HOME

TheInfoList



OR:

Economic planning is a
resource allocation In economics, resource allocation is the assignment of available resources to various uses. In the context of an entire economy, resources can be allocated by various means, such as markets, or planning. In project management, resource allocatio ...
mechanism based on a computational procedure for solving a constrained maximization problem with an
iterative Iteration is the repetition of a process in order to generate a (possibly unbounded) sequence of outcomes. Each repetition of the process is a single iteration, and the outcome of each iteration is then the starting point of the next iteration. ...
process for obtaining its solution. Planning is a mechanism for the allocation of resources between and within organizations contrasted with the market mechanism. As an allocation mechanism for
socialism Socialism is a left-wing economic philosophy and movement encompassing a range of economic systems characterized by the dominance of social ownership of the means of production as opposed to private ownership. As a term, it describes th ...
, economic planning replaces factor markets with a procedure for direct allocations of resources within an interconnected group of socially owned organizations which together comprise the productive apparatus of the economy. There are various forms of economic planning that vary based on their specific procedures and approach. The level of
centralization Centralisation or centralization (see spelling differences) is the process by which the activities of an organisation, particularly those regarding planning and decision-making, framing strategy and policies become concentrated within a particu ...
or
decentralization Decentralization or decentralisation is the process by which the activities of an organization, particularly those regarding planning and decision making, are distributed or delegated away from a central, authoritative location or group. Conce ...
in decision-making depends on the specific type of planning mechanism employed. In addition, one can distinguish between centralized planning and decentralized planning. An economy primarily based on planning is referred to as a planned economy. In a centrally planned economy, the allocation of resources is determined by a comprehensive plan of production which specifies output requirements. Planning can also take the form of indicative planning within a market-based economy, where the state employs market instruments to induce independent firms to achieve development goals. A distinction can be made between physical planning (as in pure socialism) and financial planning (as practiced by governments and private firms in
capitalism Capitalism is an economic system based on the private ownership of the means of production and their operation for profit. Central characteristics of capitalism include capital accumulation, competitive markets, price system, private ...
). Physical planning involves economic planning and coordination conducted in terms of disaggregated physical units whereas financial planning involves plans formulated in terms of financial units.


In socialism

Different forms of economic planning have been featured in various models of socialism. These range from decentralized-planning systems which are based on collective decision-making and disaggregated information to centralized systems of planning conducted by technical experts who use aggregated information to formulate plans of production. In a fully developed socialist economy, engineers and technical specialists, overseen or appointed in a democratic manner, would coordinate the economy in terms of physical units without any need or use for financial-based calculation. The economy of the Soviet Union never reached this stage of development, so planned its economy in financial terms throughout the duration of its existence. Nonetheless, a number of alternative metrics were developed for assessing the performance of non-financial economies in terms of physical output (i.e.
net material product Net Material Product (NMP) was the main macroeconomic indicator used for monitoring growth in national accounts of socialist countries during the Soviet era. These countries included the USSR and all the Comecon members. NMP is the conceptual equi ...
versus
gross domestic product Gross domestic product (GDP) is a monetary measure of the market value of all the final goods and services produced and sold (not resold) in a specific time period by countries. Due to its complex and subjective nature this measure is of ...
). In general, the various models of socialist economic planning such as a socialist mode of production exist as theoretical constructs that have not been implemented fully by any economy, partially because they depend on vast changes on a global scale. In the context of mainstream economics and the field of comparative economic systems, socialist planning usually refers to the Soviet-style command economy, regardless of whether or not this economic system actually constituted a type of
socialism Socialism is a left-wing economic philosophy and movement encompassing a range of economic systems characterized by the dominance of social ownership of the means of production as opposed to private ownership. As a term, it describes th ...
or state capitalism or a third, non-socialist and non-capitalist type of system. In some models of socialism, economic planning completely substitutes the market mechanism, supposedly rendering monetary relations and the price system obsolete. In other models, planning is utilized as a complement to markets.


