Features of Mixed Economy
Coexistence of All Sectors: In a mixed economy all three sectors coexist in harmony, i.e. private sector, public sector, and joint sector. The joint sector is jointly run by the government and private companies, with at least 51% ownership belonging to the state.
Cooperative Sector: In a mixed economy another sector exists, the cooperative sector. The main aim of the formation of this sector is so that the government can provide financial assistance to cooperative societies involved in warehousing, agricultural, dairy industry, etc.
Freedom and Control: Here all individuals have the freedom to produce goods and products, hold property, choose their occupation and choose or demand products/services they want. But to keep a check on monopolistic practices and discrimination of the lower sectors of society the state maintains some control.
Economic Planning: In a mixed economy we have a central planning authority. All sectors of the economy follow the economic plan of the state to achieve various targets and goals. The plan is not rigid but more of a general guideline for economic growth and prosperity of the nation.
Social Welfare: One of the main aims of a mixed economy is social welfare. It aims to reduce the wealth gap in the country and fight the inequalities of our society. The aim is to reduce poverty and unemployment. And at the same time also improve social security, public health care, public education system, etc.
Merits of a Mixed Economy
Freedom the citizens enjoy. The economic freedom of ownership of property and choice of goods and services.
Ownership and existence of private producers also increase capital formation in the country. There is an incentive to do better and innovate as well.
Price mechanism prevails. So the allocation of resources is more scientific and beneficial to the economy.
Also enjoys the advantages of central economic planning. This will help the economy grow rapidly and in the correct direction.
There is healthy competition in the market. There is no cut-throat competition and adverse tactics due to government oversight. Also, there is no absolute lack of competition which is disadvantageous.
Demerits of Mixed Economy:
The main demerits of mixed economy are as follows:
Un-stability:
Some economists claim that mixed economy is most unstable in nature. The public sector gets maximum benefits whereas private sector remains controlled.
Ineffectiveness of Sectors:
Under this system, both the sectors are ineffective in nature. The private sector does not get full freedom, hence it becomes ineffective. This leads to ineffectiveness among the public sector. In true sense, both sectors are not only competitive but also complementary in nature.
Inefficient Planning:
There are no such comprehensive planning in mixed economy. As a result, a large sector of the economy remains outside the control of the government.
Lack of Efficiency:
In this system, both sectors suffer due to lack of efficiency. In public sector it is so because government employees do not perform their duty with responsibility, while in private sector, efficiency goes down because government imposes too many restrictions in the form of control, permits and licenses, etc.
Delay in Economic Decisions:
In a mixed economy, there is always delay in making certain decisions, especially in case of public sector. This type of delay always leads to a great hindrance in the path of smooth functioning of the economy.
More Wastages:
Another problem of the mixed economic system is the wastages of resources. A part of funds allocated to different projects in public sector goes into the pocket of intermediaries. Thus, resources are misused.
Corruption and Black Marketing:
There is always corruption and black marketing in this system. Political parties and self- interested people take undue advantages from public sector. Hence, this leads to emergence of several evils like black money, bribe, tax evasion and other illegal activities. All these ultimately bring red-tapism within the system.
Threat of Nationalism:
Under mixed economy, there is a constant fear of nationalism of private sector. For this reason private sector does not put into use their resources for the common benefits.
A centrally planned economy, also referred to as a command economy, is an economic system within which a central authority, like a government, makes economic decisions regarding the manufacturing and therefore the distribution of products. Centrally planned economies are different from market economies, during which such decisions are traditionally made by businesses and consumers.
The production of products and services in command economies is usually done by state-owned enterprises, which are government owned companies. In centrally planned economies, which are sometimes mentioned as "command economies", prices are controlled by bureaucrats.
In a centrally planned economy, major economic decisions are made by a central authority.
Centrally planned economies stand in contrast to promote economies where large numbers of individual consumers and profit-seeking private firms operate most or all of the economy.
Centrally planned economies are criticized by many economists as affected by various economic problems associated with poor incentives, informational constraints, and inefficiency.
Centrally Planned Economy
Understanding Centrally Planned Economies
Most developed nations have mixed economies that combine aspects of central planning with the free market systems promoted by classical and neoclassical economists. The bulk of these systems skew heavily toward free markets, where governments intervene only to implement certain trade protections and coordinate certain public services.
Theory of Central Planning
Advocates of centrally planned economies believe central authorities can better meet social and national objectives by more efficiently addressing egalitarianism, environmentalism, anti-corruption, anti-consumerism and other issues. These proponents think the state can set prices for goods, determine what percentage items are produced, and make labor and resource decisions, without necessarily expecting private sector investment capital.
