Economic planning
Encyclopedia
Economic planning refers to any directing or planning of economic activity outside the mechanisisms of the market
, in an attempt to achieve specific economic or social outcomes. Planning is an economic mechanism for resource allocation and decision-making in contrast with the market mechanism
. Most economies are mixed economies, incorporating elements of market mechanisms and planning for distributing inputs and outputs. The level of centralization of decision-making ultimately depends on the type of planning mechanism employed; as such planning may be based on either centralized or decentralized decision-making.
Economic planning can apply to production
, investment
, distribution
or all three of these functions. Planning may take the form of directive planning or indicative planning
. An economy primarily based on central planning is a planned economy
; in a planned economy the allocation of resources is determined by a comprehensive plan of production which specifies output requirements.
, and economic planning, defining a command economy as top-down administrative planning based on bureaucratic organization (akin to organizing the economy as a single capitalist firm).
Classical socialists and Marxists
define economic planning as directly producing use-values, as opposed to indirectly producing use-value as a byproduct of pursuing profits, and consider this to be a fundamental element of a socialist economy. Economic planning implies production for use
, social control over the allocation of surpluses, 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. democratic fashion
. This differs from planning within the framework of capitalism, which is based on the planned accumulation of capital
, as opposed to the planned production of use-values.
Marxists and early technocratic socialists
hold the view that in 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 scientific administration of things and a direction of processes of production; that is the state would become a coordinating economic entity rather than a mechanism of class or political control, thereby ceasing to be a state in the traditional sense.
Libertarian socialists, Syndicalists, Trotskyists
, orthodox Marxists
and democratic socialists advocate various forms of de-centralized planning
and self-management. In a de-centralized planned economy, economic decision-making is based on self-management and self-governance from the bottom-up without any directing central authority (in a spontaneous manner). On the other hand, Leninists
, Marxist-Leninists
, Social democrats and some state-oriented socialists
advocate directive administrative planning where directives are passed down from higher authorities (planning agencies) to agents (enterprise managers), who in turn give orders to workers.
In some socialist theories, economic planning completely substitutes the market mechanism and supposedly renders monetary relations and the price system obsolete. In other theories, planning is utilized as a complement to markets. Polish economist Oskar Lange
and American economist Abba Lerner proposed a form of market socialism
where a central planning board would adjust prices of publicly-owned firms to equal marginal cost to enhance the market mechanism by achieving pareto efficient
outcomes.
In general, the various types of socialist economic planning listed above exist as theoretical constructs that have not been implemented fully by any economy, partially because they depend on vast changes in social and economic development on a global scale (see: mode of production
). In the context of mainstream neoclassical economics, socialist planning usually refers to the Soviet-type command economies, regardless of whether or not they actually constituted a type of state capitalism
or a third, non-socialist and non-capitalist system, such as Bureaucratic collectivism
.
is often cited as a form of economic planning employed by large firms to increase demand for future products by deliberately limiting the operational lifespan of a product.
In The New Industrial State
, economist John Kenneth Galbraith
posited that large firms can manage prices and consumer demand, and because of increasing technological capacity, management has become increasingly specialized and bureaucratized. The internal structure of a corporation has been reorganized in what he calls a "technostructure
", where specialized groups and committees are the primary decision-makers and specialized managers, directors and financial advisers and formal, bureaucratic procedures have replaced the individual entrepreneur's role. He states that both the obsolete notion of "entrepreneurial capitalism" and democratic socialism are impossible for managing the modern industrial system.
Austrian economist Joseph Schumpeter
argued that the changing nature of economic activity; the increasing bureaucratization and specialization of production; was one of the main reasons capitalism would eventually evolve into socialism. The role of the businessman was increasingly bureaucratic and specific functions within the firm required increasing specialized knowledge, which can just as easily be supplied by the state apparatus.
In the first volume of Capital, Karl Marx
identifies a tendency for capital to accumulate under capitalism, which leads to increasing industrial capacity due to increasing returns to scale. Capitalism eventually socializes labor and production to a point where the traditional notion of private ownership and commodity production are insufficient for managing and further expanding the productive capabilities of society, necessitating a socialist economy of the means of production and cooperative worker control over the surplus value. Socialists see this as evidence of the increasing obsolescence and inapplicability of notions of perfect competition and as evidence of the increasingly trend toward economic planning in some form or another, the next stage of evolution being planning production on the level of the national economy.
utilized economic planning during the First World War. 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 the Second World War, the economy experienced staggering growth under a similar system of planning.