Concept of socialist planning

The classical conception of socialist economic planning held by Marxists involved an economic system where goods and services were valued, demanded and produced directly for their use-value as opposed to being produced as a by-product of the pursuit of profit by business enterprises. This idea of production for use is a fundamental aspect of a socialist economy. This involves social control over the allocation of the
surplus product Surplus product (german: Mehrprodukt, links=no) is an economic concept explicitly theorised by Karl Marx in his critique of political economy. Roughly speaking, it is the extra goods produced above the amount needed for a community of workers to ...
and in its most extensive theoretical form calculation-in-kind in place of financial calculation. For Marxists in particular, planning entails control of the surplus product (profit) by the associated producers in a democratic manner. This differs from planning within the framework of capitalism which is based on the planned
accumulation of capital Capital accumulation is the dynamic that motivates the pursuit of profit, involving the investment of money or any financial asset with the goal of increasing the initial monetary value of said asset as a financial return whether in the form o ...
in order to either stabilize the business cycle (when undertaken by governments) or to maximize profits (when undertaken by firms) as opposed to the socialist concept of planned production for use. In such a socialist society based on economic planning, the primary function of the state apparatus changes from one of political rule over people (via the creation and enforcement of laws) into a technical administration of production, distribution and organization; that is, the state would become a coordinating economic entity rather than a mechanism of political and class-based control and thereby ceasing to be a state in the Marxist sense.


Administrative-command system

The concept of a command economy is differentiated from the concepts of a planned economy and economic planning, especially by socialists and Marxists who liken command economies (such as that of the former Soviet Union) to that of a single capitalist firm, organized in a top-down administrative fashion based on bureaucratic organization akin to that of a capitalist corporation. Economic analysts have argued that the economy of the Soviet Union actually represented an administrative or command economy as opposed to a planned economy because planning did not play an operational role in the allocation of resources among productive units in the economy since in actuality the main allocation mechanism was a system of command-and-control. The term ''administrative-command economy'' gained currency as a more accurate descriptor of Soviet-type economies.


Decentralized planning

Decentralized economic planning is a planning process that starts at the user-level in a bottom-up flow of information. Decentralized planning often appears as a complement to the idea of socialist self-management, most notably by democratic socialists and libertarian socialists. The theoretical postulates for models of decentralized socialist planning stem from the thought of
Karl Kautsky Karl Johann Kautsky (; ; 16 October 1854 – 17 October 1938) was a Czech-Austrian philosopher, journalist, and Marxist theorist. Kautsky was one of the most authoritative promulgators of orthodox Marxism after the death of Friedrich Engels ...
, Rosa Luxemburg, Nikolai Bukharin and Oskar R. Lange. This model involves economic decision-making based on self-governance from the bottom-up (by employees and consumers) without any directing central authority. This often contrasts with the doctrine of orthodox
Marxism–Leninism Marxism–Leninism is a communist ideology which was the main communist movement throughout the 20th century. Developed by the Bolsheviks, it was the state ideology of the Soviet Union, its satellite states in the Eastern Bloc, and vario ...
which advocates directive administrative planning where directives are passed down from higher authorities (planning agencies) to agents (enterprise managers), who in turn give orders to workers. Two contemporary models of decentralized planning are participatory economics, developed by the economist Michael Albert; and negotiated coordination, developed by the economist Pat Devine.


Lange–Lerner–Taylor model

The economic models developed in the 1920s and 1930s by American economists
Fred M. Taylor Fred Manville Taylor (July 11, 1855, Northville, Michigan – August 7, 1932) was a U.S. economist and educator best known for his contribution to the theory of market socialism. He taught mostly history at Albion College from 1879 to 1892. He t ...
and
Abba Lerner Abraham "Abba" Ptachya Lerner (also Abba Psachia Lerner; 28 October 1903 – 27 October 1982) was a Russian-born American-British economist. Biography Born in Novoselytsia, Bessarabia, Russian Empire, Lerner grew up in a Jewish family, which ...
and by Polish economist Oskar R. Lange involved a form of planning based on marginal cost pricing. In Lange's model, a central planning board would set prices for producer goods through a trial-and-error method, adjusting until the price matched the marginal cost, with the aim of achieving
Pareto-efficient Pareto efficiency or Pareto optimality is a situation where no action or allocation is available that makes one individual better off without making another worse off. The concept is named after Vilfredo Pareto (1848–1923), Italian civil engin ...
outcomes. Although these models were often described as
market socialism Market socialism is a type of economic system involving the public, cooperative, or social ownership of the means of production in the framework of a market economy, or one that contains a mix of worker-owned, nationalized, and privately owned ...
, they actually represented a form of market simulation planning.