Central economic planning naysayers believe central entities lack the required bandwidth to gather and analyze the financial data required to form major economic determinations. Furthermore, they argue that central economic planning is in line with socialist and communist systems, which traditionally cause inefficiencies and lost aggregate utility.
Free market economies run on the idea that people seek to maximise personal financial utility which businesses strive to get the most possible profits. In other words: all economic participants act in their own best interests, given the consumption, investment, and production options they face before them. The inherent impulse to succeed consequently assures that price and quantity equilibrium are met which utility is maximized.
India’s commitment to planned economic development may be a reflection of our society’s determination to enhance the economic conditions of our people and an affirmation of the role of the govt in bringing about the growth performance through a range of social, economic and institutional means. The main objective of the Indian planning is to attain broad based improvement within the living standard of society at large. Rapid growth is important for expanding incomes and employment. It provides the specified resources to finance programmes of social uplift.
Economic Planning – Meaning and Features
The term ‘economic planning’ has been used very loosely in economic literature. Therefore the term has been often confused with communism, socialism or economic development. Economists aren't unanimous with reference to the term ‘economic planning’. Despite the aforesaid situation, efforts are made to elucidate the term in precise words.
Economic planning is that the making of major economic decision, what and how much is to be produced, and to whom it's to be allocated by the conscious decision of a determinate authority, on the idea of a comprehensive survey of the economic system as an entire .
Professor Lewis has mentioned six different sense during which the term economic planning is employed in economic literature. “First, there's a vast literature in which it refers only to the geographical zoning of things , residential buildings, cinemas and the like. Sometimes this is often called town and country planning and sometimes just planning. Secondly, ‘planning’ means only deciding what money the govt will spend within the future, if it's the money to spend.
Thirdly, a ‘planned economy’ is one during which each production unit (or firm) uses only the resources of men, materials and equipment allocated thereto by quota and disposes of its product exclusively to persons or firms indicated thereto by central order. Fourthly, ‘planning’ sometimes means any setting of production targets by the govt , whether for private or public enterprise.
Most governments practice this sort of planning if only sporadically, and if just for one or two industries or services to which they attach special importance. Fifthly, here targets are set for the economy as an entire , purporting to allocate all the country’s labour, foreign exchange, raw materials and other resources between the varied branches of the economy.
And, finally, the word ‘planning’ is usually used to describe the means which the govt uses to undertake to enforce upon private enterprise the targets which are previously determined.”
Major features of economic planning
(i) it's concerned with survey and diagnosis of this economic scenario.
(ii) It defines policy and objectives to be achieved in future.
(iii) It presents a macroeconomic projection for the entire economy.
(iv) It formulates strategies through which objectives are to be achieved.
(v) It guides and directs the economy along side the trail of growth and development.
(vi) It creates productive capacity within the country.
Some of the definitions of economic planning are:
Professor Robbins defines economic planning as “collective control or supervision of private activities of production and exchange.”
To Hayek, planning means, “the direction of productive activity by a central authority”.
According to Dr. Dalton, “Economic planning within the widest sense is that the deliberate direction by person’s responsible of large resources of economic activity towards chosen ends.”
Lewis Lordwin defined economic planning “as a scheme of economic organisation during which individual and separate plants, enterprises, and industries are treated as coordinate units of 1 single system for the aim of utilising available resources to realize the maximum satisfaction of the people’s needs within a given time.”
In the words of Zweig, “Economic planning consists within the extension of the functions of public authorities to organisation and utilisation of economic resources. . . . Planning implies and results in centralisation of the national economy.”
According to Dickinson who defines planning as “the making of major economic decisions-what and the way much is to be produced, how, when and where it's to be produced, to whom it's to be allocated, by the conscious decision of a determinate authority, on the basis of comprehensive survey of the economic system as an entire .”
(1). Direction and Inducement Planning:
(i) Planning by Direction:
Planning by direction is an integral a part of a socialist society. It assumes complete absence of laissez faire.
Therefore, it implies complete centralized planning with no features of a private economy. Under planning by direction, planning authority takes charge of the productive resources and use them in accordance with social priorities.
In other words, there's one central authority which plans, directs and orders the execution of the plan. Market forces aren't allowed to operate freely. Both saving and investment are strictly controlled by the design authority. The state holds the commanding posts in its hands by taking up entire private industrial and agricultural sectors and banking and transport. “Without such concentration, the state would lack the means to hold out the tasks of the plan. Provisions in the plan would be mere pious wishes without any guarantee of realization attached to them.”
Planning by direction is comprehensive and embraces the whole economic life of the country. Russia provides the simplest example of planning by direction. Under such planning, the targets for optimum planning are often realized. Full employment are often ensured. Oligopolistic and monopolistic tendencies can easily be eliminated.