From the start of the Cold War to the present, the United States Federal Government directs a significant amount of investment and funding into research and development, often initially through the Department of Defense
. 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. Examples include laser technology, the internet, telecommunications and computers.
to develop its mixed economy. Singapore
and South Korea
were also partially based on economic planning with active government industrial policies
during their rapid development. However, the latter is better described as interventionist
because the government intervened in a mainly market-based, rather than planned, economy.
Iran
practices a degree of economic planning, but has experienced shortages of oil at pumping stations despite enormous natural reserves.
, France practiced indicative planning
and nationalized or established a number of state 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 modified in a timely fashion to reduce the incidence of market disequilibrium, with the goal being a concerted economy.
and Ludwig von Mises
. 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 in the particular time and place that take place in an economy, and are unfamiliar with these circumstances. Transmitting all the necessary information to planners to accumulate and form a comprehensive plan is therefore inefficient.
Centralized economic planning has also been criticized by proponents of de-centralized economic planning. For example, Leon Trotsky
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 understand/respond to local conditions and changes in the economy would be unable to effectively coordinate all economic activity.
Proponents of technocratic planning have responded by saying democratic planning would be inefficient due to the time it takes to deliberate and vote on action in a direct democratic setting. Democratic planning would also be ineffective because various economic decisions require specialized knowledge, which the majority of voters lack.
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...
, in an attempt to achieve specific economic or social outcomes. Planning is an economic mechanism for resource allocation and decision-making in contrast with the market mechanism
Market economy
A market economy is an economy in which the prices of goods and services are determined in a free price system. This is often contrasted with a state-directed or planned economy. Market economies can range from hypothetically pure laissez-faire variants to an assortment of real-world mixed...
. Most economies are mixed economies, incorporating elements of market mechanisms and planning for distributing inputs and outputs. The level of centralization of decision-making ultimately depends on the type of planning mechanism employed; as such planning may be based on either centralized or decentralized decision-making.
Economic planning can apply to production
Production (economics)
In economics, production is the act of creating 'use' value or 'utility' that can satisfy a want or need. The act may or may not include factors of production other than labor...
, investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
, distribution
Distribution (economics)
Distribution in economics refers to the way total output, income, or wealth is distributed among individuals or among the factors of production .. In general theory and the national income and product accounts, each unit of output corresponds to a unit of income...
or all three of these functions. Planning may take the form of directive planning or indicative planning
Indicative planning
Indicative planning is a form of central economic planning implemented by a state in an effort to solve the problem of imperfect information in economies and thus increase economic performance...
. An economy primarily based on central planning is a planned economy
Planned economy
A planned economy is an economic system in which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a government agency...
; in a planned economy the allocation of resources is determined by a comprehensive plan of production which specifies output requirements.
Socialist economic planning
Socialists and Marxists differentiate between the concept of command economy, which existed in the Soviet UnionSoviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....
, and economic planning, defining a command economy as top-down administrative planning based on bureaucratic organization (akin to organizing the economy as a single capitalist firm).
Classical socialists and Marxists
Socialism (Marxism)
In Marxist theory, socialism, or the socialist mode of production, refers to a specific historical phase of economic development and its corresponding set of social relations that eventually supersede capitalism...
define economic planning as directly producing use-values, as opposed to indirectly producing use-value as a byproduct of pursuing profits, and consider this to be a fundamental element of a socialist economy. Economic planning implies production for use
Production for use
Production for use is a defining criterion of a socialist economy and distinguishes socialism from capitalism...
, social control over the allocation of surpluses, and in its most extensive theoretical form, calculation-in-kind
Calculation in kind
Calculation in kind is a type of accounting based on physical magnitudes and physical quantities rather than a common unit of accounting for economic calculation. Calculation in kind, or valueless calculation, is often described as the form of calculation that would supersede monetary calculation...
in place of financial calculation. For Marxists in particular, planning entails control of the surplus product (profit) by the associated producers. democratic fashion
Economic democracy
Economic democracy is a socioeconomic philosophy that suggests a shift in decision-making power from a small minority of corporate shareholders to a larger majority of public stakeholders...