Material balances

Material balance planning Material balances are a method of economic planning where material supplies are accounted for in natural units (as opposed to using monetary accounting) and used to balance the supply of available inputs with targeted outputs. Material balancing ...
was the type of economic planning employed by Soviet-type economies. This system emerged in a haphazard manner during the collectivisation drive under
Joseph Stalin Joseph Vissarionovich Stalin (born Ioseb Besarionis dze Jughashvili; – 5 March 1953) was a Georgian revolutionary and Soviet Union, Soviet political leader who led the Soviet Union from 1924 until his death in 1953. He held power as Ge ...
and emphasized rapid growth and industrialization over efficiency. Eventually, this method became an established part of the Soviet conception of socialism in the post-war period and other socialist states emulated it in the latter half of the 20th century. Material balancing involves a planning agency ( Gosplan in the case of the Soviet Union) taking a survey of available inputs and raw materials and using a balance-sheet to balance them with output targets specified by industry, thereby achieving a balance of supply and demand.


In capitalism


Intra-firm and intra-industry planning

Large
corporations A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and r ...
use planning to allocate resources internally among their divisions and subsidiaries. Many modern firms also use
regression analysis In statistical modeling, regression analysis is a set of statistical processes for estimating the relationships between a dependent variable (often called the 'outcome' or 'response' variable, or a 'label' in machine learning parlance) and one ...
to measure market demand to adjust prices and to decide upon the optimal quantities of output to be supplied. Planned obsolescence is often cited as a form of economic planning that is used by large firms to increase demand for future products by deliberately limiting the operational lifespan of its products. Thus, the internal structures of corporations have been described as centralized command economies that use both planning and hierarchical organization and management. According to
J. Bradford DeLong James Bradford "Brad" DeLong (born June 24, 1960) is an economic historian who is a professor of economics at the University of California, Berkeley. DeLong served as Deputy Assistant Secretary of the U.S. Department of the Treasury in the Clint ...
, many transactions in Western economies do not pass through anything resembling a market, but rather they are actually movements of value among different branches and divisions within corporations, companies and agencies. Furthermore, much economic activity is centrally planned by managers within firms in the form of production planning and marketing management (that consumer demand is estimated, targeted and included in the firm's overall plan) and in the form of production planning. In ''
The New Industrial State ''The New Industrial State'' is a 1967 book by John Kenneth Galbraith. Three revised editions appeared in 1972, 1978 and 1985. Discussion In it, Galbraith asserts that within the industrial sectors of modern capitalist societies, the traditiona ...
'', the American economist John Kenneth Galbraith noted that large firms manage both prices and consumer demand for their products by sophisticated statistical methods. Galbraith also pointed out that because of the increasingly complex nature of technology and the specialization of knowledge, management had become increasingly specialized and bureaucratized. The internal structures of corporations and companies had been transformed into what he called a " technostructure". Its specialized groups and committees are the primary decision-makers and specialized managers, directors and financial advisers operate under formal bureaucratic procedures, replacing the individual entrepreneur's role and
intrapreneurship Intrapreneurship is the act of behaving like an entrepreneur while working within a large organization. Intrapreneurship is known as the practice of a corporate management style that integrates risk-taking and innovation approaches, as well as t ...
. Galbraith stated that both the obsolete notion of entrepreneurial capitalism and democratic socialism (defined as democratic management) are impossible organizational forms for managing a modern industrial system. Joseph Schumpeter, an economist associated with both the
Austrian School The Austrian School is a heterodox school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result exclusively from the motivations and actions of individuals. Austrian scho ...
and the institutional school of economics, argued that the changing nature of economic activity (specifically the increasing bureaucratization and specialization required in production and management) was the major cause for capitalism eventually evolving into socialism. The role of the businessman was increasingly bureaucratic and specific functions within the firm required increasingly specialized knowledge which could be supplied as easily by state functionaries in publicly owned enterprises. In the first volume of ''
Das Kapital ''Das Kapital'', also known as ''Capital: A Critique of Political Economy'' or sometimes simply ''Capital'' (german: Das Kapital. Kritik der politischen Ökonomie, link=no, ; 1867–1883), is a foundational theoretical text in materialist phi ...
'',
Karl Marx Karl Heinrich Marx (; 5 May 1818 – 14 March 1883) was a German philosopher, economist, historian, sociologist, political theorist, journalist, critic of political economy, and socialist revolutionary. His best-known titles are the 1848 ...
identified the process of capital accumulation as central to the law of motion of capitalism. The increased industrial capacity caused by the increasing returns to scale further socializes production. Capitalism eventually socializes labor and production to a point that the traditional notions of private ownership and commodity production become increasingly insufficient for further expanding the productive capacities of society, necessitating the emergence of a socialist economy in which means of production are socially owned and the surplus value is controlled by the workforce. Many socialists viewed these tendencies, specifically the increasing trend toward economic planning in capitalist firms, as evidence of the increasing obsolescence of capitalism and inapplicability of ideals like perfect competition to the economy, with the next stage of evolution being the application of society-wide economic planning.