Arguments against Planning by Direction:
1. It provides no consequence of actions:
Modern economic system is so complex that no planning authority can take quick and right decisions to tackle its old problems. Prof. Lewis says that, “in planning by direction, the result's always a shortage of something and a surplus of others.”
2. Imperfect Result:
It has also been noticed that planning by direction seems accurate and excellent at the time of formation but fulfillment is also upset because of some adverse circumstances, thus, it delivers imperfect and wrong results.
3. Inflexible:
In the case of direction planning, all schemes are finalized once for all and there's no scope for revision and modification. Thus, it becomes rigid. Prof. Lewis has rightly observed that “the price mechanism can adjust itself from day to day, the flow of money alters and prices and production respond, but the economy planned by direction is inflexible.”
4. Costly Affair:
Planning by direction requires the services of thousand of economists and an army of clerks for its implementation. In this way, it's costly affair to assign an outsized number of man power only for nothing while this job can simply be done by price mechanism.
5. Only Temptation for Higher Standardization:
No doubt, standardization is known engine of growth but, in fact, it's an enemy of happiness. It's going to be fatal just in case of foreign trade as a rustic can maintain foreign trade only if it's pioneering new ideas, inventing new goods and further making adjustment in its production to consumer reaction.
6. No Place for Consumer’s Sovereignty:
In direction planning, there's no place for consumer’s sovereignty. Both consumer and labour markets are determined by the planning authority.
(ii) Planning by Inducement:
Planning by inducement is according to democratic planning. It named the planning by manipulating the market. There's no compulsion and direction but only persuasion. Therefore, in planning by inducement, the state manipulates the market economy not by command but by providing inducement to secure its objectives.
The planning authority induces the people through monetary and fiscal measures and thru appropriate price policies to act in certain desired ways. In case, planning authority wishes to raise the extent of production, it can do so by granting subsidies. Similarly, control and rationing, is adopted just in case of scarcity.
Furthermore, so as to increase the speed of capital formation, planning authority can undertake public investments or encourage private investment. During a real sense, quantitative methods of credit control can help during a long way in maintaining the price level while qualitative method of credit control can help in diverting investment into desired channels.
Difficulties:
Prof. Lewis has acknowledged the following difficulties of planning by inducement:
1. Difficult to regulate Demand and Supply:
Shortage or surplus may be a common phenomena in an economy. Control and rationing could also be essential until supply is augmented to meet the increased demand. Under these circumstances, the efficiency of planning is judged not by excellence of the system of rationing and control . Shortages are often eliminated through control . However if planning by inducement isn't properly worked out, it merges into planning by direction.
2. Not Suitable to the need of Underdeveloped Countries:
Another difficulty of inducement planning is that it's not conductive to the need of less developed countries. In fact, these countries need faster rate of increase in investment and must enter desired channels. Therefore, the state must actively direct investment into such activities where social gain is bigger than the private gain.
3. Methods of Monetary and fiscal Control are Weak:
The instruments of monetary and fiscal control are too weak and mild to bring desired changes within the economy especially within the backward countries as its problems are quite different from the problems of well advanced countries.
(2). Democratic and Totalitarian Planning
(i) Democratic Planning:
Democratic Planning implies a system of economic order during which the authority that vests in the state is predicated on the support of common masses. The economists like Hayek and Lippman have acknowledged that planning is incompatible with democracy. Hayek says that “What was promised to us because the road to freedom was in fact the high road to serfdom.” Therefore, in democratic planning, the state doesn't control all the means of production and doesn't regulate economic operations of the private economy directly.
Features:
The main characteristics of democratic planning are as follows:
(i) As a consequence of democratic planning, mixed economy comes into being. Public and private Sectors operate side by side.
(ii) Central Planning Authority has direct control over Public Sector.
(iii) Private sector is indirectly controlled by the Central Planning Authority within the national interest through fiscal and monetary measures.
(iv) People enjoy economic, social and non secular freedom. People have freedom to conduct such economic activities as consumption, production, exchange, investments etc. within the national interest and social welfare of the community as an entire .
(v) People’s co-operation is sought within the preparation of the plan. There's close relationship between welfare of the people and economic activities.
(vi) one amongst the aims of planning is to co-ordinate the activities of public and private sectors.
(vii) People’s co-operation is sought in achieving the targets of the plan by giving them proper incentives.
(viii) Economic activities are conducted both to earn profit and promote welfare .
(ix) Under democratic planning there's importance both of price mechanism and government-decisions.