. This differs from planning within the framework of capitalism, which is based on the planned accumulation of capital
Capital accumulation
The accumulation of capital refers to the gathering or amassing of objects of value; the increase in wealth through concentration; or the creation of wealth. Capital is money or a financial asset invested for the purpose of making more money...
, as opposed to the planned production of use-values.
Marxists and early technocratic socialists
Utopian socialism
Utopian socialism is a term used to define the first currents of modern socialist thought as exemplified by the work of Saint-Simon, Charles Fourier, and Robert Owen which inspired Karl Marx and other early socialists and were looked on favorably...
hold the view that in 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 scientific administration of things and a direction of processes of production; that is the state would become a coordinating economic entity rather than a mechanism of class or political control, thereby ceasing to be a state in the traditional sense.
Libertarian socialists, Syndicalists, Trotskyists
Trotskyism
Trotskyism is the theory of Marxism as advocated by Leon Trotsky. Trotsky considered himself an orthodox Marxist and Bolshevik-Leninist, arguing for the establishment of a vanguard party of the working-class...
, orthodox Marxists
Marxism
Marxism is an economic and sociopolitical worldview and method of socioeconomic inquiry that centers upon a materialist interpretation of history, a dialectical view of social change, and an analysis and critique of the development of capitalism. Marxism was pioneered in the early to mid 19th...
and democratic socialists advocate various forms of de-centralized planning
Decentrally planned economy
A decentrally planned economy or decentralised planned economy is an economy where members of a society, acting with equal economic power, democratically plan economic activity in the absence of a central authority.The 1970 Chilean computer controlled planned economy cybersyn was pioneered by...
and self-management. In a de-centralized planned economy, economic decision-making is based on self-management and self-governance from the bottom-up without any directing central authority (in a spontaneous manner). On the other hand, Leninists
Leninism
In Marxist philosophy, Leninism is the body of political theory for the democratic organisation of a revolutionary vanguard party, and the achievement of a direct-democracy dictatorship of the proletariat, as political prelude to the establishment of socialism...
, Marxist-Leninists
Marxism-Leninism
Marxism–Leninism is a communist ideology, officially based upon the theories of Marxism and Vladimir Lenin, that promotes the development and creation of a international communist society through the leadership of a vanguard party over a revolutionary socialist state that represents a dictatorship...
, Social democrats and some state-oriented socialists
State socialism
State socialism is an economic system with limited socialist characteristics, such as public ownership of major industries, remedial measures to benefit the working class, and a gradual process of developing socialism through government policy...
advocate directive administrative planning where directives are passed down from higher authorities (planning agencies) to agents (enterprise managers), who in turn give orders to workers.
In some socialist theories, economic planning completely substitutes the market mechanism and supposedly renders monetary relations and the price system obsolete. In other theories, planning is utilized as a complement to markets. Polish economist Oskar Lange
Oskar Lange
Oskar Ryszard Lange was a Polish economist and diplomat...
and American economist Abba Lerner proposed a form of market socialism
Market socialism
Market socialism refers to various economic systems where the means of production are either publicly owned or cooperatively owned and operated for a profit in a market economy. The profit generated by the firms system would be used to directly remunerate employees or would be the source of public...
where a central planning board would adjust prices of publicly-owned firms to equal marginal cost to enhance the market mechanism by achieving pareto efficient
Pareto efficiency
Pareto efficiency, or Pareto optimality, is a concept in economics with applications in engineering and social sciences. The term is named after Vilfredo Pareto, an Italian economist who used the concept in his studies of economic efficiency and income distribution.Given an initial allocation of...
outcomes.
In general, the various types of socialist economic planning listed above exist as theoretical constructs that have not been implemented fully by any economy, partially because they depend on vast changes in social and economic development on a global scale (see: mode of production
Mode of production
In the writings of Karl Marx and the Marxist theory of historical materialism, a mode of production is a specific combination of:...
). In the context of mainstream neoclassical economics, socialist planning usually refers to the Soviet-type command economies, regardless of whether or not they actually constituted a type of state capitalism
State capitalism
The term State capitalism has various meanings, but is usually described as commercial economic activity undertaken by the state with management of the productive forces in a capitalist manner, even if the state is nominally socialist. State capitalism is usually characterized by the dominance or...
or a third, non-socialist and non-capitalist system, such as Bureaucratic collectivism
Bureaucratic collectivism
Bureaucratic collectivism is a theory of class society. It is used by some Trotskyists to describe the nature of the Soviet Union under Joseph Stalin, and other similar states in Central and Eastern Europe and elsewhere .- Theory :...
