Centrally Planned vs. Market Economy Essay

It is a cardinal truth that, in order to make the best possible use of the economic resources available in any economy, three basic decisions need to be taken – what to produce, how to produce and for whom to produce. The answers to these three fundamental questions are completely dependent to the extent of government’s interference in the economy. Based on the government’s role in the economy, the economic systems are divided into two major categories viz. market or capitalist economy and centrally planned or socialistic or command economy. Market Economy and Centrally Planned Economy The capitalist or market economic system emphasizes complete freedom of individuals as buyers and sellers through the price mechanism. In such a market, price of a commodity is based on market forces of demand and supply. The customers have complete freedom to make choices regarding their purchases and the producers, in turn, allocate their resources according to the respective demand. If the demand of a particular product increases, its price is expected to be increased initially and if the cost price remains the same as before, it will generate more profit for the producers. Naturally, the producers will allocate more resources to that particular product. On the other hand, if the consumers are unwilling to bye a product, its price would fall, resulting in a lower profit or even loss to the producers. But the scenario is completely different in a centrally planned or command or socialistic economy. Here, the three major economic decisions – what to produce, how to produce and for whom to produce – are taken by the government. All major decisions regarding investment, savings and consumptions are practically governed by the central authority. Thus, all the decisions, starting from the allocation of resources to the distribution of end products, are taken care off solely by the government. Unlike a capital market, efficiency in a centrally planned economy can only be achieved only when the demands are accurately estimated and the resources are allocated accordingly. The government fixes the output target for each state and industry and allocates the required resources accordingly. Legal Institution of Private Property vs. Social Ownership: In a market or capitalistic economy, all the properties and means of production belong to the private individuals. The enterprises execute complete freedom and, as a result, the system is often called private enterprise economy. The land, building, machine and other articles of wealth in the country are owned by private firms. This is termed as system of ‘private property’. Social ownership of property is practically non-existent. But, the situation is completely different in case of a socialist economy. The basic feature of such an economic system is the social or government ownership of means of production such as, land, machine, mineral resources, capital etc. The government allocates the resources according to the requirements and necessity of the nation as a whole, and not on individual preferences. Hence, property ceases to be a source of individual income. Privatization vs. Socialization: Capitalism preaches the freedom of enterprise which means that one is free to engage oneself in whatever economic activity according to one’s own will. Almost all the economic activities, except some limited number of services rendered by the government (like railways, defense etc. ), are left in the hands of private enterprise. Trade, business and commence are absolutely free from state intervention and control. Business decisions, made by private owners, are ultimate. This is regarded as ‘freedom of enterprise’. In a centrally planned economy, the vital sectors of economy (like agriculture, industries, trade, commerce etc. ) are owned and governed by the government ownership and management respectively. Almost all the production processes are controlled either directly or indirectly by the government.