(x) Objectives of public sector and private sector are co-ordinated
(xi) it's quite flexible planning. There's enough scope to modify-the targets of private sector. Targets of Public Sector are subject to vary consistent with changed circumstances.
(xii) it's a bent of decentralization.
(xiii) Its main objective is to boost the quality of living of the people quickly. As such, consumer goods industries are given as much importance as heavy industries.
In democratic planning, the philosophy of democratic government is accepted because the ideological basis. Under this sort of designing , the choices of the private sector are influenced by incentives and partial controls through monetary and monetary policies. People are associated at every step within the formation and implementation of the plan. Unlike fascist planning, it's not based on force or coercion. In fact, democratic planning reconciles capitalism with government interference.
Since democratic planning may be a planning by the people, for the people and of the people, the state comes into the picture as a representative of the people but not as a separate identity. The state government gives wide publicity to understand the opinion of the people and tries its best to hunt the cooperation and active support of the people within the country. It seeks to avoid all clashes and tries to harmonies different opinions for the sake or welfare of the poor lots.
Therefore, different agencies, voluntary groups and other associations are closely linked and play pioneer role in its execution. Furthermore, the plan is fully debated within the Parliament, state legislature and within the private forums. The plan prepared by the planning commission isn't fully accepted but it also can be rejected or modified. Thus, the plan isn't forced from the above on the people but actually , it's planning from below.
(ii) Totalitarian (authoritarian) planning:
When planning is adopted under a planning, it's called totalitarian dictator. Under this planning, state fully controls the economic affairs, productive resources and economic decisions. The state is that the final authority in allocating the productive resources and it determines in accordance with the directions of the central authority.
The profits or production rather than being pocketed by the private capitalists attend the state for ameliorating the issues of the poor lots within the country. Totalitarian planning shows the entire socialization of entire economy . Under such planning, plans are formulated, controlled, financed and executed by the state and people need to do nothing in it. This sort of authoritarian planning has found within the writing of Maurice Dobb.
Features:
Totalitarian Planning has the subsequent features:
(i) Public sector alone functions in this type of planning. Government has full and direct control.
(ii) Central Planning Authority formulates a comprehensive plan for the whole economy.
(iii) there's no economic freedom and all economic decisions are taken by the govt .
(iv) People’s welfare are often sacrificed at the altar of rapid economic development of the country. Minimum needs of the people alone are catered to.
(v) Means of production are controlled by the govt that functions as an entrepreneur. Private enterprise has no place in it.
(vi) Economic decisions aren't taken by the market forces or price mechanism but by the govt .
(vii) there's no economic freedom. Government alone controls all economic activities.
(viii) All economic activities like foreign trade, foreign capital, investment and loan etc. are controlled by the govt .
(ix) it's a rigid planning. People are often pressurized by the govt for the achievements of the plan-targets.
(x) it's more comprehensive and efficient.
Regarding choice between democratic and totalitarian planning, some regard democratic planning as better because it gives complete freedom to consumers and producers. But this planning accelerates the pace of economic development slowly. Others regard democratic planning as imaginary since the interference by the govt is indispensable. On the opposite hand, under totalitarian planning, there are big sacrifices by the general public . But the pace of economic development is extremely fast. Prof. Myrdal has observed that ‘planning in any way has affected democracy’.
(3). Centralized and Decentralized Planning:
(i) Centralized planning:
The framing, adopting, executing supervising and controlling the plan is completed by central planning authority. Planning authority determines targets and priorities. It's the duty of the design authority to bring harmony within the planning process. This sort of planning comes from the top to the bottom. This plan determines the equality and cohesion. The central planning authority which determines the essential policies in sight of the regional and local needs.
All investment decisions are taken in accordance with goods and targets fixed by the central planning authority. All economic decisions like what to produce, the way to produce, where to produce and to whom it's to be allocated are exclusively decided by the central authority. All aspects of the economy are controlled by the central authority. Again the costs and wages also are fixed by the planning authority.
Oscar Lange criticized centralized planning because it isn't democratic in nature and character. The entire process of planning is regulated and controlled by authority. This planning is inflexible thanks to which it's less adaptability. There's no economic freedom at all. Further, the disequilibrium arising on account of centralized planning can't be easily corrected.
(ii) Decentralized Planning:
Under this planning, responsibility lies with local and regional officials who take economic decisions about the plan. In other words, this planning starts from the grass roots. In other words, this sort of planning is from bottom to top. Under this, plan is framed by the central planning authority by consulting different administrative units of the country.
The plan incorporates plans under central, state and local schemes. Also plans are prepared for various industries too. But individual firms are liberal to take their own decisions about investment and output. Prices are determined by market mechanism although there are government controls.
