The economic planning is justified on the following grounds.
1. To accelerate and strengthen market
mechanism: The market mechanism works imperfectly in underdeveloped countries because of the ignorance and unfamiliarity with it. A large part of the economy comprises the non-monetized sector. The product, factor, money and capital markets are not organized properly. Therefore the planned economy will be a better substitute for free economy.
2. To remove unemployment: Capital being scarce and labour Being abundant, the problem of providing gainful employment opportunities to an ever-increasing labour force is a difficult task. The need for planning
in underdeveloped countries is further stressed by the necessity of removing widespread unemployment and disguised unemployment in such economies.
3. To achieve balanced development:In the absence of sufficient enterpriseand initiative, the planning authority is the only institution for planning the balanced development of the economy.For rapid economic development,
underdeveloped countries require the
development of the agricultural and industrial sectors, the establishment of social and economic overheads, the expansion of the domestic and foreign trade sectors in a harmonious way.
i) Development of Agriculture and Industrial Sectors: The need for developing the agriculture sector along with the industrial sector arises from the fact that agriculture and industry are interdependent. Reorganization of agriculture releases surplus labour force
which can be absorbed by the industrial
sector. Development of agriculture is also essential to supply the raw material needs of the industrial sector.
ii) Development of Infrastructure: The
agriculture and industrial sectors cannot develop in the absence of economic and social overheads. The building of canals, roads, railways,power stations, etc., is indispensable for agricultural and industrial
development. Infrastructure involves huge capital investment long gestation period and low rate of return. The state alone can provide strong infrastructural bases through planning.
iii) Development of Money and Capital Markets: The expansion of the domestic and foreign trade requires not only the development of agricultural and industrial sectors along with social and economic
overheads but also the existence of financial institutions. Money and capital markets are not adequate in underdeveloped countries. This factor acts as an obstacle to the growth of industry and trade. So planning alone can provide sound money market and capital market.
4. To remove poverty and inequalities: Planning is the only path open to underdeveloped countries, for raising
national and per capita income,reducing inequalities and poverty and increasing employment opportunities.Has it happened in India in the last 65 years? Hence, Arthur Lewis says, “Planning is more necessary in backward countries
to devise ways and means and to make
concerted efforts to raise national income”
Case against planning
The failure of market mechanism invited state intervention in economic activities through planning. The prime goals of economic planning are stabilization in developed countries and growth in LDCs. But the economic planning also is not free from limitations.It may retard private initiatives, hamper freedom of choice, involve huge cost of administration and stop the automatic
adjustment of price mechanism. The
arguments against planning are discussed below.
1. Loss of freedom:The absence of freedom in decision making may act as an obstacle for
economic growth. Regulations and
restrictions are the backbone of a planned
economy. The economic freedom comprises freedom of consumption,freedom of choice of occupation,freedom to produce and the freedom to fix prices for the products. Under
planning, the crucial decisions are made by the Central Planning Authority. The consumers, producers and the workers enjoy no freedom of choice. Therefore, Hayek explains in his book ‘Road to Serfdom’ that centralized planning leads to loss of personal freedom and ends in economic stagnation. The decisions by the Government are not always rational.But, freedom to private producers will be misused; profit will be given top priority,welfare will be relegated.
2. Elimination of Initiative:Under centralized planning, there will be no incentive for initiatives and innovations. Planning follows routine procedure and may cause stagnation in growth. The absence of initiatives may
affect progress in following ways.
a. The absence of private ownership and
profit motive discourages entrepreneurs from taking bold decisions and risk taking. Attractive profit is the incentive for searching new ideas, new lines and new methods. These are missing in a planned economy.
b. As all enjoy equal reward under planned
economy irrespective of their effort,efficiency and productivity, nobody is interested in undertaking new and risky ventures.
c. The bureaucracy and red tapism which are the features of planned economy,cripple the initiative as they cause procedural delay and time loss. The ease of doing business is disrupted. It is because of this, even socialist countries like Russia and China offer incentives to private enterprises.
3. High cost of Management: No doubt the fruits of planning such as industrialization, social justice and regional balance are good. But the cost of management of the economic affairs outweighs the benefits of planning. Plan formulation and implementation involve
engagement of an army of staff for data
collection and administration. As Lewis
remarks, “The better we try to plan, the more planners we need”. Inadequate data, faulty estimations and improper implementation of plans result in wastage of resources and cause either surplus or shortages.
4. Difficulty in advance calculations: Price mechanism provides for the automatic adjustment among price,demand and supply in a Laissez Faire economy. The producers and consumers adjust their supply and demand based on price changes. There is no such mechanism in a planned economy.
Advance calculations in a precise manner
are impossible to make decisions regarding
the consumption and production. It is also
very difficult to put the calculations into
practice under planning. Excess supply
and excess demand can also happen in the
market oriented economy. Infact it has
happened in many expitalistic economies,
including the US. The arguments against planning are mostly concerned with centralized and totalitarian planning. The democratic planning, planning by inducement and decentralized planning especially under
mixed economies give equal role for
private sector and public sector. Planned
economy appears to be more efficient
operationally than a market economy.
So the question is not one of plan or no
plan but one of the type of plan. The
right mix of market mechanism and state
intervention in right proportion will
promise accelerated economic growth
accompanied by stability and social