Friday, March 10, 2017

Economic Planning - Capitalistic, Socialistic and Mixed Economy Systems

Up until independence, agriculture was the main source of survival for the people of India.

Secondary and tertiary areas of work were still not developed and people highly depended on physical labor work.

This led to a large population of the country to live in poverty.

Life expectancy was utterly low and people were living for the sole purpose to survive.

There was no quality of life and no initiatives were taken for growth and prosperity.

This was the kind of economy that we inherited from the British.

Our forefathers understood the situation and knew that some measures had to be taken in order to improve the quality of life of the population.

This gave birth to the need of direct interference of the government for the development and growth of the economy and hence economic planning was introduced.

Economic planning

Economic planning is a process under which a central body of the government makes certain strategies for the development of the economy.

In India, this central body is the Planning commission of India.

The commission decides certain goals and objects which are to be completed and finished in a fixed amount of time.

These strategies and policies are made keeping in mind the growth and development of the nation.

According to the Planning Commission of India, “Economic Planning means utilization of the country’s resources in different developmental activities in accordance with national priorities”.

The president of the planning commission of India is the prime minister.

Economic and social planning is mentioned in the seventh schedule of the Indian constitution.

Economic planning with and without the free play of the market forces

The concept of economic planning for the nation’s growth and development was first introduced and implemented by Russia or better known as the Soviet Union back in 1928.

In that model of economic planning, the state or the central government was considered to be the owner of all the means of production of various resources and goods.

This model was strictly based on the principle of statism in which the free play of the market was not allowed at all.

By free play of the market we mean the various ups and downs in prices and demands which are influenced by the personal greed of merchants and producers in order to gain maximum profits.

In statism economy planning, the central authorities regulate and decide the relative prices of various commodities. This model is commonly known as socialism.

India started the planning commission in 1951.

It was greatly inspired and influenced with the soviet economic strategies.

But there was a huge difference in the kind of economy that India decided to implement in the country.

By 1951, the Soviet Union had already completed several successful years of economic planning and great results were obtained in the sectors of growth and development.

But there was a huge difference in the model of economic planning that we adopted as compared to the soviet union.

While in the Soviet Union, the model of economic planning that was used was based on the principle of ‘statism’ where the free flow of market is not allowed, or in other words, the market prices are not direct result of supply and demand.

In India, the economic planning model is based on the principle of mixed economy.

In a mixed economy, the market prices are driven by the forces of supply and demand as well as by direct interference from the government.

The owner of the production of goods and services are the people themselves whereas some important sectors which are essential for growth and sustenance of the nation, like power, water etc are controlled either by the government itself,or by the combination of the private companies and the government.

For example, the toothpaste sector is completely privatized with different private companies producing the goods.

Also, the electricity distribution is run by a combination of government and private companies like the tata power delhi distribution limited.

The prices per unit of electricity are proposed by the private companies to the government, which then regulates these prices based on the current economic conditions of the general public.

To understand the goals and achievements of planning in India, we first need the basic understanding of Capitalism, Socialism and a Mixed Economy.

Capitalism System

In this economic system, all the major economic decisions are made without the intereference of the government.

Decisions like what goods should be produced and what services should be provided, how these goods and services are distributed among the people and the manner in which these are produced are all left to the forces of the market.

These decisions are made by people themselves and the prices and quantity of such goods and services are decided by the respective companies without the interference of the government.

Every decicion in a capitalism economy is made with the sole objective of maximizing profits and no thought is given to social welfare. Some characteristics of a capitalism economy are

(a). only the goods and services that are high in demand in the market are produced.

(b). these goods are produced in such a way so as to minimize the cost of production and maximize the profits.

(c). the goods and services are distributed according to the financial power of the companies.

Merits of capitalism

the main advantage of this system is that it promotes self interest which is driven by maximum profits.

Following this goal, the companies are self motivated to grow and develop as much and as fast as possible.

This contributes to the development of the nation.

Demerits of capitalism

The main disadvantage of this system is that while following the goal to maximizing profits, the companies very often neglect the basic values of social welfare.