There is complete economic freedom in consumption, production and exchange. The most defect of decentralized planning is that there's no uniformity and coordination among different sectors of the economy. This plan has been adopted in England and France.
Choice between Centralized and Decentralized Planning:
Decentralized planning is superior to centralized planning. It provides economic freedom and adaptability within the economy. Dependence on market mechanism results into shortages or surpluses within the production of goods and services. The adjustment are often made only through government. If there are shortages of goods, it'll result in inflationary pressures.
These inflationary pressures are often controlled through price controls and rationing. But these create more problems than what they solve. Also it's impossible to coordinate the decision of the planned and unplanned activities. This might lead to disequilibrium within the demand for and supply of goods and services. Again decentralized planning provides economic freedom and incentives to the market economy while centralized planning provides cohesiveness to the economy.
(4). Functional and Structural Planning
(i) Functional planning:
Under functional planning, there's no got to build up new structure, rather the prevailing structure is corrected and modified. According to Zweig in his “The Planning of Free Societies’ has stated “Functional planning will only repair, not build a replacement , it'll improve the wave of the existing order, but not supersede it. It's a conservative, or rather evolutionary sort of planning which can not over turn the existing structure and moves only within its narrow border”. Thus functional planning brings no change within the economic and social set up.
(ii) Structural Planning:
In this sort of planning this social and economic structure is changed and a new structure emerges. Within the developing countries, there's a structure planning. Big economic and social changes are caused to usher into a new system.
For instance, shift from capitalist to socialism can be called a structural change. Structural planning can help in accelerating the pace of economic development. The Communist countries like Russia and China followed structural planning.
Choice between Structural and Financial Planning:
Indian planning is both structural and financial because under public sector, a new economic structure is built up where as under private sector, the prevailing structure is modified. There's not much difference in structural and financial planning. After sometimes structural planning turns into financial planning.
(5). General Planning and Partial Planning:
(i) General Planning:
It refers to planning of all activities in an economy. All sectors of the economy, namely, agriculture, industry, transport, irrigation, power, social services etc. are brought under its scope. The whole resources of the country are sought to be allocated among the different sectors.
(ii) Partial Planning:
It refers to the design of a particular sector of the economy. If planning during a country is confined only to agricultural sector, it's called partial planning. Under it, only a part of the entire investment is studied. It's a short- term method which is adopted to achieve a specific objective.
(B). On the basis of Time:
On the basis of time, planning are often classified into perspective and annual plans:
(6). Perspective and Annual Planning:
(i) Perspective Planning:
Perspective planning may be a long run planning where targets are fixed for long period say 15 to 25 years. But a perspective plan cannot mean one plan for the entire period. During a true sense, broader objectives are to be achieved during a fixed period by dividing the perspective plan into short-run plans of 4 to 6 years.
The long-run objectives are so divided into short- run that one by one all the objectives are achieved within the long-run. In other words, short run plans pave way for the achievement of long run motives. For instance in India, under five years plans, the objectives of employment and national income are determined on the idea of short and long-run.
According to J.Tinbergen, “The main purpose of a perspective plan is to produce a background to the shorter terms plans, so that the issues that need to be solved over a very long period are often taken under consideration in planning over short-terms”. The attitude plan has numerous administrative difficulties thanks to which the fulfillment of the objectives becomes difficult.
(ii) Annual Planning or Prospective Planning:
Annual Planning or short term planning refers to 4 to 6 years plans which are further divided into annual plans in order that each annual plan may slot in short-run plan and every short-run plan may ultimately fit in the long-run^ plan. Plans are further divided into regional and sectional plans. Regional plans are linked with regions, district and localities which are further divided into sectional plans for agriculture, industry, transport, foreign trade etc. The sectional plans are again divided for various branches like iron and steel, food-grains, exports etc.
(C) On the idea of Finance:
On the idea of finance, planning is assessed into physical and financial plans.
(7). Physical and Financial Planning:
(i) Physical Planning:
Physical planning is that where targets or objectives are fixed in terms of real physical resources. Plans also are formulated on the idea of real resources of the economy, i.e., the supply of natural, human, raw materials and capital resources. On the idea of those resources, the output targets are fixed. To quote second Five Year Plan, Physical planning, is an attempt to work out the implication of the development effort in terms of factor allocations and products yield so on maximize incomes and employment. Financial planning is followed as a mean to realize physical targets only. But the target under it, should be properly balanced. Further physical planning has got to be viewed as an over all long-term planning instead of a short-term planning.
Draw backs:
Physical planning has the subsequent drawbacks:
Lack of statistics:
In case of physical planning, there's lack of statistical data. The targets without adequate statisticscannot be achieved.