State development planning

State development planning or national planning entails macroeconomic policies and financial planning conducted by governments to stabilize the market or promote economic growth in market-based economies. This involves the use of monetary policy, industrial policy and fiscal policy to steer the market toward targeted outcomes. Industrial policy includes government taking measures "aimed at improving the competitiveness and capabilities of domestic firms and promoting structural transformation". In contrast to socialist planning, state development planning does not replace the market mechanism and does not eliminate the use of money in production. It only applies to privately owned and publicly owned firms in the strategic sectors of the economy and seeks to coordinate their activities through indirect means and market-based incentives (such as tax breaks or subsidies).


Around the world

While economic planning is mainly associated with
socialism Socialism is a left-wing economic philosophy and movement encompassing a range of economic systems characterized by the dominance of social ownership of the means of production as opposed to private ownership. As a term, it describes th ...
and the
Soviet Union The Soviet Union,. officially the Union of Soviet Socialist Republics. (USSR),. was a transcontinental country that spanned much of Eurasia from 1922 to 1991. A flagship communist state, it was nominally a federal union of fifteen nationa ...
and the
Eastern Bloc The Eastern Bloc, also known as the Communist Bloc and the Soviet Bloc, was the group of socialist states of Central and Eastern Europe, East Asia, Southeast Asia, Africa, and Latin America under the influence of the Soviet Union that existed du ...
, in particular its administrative-command system, government planning of the economy can also happen under other political philosophies to industrialise and modernise the economy. A different form of planned economy operated in India during the Permit Raj era from 1947 to 1990. The unusually large government sector in countries like Saudi Arabia means that even though there is a market, central government planning controls allocation of most economic resources. In the United States, the government temporarily seized large portions of the economy during World War I and World War II, resulting in a largely government-planned war economy.


East Asia

The development models of the East Asian Tiger economies involved varying degrees of economic planning and state-directed investment in a model sometimes described as state development capitalism or the East Asian Model. The economy in both
Malaysia Malaysia ( ; ) is a country in Southeast Asia. The federal constitutional monarchy consists of thirteen states and three federal territories, separated by the South China Sea into two regions: Peninsular Malaysia and Borneo's East Mal ...
and
South Korea South Korea, officially the Republic of Korea (ROK), is a country in East Asia, constituting the southern part of the Korea, Korean Peninsula and sharing a Korean Demilitarized Zone, land border with North Korea. Its western border is formed ...
were instituted by a series of macroeconomic government plans (
First Malaysia Plan The First Malaysia Plan (1966–1970) was an economic development plan implemented by the government of Malaysia. It was the first economic plan for the whole of Malaysia—Sabah and Sarawak included—as opposed to just Malaya, which previous e ...
and Five-Year Plans of South Korea) that rapidly developed and industrialized their mixed economies. The economy of Singapore was partially based on government economic planning that involved an active
industrial policy An industrial policy (IP) or industrial strategy of a country is its official strategic effort to encourage the development and growth of all or part of the economy, often focused on all or part of the manufacturing sector. The government takes m ...
and a mixture of state-owned industry and free-market economy.


