The Alternative Economic Systems – Explained!

Now, an important question is if there is any alternative economic system that can solve the basic economic problem faced by the nations. In fact an alternative economic system known as authoritarian socialist system or command economy was adopted in erstwhile Soviet Russia, China, East European countries such as Poland, Czechoslovakia.

In this authoritar­ian socialist system or command economy basic economic problem of what, how and for whom to produce etc. are resolved through a combination of state ownership of productive enterprises and centralised planning.

It is government or any central authority set up by it that decides output targets for each public enterprise, allocates resources to them and fixes prices of various goods and services and incomes (wages, salaries) of various types of workers.

In a centrally planned socialist economy, there exists a central planning authority, which organises and regulates the various economic activities. Thus it is the central planning authority which determines what the various production units shall produce, what the various individuals shall obtain for consumption and as a result what shall be left for investment. Further, it decides what type of investment shall be made.


It should be realised that the organization of the various economic activities by one planning authority is full of administrative and economic difficulties. The authority is faced with the political and administrative problems of getting their decisions implemented. In other words, there are problems of putting the various decisions into effect.

Moreover, the planning authority is faced with an overall economic problem, namely, how to use the limited productive resources for achieving the best possible results. The particulars purposes for which resources are to be used have to be decided. In other words, allocation of resources as between various kinds of consumer goods, and as between consumer goods and capital goods, and as between civilian goods and war goods has to be decided.

Taking of all these decisions is indeed a very difficult task. Besides, decisions have to be taken about the particular techniques with which various products are to be produced and about distributing goods among the people.

It may be noted that planning of actual production of various products is greatly difficult due to the fact that technical relations between different kinds of products are very much complicated. For example, to build ships it apparently seems that only steel and other materials which make up ships are required.


But little more thinking will reveal that arrangements for the complicated process of production of steel and other materials have to be made before steel and other materials become available for use in ship building. Moreover, various types of machinery would have to be made for converting iron ore into steel as well as converting steel into ships.

Further, the arrangements for coal, electricity and transport have to be made if the production of steel and ships is to become possible. Thus, technical relations between different kinds of output are so complicated that for carrying out the decision to produce more of one kind of product, adjustments on several other lines have to be made.

Collapse of the Command Economy or Authoritarian Socialist System:

It is obvious from what has been said above that the planning of productive activity by one central authority is a very difficult task. The planning authority in the centrally planned economies like those of erstwhile Soviet Russia and East European countries which used to plan production with the aid of several technical experts before the system broke down in the late eighties.


In the late eighties the socialist countries, Soviet Russia and countries of Eastern Europe such as Poland, Czechoslovakia had to face severe economic problems which led to the collapse of Soviet-type authoritarian socialism or what is called command economy. In its place the market system has been introduced and this is proclaimed as victory of capitalism over socialism.

There is more than one reason for the collapse of the command economy in Soviet Russian and/Eastern Europe. The important reason for the collapse of socialism and centralised planning was lack of efficiency in resource allocation. It was found that for a central planning authority consisting of bureaucrats it was difficult to make right decisions to allocate scarce resources according to the wants and preferences of the people.

As result, shortage in some goods and surplus in others emerged. These could not be easily corrected due to corrupt, inefficient and unresponsive government officials. This caused a lot of wastage of national resources.

The most glaring example of inefficiency in allocation of resources in Soviet Russia and other command economies was the emergence of acute scarcity of essential consumer goods. This led to long-queues of the people at the consumer stores to get these goods.


This acute scarcity of consumer goods led to the lack of faith in socialism to deliver the goods. Indeed, it was said that Soviet-type authoritarian socialism promised bread at the expense of liberty of the people. But in actual practice people got neither bread nor liberty.

Since by the late nineteen eighties the then Soviet President Mickhail Gorbachev had introduced some freedom for the people, the wide expression of resentment about the scarcity of consumer goods could not be suppressed. This led to the collapse of authoritarian socialism and introduction of reforms aimed at introduction of private enterprise and the market system.

The other important reason for the failure of centralised planning was that the managers of public enterprises lacked incentives to improve productivity and efficiency. This was due to the absence of profit motive on the part of managers of public enterprises. This caused inefficiency in the use and allocation of scarce resources.

The most important economic problem faced by these socialist countries was slowdown in economic growth in these countries. In Soviet Russia the growth rate which in the post-war period averaged about 7 per cent in 1950s and about 5 per cent in 1960s slipped into 3 per cent range during the 1970s and was nearly zero in the 1980s.

Similar experience of slowdown in economic growth rate was observed in other socialist countries of Eastern Europe. Now, when growth rate in them was higher, more employment opportunities were increasing and more goods were forthcoming which enabled people to improve their levels of living. However, when there was sharp slowdown in economic growth, to satisfy the ever-rising wants of the people for goods became difficult and a strong need was felt to make a switch over to the market system to speed up the rate of economic growth.

Lastly, problems of centralised planning with its inflexibility and inefficiency have been present throughout in the post revolution period in Soviet Russia. Lacking profit-motive the managers of productive enterprises do not have sufficient incentives to produce the right type of goods in the most efficient way.

This causes inefficiency in the use and allocation of resources which accounted for low productivity and efficiency in the socialist countries. Owing to lack of incentives managers of productive enterprises were more concerned with fulfilling the quotas assigned to them (which they succeeded in achieving them by deliberately setting them at lower levels) rather than improving efficiency.

But still deeper problem posed by the absence of profit motive was managers of state enterprises lacked incentives to introduce innovations and undertake risks which caused inefficiency and slow economic growth and ultimately stagnation.

To conclude, the above problems led to the downfall of authoritarian socialism or command economy system in Soviet Russia and other socialist countries. This led to the process of liberalisation of Soviet Russia and other socialist countries.

It is because of these problems of economic inefficiency and slowdown in economic growth that even China and India introduced economic reforms which lay stress on privatisation and greater role of market mechanism for solving the economic problems. It may be noted here the India has adopted the path of a mixed economy. In India’s mixed economy both private sector and economic planning by the Government play roles in the working of the Indian economy.

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