Inconsistencies:
It is difficult to balance different parts of the economy under physical planning. Because of structural difficulties, within the underdeveloped countries it's impossible to have internal consistencies.
Inflationary Pressures:
Shortages in physical targets cause inflationary pressures which is really very harmful for developing countries. The speed of savings will be low which results in low capital formation. Financial Planning Ignored. Physical planning can't be successful without financial planning. Just in case of India, due to lack of, financial resources in the closing year of (he second plan, the size of the plan had to be reduced.
(ii) Financial Planning:
Financial planning helps in removing disequilibrium between demand and supply to avoid inflation and to cause economic stability. Finance is that the basic key to economic planning. Without financial resources, physical targets can't be achieved. All objectives are fixed in terms of finance i.e, how much value , savings and investments are to be increased.
Limitations:
Financial Planning has the subsequent limitations:
(i) Mobilizing resources through taxation may badly affect the savings.
(ii) There are two sectors in underdeveloped countries i.e barter and monetary system. There's imbalance between the 2 sectors. It'll cause price-rise because of scarcities of supplies.
(iii) little question supplies are often raised through imports but this may cause deficit in balance of payments.
(iv) Financial planning isn't suitable for the developing countries.
(v) Financial planning are often successful as long as there are no bottlenecks. That way, it's necessary to use sectorial planning rather than over all planning.
(D) Other Types:
Other sorts of plans are discussed as under:
(8). Indicative and Imperative Planning:
(i) Indicative Planning:
Indicative plan isn't imperative but flexible. In socialistic countries, planning is comprehensive where planning authority decides about the investment in each sector. Planning authority fixes the costs of the products and factors. All it decides is what to produce and in what quantities to supply . As this planning is rigid, any deficiency in one sector would adversely affect the economy which can't be corrected easily.
Indicative planning is peculiar to the economy of France. But this is often quite different from the sort of planning which exists in other mixed economies. By mixed economy, we mean simultaneous working of public and private sector. It's the state which controlled the private sector in several ways, i.e. by quotas, price, licenses, etc. But under indicative planning, the private sector isn't rigidly controlled to realize the targets and priorities of the plan.
The state gives full assistance to private sector but doesn't control it. It, rather, directs the private sector in certain areas to implement the plan. This plan was utilized in France from 1947-50 as Monnet Plan. France’s experience shows that the firms don't play the sport when development programme doesn't coincide with profit expectations.
Generally monopolistic firms don't bother about government policies and use their power for private benefit. Same way under inflationary pressures, the govt resorts to direct controls instead of maintaining prices mechanism through monetary and monetary policies.
(ii) Imperative Planning:
It refers thereto where all economic activities and resources of the country operate under the direction of the state. The resources are optimally used by the state so as to achieve the targets of the plan. Consumer’s sovereignty is sacrificed under this sort of planning. The consumers get fixed quantities at fixed prices. The govt policies are rigid which can't be changed easily. Any change can adversely affect the economy.
(9)Rolling and fixed Planning:
(i) Rolling Planning:
Rolling plan was advocated by Prof. Myrdal for the development of developing countries. India experienced it for the primary time in April 1978 under Janata Party rule and continued up to April 1980.
In the rolling plan, each year, three new plans are made:
(i) there's an idea for the present year which incorporates annual budget and the foreign exchange budget,
(ii) there's an idea for number of years say 3 to five . It's changed per annum keeping in sight the requirements of the economy,
(iii) A perspective plan for 10 to 20 years or more is presented where broader goals are stated. The annual plan is fitted into same year’s new 3 to five years plan and both are framed within the light of perspective plan.
Rolling plan is framed with a view to remove rigidities. It considers the unforeseen changes like natural calamities or economic changes. Under this financial and physical targets are revised. During this way, the rolling plan gives the advantages of both perspective and flexible planning.
But under rolling plan, long-term subjective can't be achieved since the targets are revised every year. Such changes cannot maintain proper balances within the economy so on achieve balanced development. Moreover frequent revision of the plan results in uncertainties between both the public and private sectors. Further revisions of the targets make the attitude non-committal. This plan has been successful in Poland and Japan, but it failed in Mexico and Burma.
(ii) Fixed Planning:
Fixed planning is for a few fixed period, say four or five or six or seven years. a fixed plan fixes definite objectives which need to be achieved during the plan period. Physical targets and financial outlays don't change except under emergencies. Under this plan, targets are achieved which are laid down within the plan.
This plan helps in maintaining proper balance within the economy. Further, there's no uncertainty during this sort of planning. Fixed plan, with given objectives, ensures public cooperation. This sort of planning needs political will for its successful implementation.