France

Under ''
dirigisme Dirigisme or dirigism () is an economic doctrine in which the state plays a strong directive (policies) role contrary to a merely regulatory interventionist role over a market economy. As an economic doctrine, dirigisme is the opposite of ''lai ...
'' (dirigism), France used indicative planning and established a number of state-owned enterprises in strategic sectors of the economy. The concept behind indicative planning is the early identification of oversupply, bottlenecks and shortages so that state investment behavior can be quickly modified to reduce market disequilibrium so that stable economic development and growth can be sustained. France experienced its '' Trente Glorieuses'' (Thirty Glorious), years with economic prosperity.


Soviet Union

The Soviet Union was the first national economy to attempt economic planning as a substitute for factor market allocation. Soviet-type economic planning took form in the 1930s and largely remained unchanged despite mild reforms until the Soviet Union's dissolution. Soviet economic planning was centralized and organized hierarchically, with a state planning agency such as the Gosplan establishing target rates for growth and the
Gossnab State Supplies of the USSR, known as the Gossnab of USSR (russian: Госснаб СССР) was active from 1948 to 1953, and 1965 to 1991. It was the state committee for material technical supply in the Soviet Union. It was charged with the prim ...
allocating factor inputs to enterprises and economic units throughout the national economy. The national plan was broken down by various ministries, which in turn used the plan to formulate directives for local economic units which implemented them. The system used
material balance planning Material balances are a method of economic planning where material supplies are accounted for in natural units (as opposed to using monetary accounting) and used to balance the supply of available inputs with targeted outputs. Material balancing ...
. Economic information, including consumer demand and enterprise resource requirements, were aggregated to balance supply from the available resource inventories, with demand based on requirements for individual economic units and enterprises through a system of iterations. The economy of the Soviet Union operated in a
centralized Centralisation or centralization (see spelling differences) is the process by which the activities of an organisation, particularly those regarding planning and decision-making, framing strategy and policies become concentrated within a particu ...
and hierarchical manner. The process used directives which were issued to lower-level organizations. Thus, the Soviet economic model was often referred to as a command economy or an administered economy as plan directives were enforced by inducements in a vertical power structure, with actual planning playing little functional role in the allocation of resources. Owing to difficulties in transmitting information in a timely fashion and disseminating information on demand throughout the whole economy, administrative mechanisms of decision-making and resource allocation played the dominant role in allocating factor inputs as opposed to planning.


United Kingdom

The need for long-term economic planning to promote efficiency was a central component of Labour Party thinking until the 1970s. The
Conservative Party The Conservative Party is a name used by many political parties around the world. These political parties are generally right-wing though their exact ideologies can range from center-right to far-right. Political parties called The Conservative P ...
largely agreed, producing the postwar consensus, namely the broad bipartisan agreement on major policies. A long-term economic plan was a phrase often used in British politics.


United States

The United States used economic planning during World War I. The federal government supplemented the price system with centralized resource allocation and created a number of new agencies to direct important economic sectors, notably the Food Administration, Fuel Administration, Railroad Administration and War Industries Board. During World War II, the economy experienced staggering growth under a similar system of planning. In the postwar period, United States governments utilized such measures as the Economic Stabilization Program to directly intervene in the economy to control prices and wages, among other things, in different economic sectors. Since the start of the Cold War, the federal government has directed a significant amount of investment and funding into
research and development Research and development (R&D or R+D), known in Europe as research and technological development (RTD), is the set of innovative activities undertaken by corporations or governments in developing new services or products, and improving existi ...
(R&D), often initially through the
United States Department of Defense The United States Department of Defense (DoD, USDOD or DOD) is an executive branch department of the federal government charged with coordinating and supervising all agencies and functions of the government directly related to national sec ...
. The government performs 50% of all R&D in the United States, with a dynamic state-directed public-sector developing most of the technology that later becomes the basis of the private sector economy.
Noam Chomsky Avram Noam Chomsky (born December 7, 1928) is an American public intellectual: a linguist, philosopher, cognitive scientist, historian, social critic, and political activist. Sometimes called "the father of modern linguistics", Chomsky i ...
has referred to the United States economic model as a form of state capitalism. Examples include laser technology, the internet, nanotechnology, telecommunications and computers, with most basic research and downstream commercialization financed by the public sector. That includes research in other fields including healthcare and energy, with 75% of most innovative drugs financed through the
National Institutes of Health The National Institutes of Health, commonly referred to as NIH (with each letter pronounced individually), is the primary agency of the United States government responsible for biomedical and public health research. It was founded in the lat ...
.


