Planned Economy Vs Market Economy

Sun, 09/09/2012 - 01:48 -- Umar Farooq

Market Economy Vs Planned Economy

Market economy Vs planned economy both are two different economy systems. An economic system is a set of institutional arrangements whose function is to employ most efficient scarce resources to meet the ends of society. Both the economic systems have to answer the basic questions of economy i.e. what to produce, (most wanted goods by the people), how much to produce (whether to produce small quantity at small scale or bulk production at large scale), how to produce (choosing techniques of production labour intensive or capital intensive) and for whom to produce (which group or class of society gets larger share).

Market Economy

Market economy operates through free working of demand and supply forces. Therefore, it is the price mechanism, which decides the allocation of resources. Price works as a signal in a market economy where consumers are sovereign, free labour and free enterprise is allowed. Most of the ownership rests with the private owners. Profit functions as incentive and motivating force in the economy where competition and combination is highly appreciated. Whatever development we see in the west is result of free working of market economy where government interference is minimum.

The problem with the economic system is that it is not always working at efficiency and moreover, results in inequitable distribution of wealth and resources. Due to cutthroat competition resources are wasted. The proletariat class is exploited by bourgeois class. The market is always fluctuating and haunted by trade cycles, unemployment and inflation.

Planned Economy

Planned economy questions about resource allocation are decided by a central authority which makes all necessary decisions, what to produce how much to produce, how to produce and for whom to produce. In planned economy system ownership of resources rests with government on behalf of people. The individual freedom to choose is sacrificed. Although, the planned economy provides economic stability (not trade cycles, no inflation and no unemployment). The emphasis of the system is more on equity than on efficiency.

To make every decision about economy needs a lot much data and information, which is always lacking so over and underproduction has been observed even in a planned economy. The emphasis of the always remains on quantity than the quality of the product, that is why, these products are not internationally competitive. The system lacks incentive and motivation for the workers. This results in disinterested and demotivated managers and workers. All decisions are made by central authority, which leads to bureaucratic rigidity. The result is, state becomes too much powerful and individuals lose their liberties as well as motivation. The environment degradation is observable in both systems

As both systems planned economy Vs market economy” in comparison show some good and bad working. Therefore, some economists have suggested the convergence hypothesis, which lead mixed economy.