(10). Socialistic and Capitalistic Planning:
In socialistic planning, the economy depends on economic planning. The central authority formulates an idea for the whole economy. Capitalistic planning is focused on the unplanned economic order which gains momentum from some invisible forces within the market. The most feature of this sort of designing is that the absence of a central economic plan.
(11). Flexible and Rigid Planning:
Flexible planning refers to the possibility of adjustment, readjustment in targets, output and resources. This type of designing is dynamic. Rigid planning deals with fixed targets which aren't subject to vary in any adverse circumstances of the country.
(12). Regional, National and International Planning:
Regional planning refers to the decentralized control exercised over the region of a specific country. When economic planning is applied for the state as an entire , it is referred to as national planning. International planning is meant for a state of affairs during which the resources of more than one country are the property of the countries as an entire .
In an underdeveloped country like India these objectives may be broadly grouped as:
(a) a better rate of growth than was being realised within the absence of the plan;
(b) A greater degree of economic equality than was possible under free enterprise;
(c) Fuller employment opportunities for the growing labour force of a country; and
(d) Larger provisions for capital formation as one of the principal instruments for accelerating the speed of growth.
In order that economic planning could be successful, certain essential conditions are to be fulfilled.
These conditions are:
i. Well-Defined Aims and Objectives:
Every plan must be related to certain well defined aims and objectives. In democratic planning there must be a large measure of agreement within the community with reference to these aims and objectives.
Ii. Emerge Out of the Conscious Decisions:
Planning must emerge out of the conscious decision of a determinate authority.
Iii. Purposive Direction:
In a federal structure, where there's the diffusion of power and responsibility, there must be an overall unity of policy. The purposive direction, which planning involves, must come from the Central Government.
Iv. Carefully Fix the Targets:
The planning authority must carefully fix the targets without illusions on what's possible. If the targets are fanciful, the entire plan are going to be fanciful. And this is often as true whether the targets are overlarge or too small. Planners, who promise quite they will perform, throw everything out of drugs , in order that the economy might use also not be planned at all. Over-fulfilment is simply as much a proof of bad planning as is under-fulfilment.
v. Flexibility:
There should be some measure of flexibility in planning, which suggests that the plans are often revised and rephrased if circumstances demand it.
Vi. Appropriate Duration:
Planning very far ahead isn't desirable. A general five-year plan for the entire economy is not any quite a game, because it's impossible to foresee what will happen to productivity in five years.
Vii. Scrupulously Earnest and Determined:
Once the targets are carefully fixed, the govt must be scrupulously earnest and determined to realize the targets.
Viii. Adoption of Judicious Price Policy:
In order that the objectives and targets, laid down within the plan, could be achieved, there must be a judicious price policy, which can not only secure an allocation of the resources for creating the fulfillment of the targets possible, but also will maintain a particular balance between the varied classes of the community.
Ix. Enthusiasm:
In a democracy the govt should make the objectives and targets known to the people and make the ultimate acceptance or rejection of the plan, dependent on the will of Parliament. When the plan emerges in its final shape, the govt must attempt to enlist the active cooperation of the citizens in implementing the plan. Popular enthusiasm is both the grease of planning, and therefore the petrol of economic development,a dynamic force that nearly makes all things possible.
x. Efficient Administrative System:
Finally, there must be an administrative system efficiently and unimpeachable integrity, capable of discharging its responsibilities in reference to the execution of the plan.
Objectives of Indian Planning.
At the time of independence, Indian economy was a backward economy. So as to maneuver the economy on the path of development, India adopted a model of planned economic development under the economy structure.
The main objectives of planning in India include the following:
(i) Increase in National Income:
This objective gets translated into a rise in not only the value , but also within the level of production and real per capita income.
(ii) Achieving Full Employment:
Unemployment is a curse in any society. It's more so when there's an inadequate Social Security or its total absence. Employment imparts dignity to human beings and is additionally a vital means of reducing poverty and inequalities. The target of planning wasn't to reduce inequalities by lowering the income levels of the richer sections but by raising the income levels of the poorer sections of the society.
(iii) Reduction in Inequalities of Income and Wealth:
India being a particularly poor country, inequalities of income and wealth translate themselves into absolute poverty and destitution. There are often no difference of opinion regarding the desirability of reducing such inequalities, particularly because they also cause inequality of economic opportunities.
(iv) Creation of a Socialist Society:
This was a clear and generally accepted objective inclusive-of there being equal opportunities of economic advancement for all sections of the society.
(v) Removal of Bottlenecks:
Removal of Bottlenecks within the way of economic growth like , low rates of saving and investment, inefficient technology, problems of balance of payments, absence of basic industries and insufficient infrastructure, etc. is additionally a crucial objective of the Indian planning.
