What are the criticism or limitations of economic planning in third world countries like Pakistan?

Answer 1

Market mechanism is a natural system, perhaps, in operation since the inception of the life. With the passage of time its shortcomings were lime lighted and need for state intervention was realized in the form of economic planning etc. The biggest attack on market mechanism is made by the socialists that it works like law of jungle have nothing to do with social and economic betterment of the masses. Accordingly, the planning was practiced in Russia with the complete centralization. While in western economies, it was adopted with great caution and suspicion. It means that they followed less planning in economic fields while greater planning was implemented in connection with socialization by providing top class Law and Order, educational and health facilities, clean water and sanitation and services relating to social security. Despite the importance of planning which is accorded as a weapon to regulate the social aI1d economic life is also subject to lot of criticism, which are elaborated below. According to Von Mises, Hayek and Robbins the market economy runs on the basis of prices, i.e. all the activities of allocation, production and 'exchange are performed on the basis of prices. But in planned economy there is no such like mechanism of prices. As in planning, choices have to be made before the occurrence of an event or operation of the economy, then it is impossible to make advanced calculations. The calculations would be accurate if the planners would have established some exact compatibility between demands of consumers and scarce resources of the society. How cumbersome it would be to make calculations regarding the production of billions of commodities for bil1ions of the people residing in the planned societies. Moreover, even the advanced ca1culations are made, yet it is difficult to put them in practice. But the proponents of the planned economy are of the view that the above problem can be resolved with the help of trial and error method. Furthermore, they say that certain important decisions be entrusted into the hands of planning machinery and certain other important decision may be performed through market. As Oskar Lange says that public enterprises should decide about what to produce, how much to produce, and how it is to be produced. Thus planning office can decide about the sum of total investment; the prices of inter-enterprise transactions, and the rates of interest on the loans to these enterprises. While the wages of the labor are fixed by market conditions. Regarding balancing or equilibrium between money incomes and consumption Goods; supply of funds and investment; the remedy suggested is change in prices and interest by the planning office. These changes will even-out the fluctuations and help in realizing the equilibrium in various magnitudes in the economy. The choice problem regarding production etc. can be resolved by considering the individual needs (the past as well as present). Planning is also objected on the ground of high cost of management attached with the planning. It is explained as: In a market economy the problems of al1ocation, distribution and exchange are solved through market mechanism involving reduced or no management costs. But it is not so in case of planning because such all problems have to be solved in advance. The planners will have to col1ect a lot of statistical data will be requiring a huge army of economic administration, information gathering; preparation of solution models and application of different strategies to achieve the goals etc. In this respect Prof. Lewis writes, "We must have to elaborate census, numerous forms and an array of clerks we can not issue thousands of licenses rapidly without thousands of clerks. The better we try to plan the more planners we need." In addition to these visible costs, there are certain invisible costs like the defective calculations, inadequate implementation of plans and shortages or surpluses due to misplanning. But the proponents of planning are of the view that these costs may be washed out with the passage of time when planning techniques will be improved. Furthermore the supporters of planning are of the view that even the market mechanism is attached with a lot of cost. For example, eyen in market system the courts and police have to be set up to legalize and protect the contracts between buyers and sellers. Moreover, "The stock exchanges, complex banking and commercial apparatus etc. will have to be arranged in the market economy involving a lot of costs. Again, how far the market economy can avoid the wastages arising due to cobweb fluctuation in outputs. Whether the costs are not involved when the competitive firms make lavish expenditures on advertisement, sales promoting activities, avoidance of standardization and under the table concessions to take away each other's customers. These costs are in no way essential for production or distribution, but they are very much must for ravening the market economy. The socialist critics are of the view that mixed economies have to face the cost of planning as well as cost attached with the market mechanism. Therefore, they' prefer complete centralization over partial aad flexible planning. Thus in connection with making a comparison between costs attached with the markets and costs concerned with the planning, it is said the former costs' are not visible while the latter costs are visible. In this respect Charles Bettleheim writes, "The actual burden of this cost is undoubtedly higher when the necessary expenditures consist essenbally of the payments of an adequate planning body than where it consists both of losses of time that adjustments after the event involved and of the waste of work, materials and investment that result from the putting into effect of many false decisions which do not reveal themselves as such until after a more or less considerable lapse of time." Market economy can avoid the wastages arising due to cobweb fluctuation in outputs. Whether the costs are not involved when the competitive firms