This leaves the poor section of the general population at the mercy of the market forces which sometimes make it very difficult for many people to sustain.

Socialism Economy

In this economic system, all the major decisions are made by the government.

These include aspects like, what to produce, how to produce, where to produce, where to distribute and how to distribute.

The prices of the goods and services are also decided by the government so that people are not burdened by unusually high prices and they can sustain their lives comfortably.

These points state that all the decisions are made in the interest of collective public and promotes social welfare.

Merits of Socialism

This economy encourages collective growth and in doing so it ensures social equality.

This means growth is achieved by following the principle of economic justice.

Demerits of socialism

Contrary to capitalism, people are forced to buy only the products made available by the government as there are no other varieties of the same product available.

For example, suppose if you were to buy a toothpaste and were living in Soviet union.

In this case, you will be forced to buy only the toothpaste that is made by the government entities.

No other varieties of toothpaste like pepsodent, sensodyne are available to you as these companies cannot produce or distribute their goods in your country.

Mixed Economy

A mixed economy is a sort of mixture of a capitalistic economy and a socialistic economy.

This simply means that there are some features of capitalist and socialist economies that have been taken to form a new kind of mixed economy.

This was done to accelerate the rate of economic growth in our country.

This was a very bold and right step that was taken and has proved out to be a boon.

Our economy was in the ruins before independence which raised the need for drastic measures.

That is when the concept of mixed economy was adopted in India.

It is a very delicate procedure.

To take only the good features of both the economies and leaving out the bad.

In this economy, all the major economic decisions are taken by both the government and the owners of the private companies that provide and produce the goods and services.

These decisions are both left to the market force and controlled by the government.

This means that while the private companies can take decisions as to what to produce and how to distribute, the central authorities decide and regulate the prices and distribution method of certain goods and services that are crucial for the survival of the general public.

In this way, people can strive for their personal growth and wealth, while the government works in the interests of social welfare.

Principal Merits of a Mixed Economy

A mixed economy offers the consumers a choice.

They can choose the products and services they want from a variety of different companies.

If we take the same example we took in socialist economy about a toothpaste, here a person has a variety of different types of toothpastes to choose from because in a mixed economy, people are allowed to produce what they want and how they want.

With time, these varieties have only increased.

A mixed economy also offers people the freedom to own various production units.

They have the freedom to run these units as they wish to maximize production and minimize the production costs.

Sometimes such companies are motivated by greed and end up using extreme measures to achieve the above goals of profit.

These measures are usually so extreme that they end up being harmful for either the consumers or the workers themselves.

This is where the government or the central regulating authority comes in.

For every sector of the economy, the government has set up some predefined parameters.

The private production units must comply with these parameters in order to keep their house open.

These method ensures the safety of the public, the workers and the overall growth of the country’s economy.

In the past, because of these policies, major disasters have been avoided.

Apart from ensuring the safety of the country’s citizens, in a mixed economy, there is direct participation of the government in the process of growth which is based on the principle of social justice and equality.

Principal Demerits of a mixed economy

As some of the sectors like water supply and petroleum are dominated by the public sector, these organisations often tend to develop corruption and inefficiency.

This is due to the fact that the workers have no sense of accountability and there are no incentives for better performance.

Generally, their incomes are fixed and being a government employee, they have a sense of job security.

Therefore, they have no motivation or incentive to perform better or at least match the industry standards.

They work under the impression that they have nothing to gain even if they perform efficiently.

This is not just the case in India, but every country who has adopted a mixed economy or even a socialist economy has suffered from this demerit.

Due to this reason, most countries have embarked upon the path towards privatization.

For example, in India, initially sectors like electricity distribution were controlled by government bodies.

With time, these sectors were opened to private companies and are now run jointly.
In India, the main aspect of economic planning is the five year plans.

The first year plan was implemented in 1951 till 1956.

In these plans, there are two kinds of goals which are to be met, the long term and the short term goals. We will discuss about those later in detail, going over their merits, demerits and success rate.

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