(vi) Industrialization:
Indian plans have adopted a technique of industrialization of the economy with particular emphasis on heavy and basic industries. It also assigned a high priority to agricultural growth but in practice, agricultural and rural development received inadequate attention.
Some analysts are of the view that India, with its vast agricultural potential should have first targeting the development of agriculture and rural parts of the economy. Such an approach would have generated economic surplus needed for capital formation and investment.
(vii) Self-Reliance:
Our plans also aimed toward “self-reliance”. It deals with the freedom from the need to import and thus a policy of “import substitution” despite its cost. This objective should are taken to mean “ability to buy our imports through our export earnings”. Thus, we should always have added to our export capacity and competitive strength in international markets.
(viii) Precedence to Public Sector:
In our planned growth, public sector was assigned a place of precedence over the private sector so on acquire commanding heights of the economy and be during a position to use it for guiding the private sector along chosen lines. This was done while ignoring the very fact that public sector undertaking is inherently less efficient than private ones.
Thus, the essential objectives of India’s Five Year Plans are rapid economic growth, full employment, self-reliance and social justice. Aside from these basic objectives, each five- year plan takes into account the new constraints and potential/possibilities during the period and attempts to form the required directional changes and emphasis.
Importance of Economic Planning in India
Planned economy has not been established in any country in a very day or in a year. Planning in practice features a history of its growth and alter over few decades. History of economic process in some countries reveals that planning has been painfully evolved and its growth or change is attributed to certain factors which have facilitated the expansion of planned economy in an increasing number of nations .
Its development is that the extensive and intensive. It's intensive within the sense that its process of perfection isn't complete. It's always subject to improvement. Its requirements are greatly changing, certain historical factors have profoundly favoured the event of planned economy. a range of factors have led to the adoption of planning in various countries.
The importance of economic planning could also be explained as follows:
i. Best Utilisation of Natural Resources:
Economic planning facilitates best utilisation of natural resources. By adopting the method of economic planning it's possible to utilise available labour and capital in the interest of nation which helps in maximisation of national output.
Ii. Growth in National and per capita Income:
The maximum level of production increases the amount of savings and investment which ultimately provide sufficient capital for economic development. Hence planned economy proves a crucial instrument for growth in national and per capita income.
Iii. Improvement in Living Standard:
The standard of living of India’s population is way below the required level. A subsistence segment of population fails to even meet their basic needs of life. The main reason responsible behind such a miserable situation has been low level of per capita income and social evils which may be improved by adopting the method of planning.
Iv. Balanced Economic Development:
The form of economic growth in India has always been unbalanced. While preparing industrial plan, more emphasis has been given to development of consumer industries whereas much is left remained to plan for development of basic industries. The method of planning could also be helpful in balanced economic development.
v. Full Employment:
The problem of unemployment are often scale-down by encouraging development of small and cottage industries within the country. It'll also reduce the pressure of population on agriculture. In India’s five-year plans, efforts are made to get more and more employment opportunities.
Vi. Equal Distribution of Wealth and Income:
In India, there exists serious inequalities within the distribution of income and wealth. a small minority of population is rolling in luxuries, while the vast masses of people are unable to form their both ends meet. The existence of plenty for the few amidst mass poverty is indeed the foremost undesirable phenomenon within the country and intensity of which may be minimised by adopting planned economy.
Vii. For Self-Sufficiency:
The initial process of economic development requires huge capital investment. By adopting the method of planning available capital resources are often best utilised within the interest of nation.
Objectives of Planning:
The objectives of planning are many and varied. These aims aren't a similar for all countries, not are they same for a similar country at all times.
Some major objectives of economic planning are:
(a) An improvement within the standard of living of the people through a sizable increase in national income within a short period of time;
(b) a large expansion of employment opportunities for the removal of unemployment and for creating jobs and incomes;
(c) a reduction in all sorts of social, economic and regional inequalities;
(d) An efficient utilisation of the country’s resources for faster growth;
(e) Removal of mass poverty within a definite limit through land reform, employment creation, and provision of educational and medical facilities;
(f) Attainment of self-reliance by reducing dependence on foreign capital and aid .
Importance of Planning:
The importance of planning lies within the fact that it's an instrument through which important socio-economic objectives, unrealisable under free private enterprise, are likely to be effectively realised.
In an underdeveloped country like India these objectives may be broadly grouped as:
(a) a better rate of growth than was being realised within the absence of the plan;
(b) A greater degree of economic equality than was possible under free enterprise;
(c) Fuller employment opportunities for the growing labour force of a country; and
(d) Larger provisions for capital formation as one of the principal instruments for accelerating the speed of growth.