make lavish expenditures on advertisement, sales promoting activities, avoidance of standardization and under the table concessions to take away each other's customers. These costs are in no way essential for production or distribution, but they are very much must for running the market economy. The socialist critics are of the view that mixed economies have to face the cost of planning as well as cost attached with the market mechanism. Therefore, they' prefer complete centralization over partial and flexible planning. Thus in connection with making a comparison between costs attached with the markets and costs concerned with the planning, it is said the former costs' are not visible while the latter costs are visible. In this respect Charles Bettleheim writes, "The actual burden of this cost is undoubtedly higher when the necessary expenditures consist essentially of the payments of an adequate planning body than where it consists both of losses of time that adjustments after the event involved and of the waste of work, materials and investment that result from the putting into effect of many false decisions which do not reveal themselves as such until after a more or less considerable lapse of time." Planning is objected on the ground that it kills initiatives on the part of labor and producers etc. As a result we do not find research, inventions and innovations, working hard and lot of concerning with incentive to go up in the planned societies. Planning is attached with routine, stagnation and passiveness. Because of such problems the sluggishness and retrogression will develop in the economy. In completely planned economies where there is no private ownership deprive the men from profit motive. As a result, the producers do not take bold decisions regarding risk and adventure. It is the desire for higher profits which drives men to search for new lines, new ideas' and new methods. Moreover, in planned societies when all get equal or near equal shares, or rewards are not linked with productivity, no body will be interested in trying new and risky ventures. In planned economies bureaucracy dominates which is also injurious to initiatives. Bureaucratic attitude of planners is furnished with lot of procedural formalities which are time-consuming and frustrating. In such state of affairs how the incentive will emerge amongst the labor and producers. But the people who criticize the planned system on the basis of killing of incentives, they should also entertain the role played by monopoles in suppressing the incentives on the part of small firms and new entrants. All this means that in the market economy profit is the source of initiative while in the planned society public interest is the source of initiative. In the planned society where there is a change in the super-structure of society, there is a socialization of motives as against individualization of motives. In other words, in planned societies there is a conversion of monetary motives into social motives. In the planned economies there is justness and security which will promote public motives amongst the people. Again, under the umbrel1a of public interest, the bureaucracy will also change its color and behavior. It is the money consideration which in3tigates the bureaucrats to follow the red-tapism, favoritism and nepotism: All such is abolished in the planned scheme of affairs. === LACK OF FREEDOM === Since the inception of planning it is criticized that this system implies restrictions on freedom, whi1e in market economy such like obstacles have not to be faced. But such objection is purely levied on the planning followed by centralized economies like Russia and China etc. In socialist economies, there is no freedom of consumption; no freedom of choice; no freedom of choosing a profession; no freedom to fix the prices and no freedom to produce. On the other hand, in free enterprise economies, consumers are free to consume whatsoever they like; labor are free to choose a profession. Producers are free to produce in accordance with profit consideration; producers are entitled to fix the prices of their goods. In this connection the supporters of planning argue that the concept of planning is an abstract one. As regards consumption, it is determined by the physiology and habits of people which are governed by Engle's Law etc Moreover, freedom of consumption is constrained by prices of the goods and incomes of the people. Regarding the open choice to work in the capitalistic economies, it is said, if it were possible the market economies would not have to face the phenomenon of unemployment. In connection with freedom to produce, the critics say that liberal system of market fails to help during depression when the firms have to quit the production. As far as fixing of prices are concerned, perhaps, it will not be possible in the framework of a competitive economy where demand for and supply of a product determine the price of a product. Planning is objected on the ground of imposing rationing on consumption goods. But the supporters of planned societies think that such type of rationing may also be observed in case of capitalistic countries when there is shortage of necessary consumer goods or some raw material. Accordingly, this situation is common both to the planned as well as unplanned societies. Planning is criticized on the basis of putting constraints on the use of one's resources. But the proponents of planned system are of the view that in the market economies there is freedom for some persons (monopolists who influence price and output). While in the planned economies there is freedom of al1 the persons. Above we have made a lot of discussion regarding the superiority of planning and criticism leveled against planning. Now we are in a position to arrive at some conclusions. As far as the problems created by market mechanism are concerned they are terrible and horrifying for mankind. Accordingly the market system in its crude form cannot be allowed to run. Therefore, even the capitalistic economies cannot refute the existence of some type of state interference in the form of economic planning. By: Shafaq Chohan