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economic system

By Arvin-Prem Kumar Mar 16, 2014 1060 Words
An economic system in which economic decisions are made by the state or government rather than by the interaction between consumers and businesses. Unlike a market economy in which production decisions are made by private citizens and business owners, a centrally planned economy seeks to control what is produced and how resources are distributed and used. The production of goods and services is undertaken by state-owned enterprises. Centrally planned economies assume that the market does not work in the best interest of the people, and that in order for social and national objectives to be met a central authority needs to make decisions. The state can set prices for goods and determine how much is produced, and can focus labor and resources on industries and projects without having to wait for private investment capital.

Most modern economies are a mixture of centrally planned economies and market economies, with governments controlling some aspects of the economy and the private sector controlling others.‎ Introduction of Planned economy

A market economy is the opposite of a command or centrally planned economy. In a command system, the government determines what goods are sold, how much of them, and what they will cost. This single actor is replaced by many in a market system, where the price of a good is determined by both the supply and demand for it ( 2012). And in the following we will talk about the advantages and disadvantages of planned economy. 1.2.2 Advantages of Planned economy Elimination of inflation and price fluctuations In command economies, the central government stipulates what and how much of most products will be produced. By setting prices and wages the central government can also dictate how much of the production is allotted to each household. In short, the central government controls production and income in command economies (Musgrave, Harding, Kacapyr & Harding 2001, p. 37). And because of this functional feature of command economies, the price could not be determined depending on how much would be produced and how much people’s demand is, as a result, price would be stable and as a matter of fact in most planned economies, prices are set by the policy makers. Hence, one major advantage of adopting the planned economy is that it largely eliminate the appearance of inflation and price fluctuations which are usually challenges to the capitalist free market economies. A powerful central government

1.2.3 Disadvantages of Planned economy Lack of employee motivation and responsibility
According to Max Weber (1978, p. 110), a planned economy oriented to want satisfaction must, in proportion as it is radically carried through, weaken the incentive to labour so far as the risk of lack of support is involved. Because it would, at least so far as there is a rational system of provision for wants, be impossible to allow a worker’s dependents to suffer the full consequences of his lack of efficiency in production. This lack of labor or employee motivation and responsibility could be found in China before its famous economy reform in the 1980s. At that time, distribution of goods are depending on the labor hours and individuals were not responsible for the consequences of their works. Therefore, the labor efficiency was much lower in China. And also, as a result, technology innovations were rare because they were not motivated to do so as there would be no obvious rewards for such good performance. An economic system that includes a mixture of capitalism and socialism. This type of economic system includes a combination of private economic freedom and centralized economic planning and government regulation. There are many countries around the world that are either capitalist or socialist, with countries ranging from the United States to Cuba being referred to as mixed economies. A capitalist system is based on private ownership, labor, personal profit and investments. In contrast, a socialist economy is controlled and regulated publicly, usually through mechanisms like government bodies and planning councils.

Advantages of Mixed Economy
Since mixed economy involves both government and private enterprises it has the advantage of taking the benefits of capitalist nature of private companies and socialist nature of government. There is less inequality of income because intent of government is to have a balanced economic growth of an economy. Mixed economy allows individuals to run their business and make profits but at the same time it places some responsibility on these companies by inducing them to contribute towards the welfare of society. Disadvantages of Mixed Economy

Since welfare of society is important in a mixed economy it leads to lower than optimum use of the resources because government mobilize the resources towards the production of those goods and services which are beneficial for the society as a whole rather than producing those goods and services which in economic terms are more beneficial for an economy. Under mixed economy private enterprises have to face lot of difficulty because of various government loopholes like favouritism and bureaucratic nature which is prevalent in mixed economy. As one can see that mixed economy like socialist and capitalist economies has both advantages and disadvantages and therefore it will be always debatable whether a country should follow mixed economy structure or not. Grant, S G, 2012. Igcse And O Level Economics India Edition. 4th ed. India: Cambridge University Press

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