Economic system- Socialistic or Centrally Planned Economic System

Learning Contents:                         

·         Economic Systems- Centrally Planned Economy

·         Characteristics, Merits and Demerits of  Centrally Planned (Socialistic Economy)

·          Solutions to central problems faced  by Centrally Planned  Economy

Centrally Planned Economy/Socialistic Economy/Command Economy

In a centrally planned economy, decisions related to ‘what to produce’, ‘how much to produce’, ‘for whom to produce’ are taken by the government or by an authority appointed by the government. The objective of this economy is social welfare i.e. produce those goods and services i.e. essential goods which can maximize social welfare.

Resources and businesses are owned by the government. The government decides what goods and services will be produced and what prices will be charged for them. The government decides what methods of production will be used and how much workers will be paid for their services. The government decides the amount and size of investment be done in the economy.

Labour-Intensive technique is adopted for the production of goods and services as it generates employment opportunities in the economy. Goods and services are mainly produced for the weaker sections of society.

Some necessities like health care and education are provided for free, as long as the state determines its need. Countries like North Korea and Cuba adopt a socialistic economy. It is also called a command economy.

  

Characteristics of Market Economy

1.      Collective ownership:  In a centrally planned economy, the factors of production such as land, labor, capital, etc. can be owned collectively by the state or central government. The government has a right to acquire, use, control, and dispose of the resources in anyways. The government does a detailed survey of resources and utilizes them in the most effective manner and wastage is avoided.

2.       Centrally Planned Economy: Economic decisions what and how much is to be produced, how, when, and where it is to be produced, and to whom it is to be allocated— are to be rationally taken by the government authority, on the basis of a comprehensive survey of the economic system as a whole. It lays down the various objectives and targets to be achieved during the plan period.

3.      Freedom of consumption: Under socialism, consumers’ sovereignty implies that production in state-owned industries are generally governed by the preferences of consumers, and the available commodities are distributed to the consumers at fixed prices through the state-run department stores. Consumers’ sovereignty under socialism is confined to the choice of socially useful commodities

4.      Welfare motive: State or central government is motivated to produce those goods and services that do social welfare. Price for goods and services is guided by a social motive, not a profit motive.

5.      Lack of Competition: Since most of the decisions for the economy are taken by the government. The role of private firms in producing goods and services is completely eliminated. It avoids all sorts of completion or rivalry among producing firms.

6.       Economic equalities: Since goods and services are mainly produced for the weaker sections of the society, as well as the focus, is primarily on the generation of employment opportunities that strive to create equal opportunity for work. Social justice is given higher priority than profit maximization. The remuneration is paid as per the ability, education, and training of the citizens.  Factor income in form of rents, interests and profits from various sources go to the state which is further spent on providing free education, healthcare, housing, and social security to the people.

Solution of Central Problems of Capitalistic Economy

The main objective of a capitalistic economy is to maximize social welfare. The central problems like what to produce, How to produce, for whom to produce- are decided by the government authority. The decisions are taken with a view to maximize social welfare.

What to Produce?

The government will produce those goods and services in the market which are useful for society. Goods and services which are socially desirable are produced by the government. The government does not produce those goods and services which consumers want instead, provides essential goods that are needed for their survival. The economy will produce up to that level through which every individual need will be fulfilled.

How to Produce?

In the socialistic economy, labor-intensive technique is adopted for the production of goods and services, as it generates more employment opportunities in the economy, and the problem of unemployment, is eradicated from the economy.

 

For whom to produce?

The economy will produce goods for the poorer sections of society. The objective of earning profit is ignored in this economy. It tries to establish equality of income as it promotes social welfare.

 

 Merits and Demerits of Socialistic Economy

Merits	Demerits
Collective ownership of resources generates efficiency.	Loss of consumer sovereignty i.e. production of only  essential goods
Greater welfare due to less inequality of Income	No freedom of occupation
Absence of monopolistic practices	Presence of bureaucracy, corruption etc.
Ensures right to work and a minimum standard of living	Absence of profit earning, no incentive for hard work.
Economic stability as no problem of unemployment or overproduction	No right of private property
	State monopolies may emerge.
	No freedom of choice/ variety of goods and services

 

Let’s assess it….

Multiple Choice Questions:

1. Which of the following is most typical of a socialistic economy?

a. Consumers have choices of many substitutes for any given product.

b. Quality of products and services tends to be consistent

c. The prices of goods and services frequently change

d. Many products are usually in short supply

2. The following country is an example of a socialistic economy.

       a. North Korea

       b. USA

       c. India

       d. None of the above

3. In a planned economy, who controls the factors of production?

    a. The citizens

    b. The entrepreneurs

    c. The business

    d. The government

4. Which of the answer choices is not the characteristic of a centrally planned economy?

    a. Social Welfare

    b. Consumer Sovereignty

    c. Collective ownership of resources

    d. Economic equality

5. In the former Soviet Union consumers had to wait in long lines to buy everyday items like bread. They did not have many choices and the government-controlled factories. What type of economy did they live in?

    a. Free market economy

    b. Mixed economy

    c. Traditional economy

    d. Command  or socialistic economy

6. Socialistic Economy is a

    a. Planned economy

    b. Profit oriented Economy

    c. Mixed Economy

    d. None of the above

7. Labour intensive technique would get chosen in a

    a. Labour Surplus economy

    b. Capital surplus Economy

    c. Developed Economy

    d. Developing Economy

   8. An economic system in which private property is almost restricted.

    a. Mixed economy

    b. Free enterprise

    c. Centrally planned economy

    d. Competition

Answers

1. b 2. a 3. d 4.b 5.d 6.a 7.a 8.c