Criticism

The most notable critique of economic planning came from Austrian economists
Friedrich Hayek Friedrich August von Hayek ( , ; 8 May 189923 March 1992), often referred to by his initials F. A. Hayek, was an Austrian–British economist, legal theorist and philosopher who is best known for his defense of classical liberalism. Hayek ...
and
Ludwig von Mises Ludwig Heinrich Edler von Mises (; 29 September 1881 – 10 October 1973) was an Austrian School economist, historian, logician, and sociologist. Mises wrote and lectured extensively on the societal contributions of classical liberalism. He is ...
. Hayek argued that central planners could not possibly accrue the necessary information to formulate an effective plan for production because they are not exposed to the rapid changes that take place in an economy in any particular time and place and so they are unfamiliar with those circumstances. The process of transmitting all the necessary information to planners is thus inefficient without a price system for the means of production. Mises also had a similar opinion. In his analysis of socialism in 1938, Oskar R. Lange addressed this theoretical issue by pointing out that planners could gain much of the information they required by monitoring changes in plant inventory levels. In practice, economic planners in Soviet-typed planned economies were able to make use of this technique. Proponents of decentralized economic planning have also criticized central economic planning.
Leon Trotsky Lev Davidovich Bronstein. ( – 21 August 1940), better known as Leon Trotsky; uk, link= no, Лев Давидович Троцький; also transliterated ''Lyev'', ''Trotski'', ''Trotskij'', ''Trockij'' and ''Trotzky''. (), was a Russian ...
believed that central planners, regardless of their intellectual capacity, operated without the input and participation of the millions of people who participate in the economy and so they would be unable to respond to local conditions quickly enough to effectively coordinate all economic activity. Trotsky, Leon. ''Writings of Leon Trotsky (1932-33)''. p. 96.


See also

*
Calculation in kind __NOTOC__ Calculation in kind or calculation in-natura is a way of valuating resources and a system of accounting that uses disaggregated physical magnitudes as opposed to a common unit of calculation. As the basis for a socialist economy, it wa ...
* Council democracy * Cybernetics *
Decentralized planning (economics) A planned economy is a type of economic system where investment, production and the allocation of capital goods takes place according to economy-wide economic plans and production plans. A planned economy may use centralized, decentralized, parti ...
*
Dirigisme Dirigisme or dirigism () is an economic doctrine in which the state plays a strong directive (policies) role contrary to a merely regulatory interventionist role over a market economy. As an economic doctrine, dirigisme is the opposite of ''lai ...
*
Economic democracy Economic democracy is a socioeconomic philosophy that proposes to shift decision-making power from corporate managers and corporate shareholders to a larger group of public stakeholders that includes workers, customers, suppliers, neighbou ...
*
Econometrics Econometrics is the application of statistical methods to economic data in order to give empirical content to economic relationships. M. Hashem Pesaran (1987). "Econometrics," '' The New Palgrave: A Dictionary of Economics'', v. 2, p. 8 p. ...
* Enterprise resource planning * Indicative planning *
Industrial policy An industrial policy (IP) or industrial strategy of a country is its official strategic effort to encourage the development and growth of all or part of the economy, often focused on all or part of the manufacturing sector. The government takes m ...
* Input-output planning * Material Product System *
Material balance planning Material balances are a method of economic planning where material supplies are accounted for in natural units (as opposed to using monetary accounting) and used to balance the supply of available inputs with targeted outputs. Material balancing ...
* Mixed economy * Nonmarket forces * Participatory planning * Peer-to-peer economy * Planned economy * Socialist calculation debate *
Socialization (economics) Social ownership is the appropriation of the surplus product, produced by the means of production, or the wealth that comes from it, to society as a whole. It is the defining characteristic of a socialist economic system. It can take the form ...
* Socialist economics * Soviet-type economic planning * "
The Use of Knowledge in Society "The Use of Knowledge in Society" is a scholarly article written by economist Friedrich Hayek, first published in the September 1945 issue of '' The American Economic Review''. Written (along with ''The Meaning of Competition'') as a rebuttal to ...
"


Notes

{{economics Socialism Economic ideologies Economic systems