Planned Economy vs Mixed Economy

Planned Economy:

The concept of a planned economy evolved from the works of Karl Marx. It was first set up in the erstwhile USSR in 1917 and subsequently in the Eastern European countries under USSR's influence. Later in 1949, the People's Republic of China also adopted a planned economic model which was also known by the names, command economy or state economy. Planned economy had two major sub-types viz., communist economy, and socialist economy.

  • In a communist economy, all property and the means of production were under state control. The state had absolute control over the economy. It decided what should be produced, how much should be paid to each factor of production (rent for land, wages to labour etc.) and controlled the demand and supply.
  • In a socialist economy, the emphasis was on collective ownership of the means of production with the state exercising control over the economy. However, the state control was not as rigid as in a communist economy.

Features of Planned Economy:

  • The state formulates a central plan, usually for a five year period. The plan spells out the social and economic goals and targets that must be achieved by every institution and region in the country.
  • All the nation's resources are allocated by the government with the objective of achieving the plan targets. All the factors of production are meant to be utilized by the government in the most efficient manner, to avoid unnecessary competition and duplication. The state also works towards eliminating unemployment.
  • The state, through the central plan, decides the priorities for production of all the goods and services in the country. It also decides the quotas and imposes price controls. The aim of the state is to provide essential services such as food, healthcare etc., for every person.
  • The state also maintains a monopoly in certain businesses such as finance, energy, heavy industries, automobiles etc., which are believed to possess strategic importance in the pursuit of national goals.
  • The state puts in place laws, rules, and regulations to enforce the provisions of the central plan.
  • The private sector has to function within the framework laid out by the state in the central plan. It cannot respond on its own to the forces of demand and supply (the state also control the market forces).

Advantages of Planned Economy:

  • Mobilization of resources on a large scale can be done in a faster way which enables the creation of industrial base, execution of massive projects etc., in order to achieve the socio-economic goals spelled out in the central plan. There is little or no opposition to national projects on the grounds of social and environmental issues.
  • The price controls imposed by the state ensure that goods and services remain affordable to a large section of the population.
  • State control over factors of production can minimize the inequalities of wealth and income.
  • Since the market is not dominated by competitive forces, the wastage of nation's resources due to competition is avoided.
  • State directs the utilization of the nation's resources in such a way as to create full or near-full employment for its workforce.

Disadvantages of Planned Economy:

  • The production of goods and services in the economy is not necessarily based on the demand from consumers but is decided by the state. This can lead to a shadow or black market which satisfies the consumer demand.
  • The state machinery is often unable to decide what and how much to produce in order to meet the demands of the economy since it does not have the up-to-date information on market trends. Often, this leads to the imposition of quotas and rationing of goods.
  • Technological and market innovations are not encouraged. The state rewards those who follow its directives rather than the innovators.
  • Goods and services produced in a command economy may not be able to compete in the international markets.
  • The absence of competition and profit-motive can make the companies turn inefficient, leading to an escalation in the cost of goods and services produced.

Planned economy was advocated as a solution to address the ills of the capitalist economic system such as exploitation of the workers, poor wages and working conditions for workers, and excessive profiteering by the capitalists which increased the income inequalities. By establishing state control over the economy, it sought to ensure the welfare of workers, limit the accumulation of profits by the capitalists, while going for industrialization of the economy.

Mixed Economy:

It is an economic system in which both the government and the private sector exercise control over the economy. It is termed as a golden mean between capitalistic and socialistic economic systems. The concept of a mixed economy is of recent origin as it gained prominence since the second half of the twentieth century.

Features of Mixed Economy:

  • The public and private sectors coexist under this system. Industries of strategic importance such as defence, atomic energy, capital goods and heavy industries, public utilities such as railways, roads, power etc., are placed under the control of the public sector. The private sector is mainly involved in the production of consumer goods, agriculture (including plantations), external trade etc., subject to the overall regulation by the government. However, the government considers the public and private sectors as equally important.
  • There exists substantial freedom to hold private property and choose the occupation of one's choice. However, the state reserves the right to control these freedoms in public interest, such as preventing the concentration of wealth in a few hands, minimizing inequalities etc.
  • Planning is considered to be an important tool for economic development. The state lays down the broad objectives and targets for the economy. It uses the various monetary and fiscal policy tools to regulate the private sector in achieving the national objectives.

Merits of Mixed Economy:

  • It maintains a healthy balance between the public and the private sector. This ensures cooperation and competition between them which is conducive to attain high growth targets.
  • Through its pricing mechanisms as well as freedoms of production, consumption, occupation and the presence of a profit motive, it ensures that there is an efficient allocation of resources in the economy.
  • By working towards minimizing the inequalities of income, wealth, eliminating unemployment and poverty, a mixed economy maximizes social welfare. It has all the main features of a welfare state.

Demerits of Mixed Economy:

  • The public sector gets preference through subsidies, lower regulatory burden, easier access to credit etc., which renders the private sector incapable of competing with the public sector in many countries.
  • The public sector which is run by the state bureaucracy becomes a burden on the public exchequer. Nepotism, red-tape, corruption etc., become common in the public sector.

Most of the developing countries today, such as India, are mixed economies. The capitalist nations of the West have realized the importance of a welfare state and hence adopted a mixed economic system to a certain extent.

India: Planned Economy or Mixed Economy?

Immediately after independence, India was declared to be a mixed economy. However, the need for planning was realized by the nationalist leadership much before the independence. Regional disparities, mass poverty, low level of national income etc., were some of the prominent difficulties faced by the country at the time of independence. The nationalist leadership, led by Jawaharlal Nehru, thus decided that the government must play an active in the mobilization and allocation of scarce economic resource for an equitable growth and development.

Contemporary international experiences such as the Great Depression of 1929 which badly affected the Western World and the rapid economic growth witnessed by the planned economies of the Soviet Union and Eastern Europe were partly responsible for India's tilt towards economic planning. The active role of the state in overcoming the market failure and in rebuilding the economy was widely recognized and accepted by the 1950s and 1960s.

However, the model of a central command economy which was adopted in the Soviet Union could not be replicated in a newly created democracy like India. Until independence, the private sector (driven by European capitalist interests) was the dominant player in Indian economy. Hence, India adopted a mixed economic model in which the state and the market had important roles to play.

To quote the First Five Year plan which elucidated the kind of planning India should go for, "Planning in a democratic set-up implies the minimum use of compulsion or coercion for bringing about a realignment of productive forces. The resources available to the public sector have, at this stage, to be utilized for investment along new lines rather than in acquisition of existing productive capacity. Public ownership of the means of production may be necessary in certain areas; public regulation and control in certain others. The private sector has, however, to continue to play an important part in the production as well as in distribution. Planning under recent conditions thus means, in practice, an economy guided and directed by the state and operated partly through direct state action and partly through private initiative and effort".

The concept of a mixed economy, however, got sidelined from the 1960s with the state assuming an increasingly larger role. It was only since the 1980s that the role of market forces in Indian economy became prominent. In the aftermath of the economic reforms of the 1990s, the role of planning and government got redefined. The private sector began to emerge a the dominant player in India's growth and development. A watershed event in the history of India's planning was the scrapping of the Planning Commission in 2014 and its replacement by the NITI Aayog in 2015. The move was necessitated by India's planning experience over the decades. A need was felt for a body which shall function purely as a government think-tank and evolve a strategy for a bottom-up approach in planning in the spirit of Cooperative Federalism.

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