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Whether resources can be efficiently organised in a centrally planned economy

GS Paper 3:

Syllabus: Indian Economy and issues relating to planning, mobilisation of resources, growth, development and employment.

 

Context:

Basic economy concept for Mains and economy/Sociology optional

Socialist calculation debate: Whether centrally planned economies can allocate scarce resources efficiently?

The debate was between the Austrian school economists Ludwig von Mises and Friedrich Hayek on the one side and socialist economists Oscar Lange and Abba Lerner on the other in the first half of the twentieth century.

No, the centrally planned economies cannot allocate resources efficiently?

  • Absence of private property: In the case of a centrally planned economy, there would be no market for resources and hence no rational resource allocation.
  • People, in general, would have very little incentive to work hard when rewards are skewed.
  • Lack of information: Group of central planners managing the economy would not have sufficient information to allocate the scarce resources under their control efficiently. Since, resources are owned by the government, knowing the true price for resources becomes difficult.
  • Market economy by default ensures resources to the most needy: When resource owners sell their resources to whoever is ready to pay the highest price, they thus ensure that the resource is allocated to those who need it the most.

Socialist argument: Markets were not essential for the rational allocation of resources:

  • Cater to the genuine need of the society: Central planning board can allocate resources according to a plan that takes into account the genuine needs of society.

In conclusion, the middle ground would be moving towards a mixed economy, where prices are determined by the private sector but essential services are in the hands of the government to enable resource allocation to the poor.

 

Insta Links

Basics: Planning in India

 

Practice Question

 

Q. The planning in India is a mixed bag of achievements and shortcomings. However, there is a lot many unfulfilled tasks which are yet to be achieved. Examine. (250 words)

 

Q. Which of the following are associated with ‘Planning’ in India? (UPSC CSE 2014)

  1. The Finance Commission
  2. The National Development Council
  3. The Union Ministry of Rural Development
  4. The Union Ministry of Urban Development
  5. The parliament

Select the correct answer using the code given below.

(a) 1, 2 and 5 only

(b) 1, 3 and 4 only

(c) 2 and 5 only

(d) 1, 2, 3, 4 and 5

Answer: D

For the Central Planning process, Parliament is associated through the MPLADS while NDC is part of the process. The planning commission collaborates indirectly with the Finance Commission but is not directly associated with the planning process. Previously (in 2014) the Union Ministries given were not part of the planning commission.

However, in the present framework of Niti Ayog, CMs of state and union misters are part of Ex-Officio members (Maximum of four from the Union council of ministers to be nominated by the Prime minister)