.
Intra-firm and intra-industry planning
Large corporations allocate resources internally among different divisions and subsidiaries through planning. Many modern firms also utilize regression analysis to measure market demand in order to adjust price and decide on the optimal quantity of output to be supplied. Planned obsolescencePlanned obsolescence
Planned obsolescence or built-in obsolescence in industrial design is a policy of deliberately planning or designing a product with a limited useful life, so it will become obsolete or nonfunctional after a certain period of time...
is often cited as a form of economic planning employed by large firms to increase demand for future products by deliberately limiting the operational lifespan of a product.
In The New Industrial State
The New Industrial State
The New Industrial State is a 1967 book by John Kenneth Galbraith. In it, Galbraith asserts that within the industrial sectors of modern capitalist societies, the traditional mechanism of supply and demand is supplanted by the planning of large corporations, using techniques such as advertising...
, economist John Kenneth Galbraith
John Kenneth Galbraith
John Kenneth "Ken" Galbraith , OC was a Canadian-American economist. He was a Keynesian and an institutionalist, a leading proponent of 20th-century American liberalism...
posited that large firms can manage prices and consumer demand, and because of increasing technological capacity, management has become increasingly specialized and bureaucratized. The internal structure of a corporation has been reorganized in what he calls a "technostructure
Technostructure
Technostructure is a term coined by the economist John Kenneth Galbraith in "The New Industrial State" to describe the group of technicians within an enterprise with considerable influence and control on its economy...
", where specialized groups and committees are the primary decision-makers and specialized managers, directors and financial advisers and formal, bureaucratic procedures have replaced the individual entrepreneur's role. He states that both the obsolete notion of "entrepreneurial capitalism" and democratic socialism are impossible for managing the modern industrial system.
Austrian economist Joseph Schumpeter
Joseph Schumpeter
Joseph Alois Schumpeter was an Austrian-Hungarian-American economist and political scientist. He popularized the term "creative destruction" in economics.-Life:...
argued that the changing nature of economic activity; the increasing bureaucratization and specialization of production; was one of the main reasons capitalism would eventually evolve into socialism. The role of the businessman was increasingly bureaucratic and specific functions within the firm required increasing specialized knowledge, which can just as easily be supplied by the state apparatus.
In the first volume of Capital, Karl Marx
Karl Marx
Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...
identifies a tendency for capital to accumulate under capitalism, which leads to increasing industrial capacity due to increasing returns to scale. Capitalism eventually socializes labor and production to a point where the traditional notion of private ownership and commodity production are insufficient for managing and further expanding the productive capabilities of society, necessitating a socialist economy of the means of production and cooperative worker control over the surplus value. Socialists see this as evidence of the increasing obsolescence and inapplicability of notions of perfect competition and as evidence of the increasingly trend toward economic planning in some form or another, the next stage of evolution being planning production on the level of the national economy.
Command economy
United States
The United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
utilized economic planning during the First World War. 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 the Second World War, the economy experienced staggering growth under a similar system of planning.
From the start of the Cold War to the present, the United States Federal Government directs a significant amount of investment and funding into research and development, often initially through the Department of Defense
United States Department of Defense
The United States Department of Defense is the U.S...
. 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. Examples include laser technology, the internet, telecommunications and computers.
Asia
The government of Malaysia instituted a series of macroeconomic plansFirst Malaysia Plan
The First Malaysia Plan 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 economic plans had confined themselves to...
to develop its mixed economy. Singapore
Economy of Singapore
Singapore has a highly developed state capitalist mixed economy; the state owns stakes in firms that comprise perhaps 60% of the GDP through entities such as the sovereign wealth fund Temasek...
and South Korea
Economy of South Korea
South Korea has a market economy which ranks 15th in the world by nominal GDP and 12th by purchasing power parity , identifying it as one of the G-20 major economies. It is a high-income developed country, with a developed market, and is a member of OECD...
were also partially based on economic planning with active government industrial policies
Industrial policy
The Industrial Policy plan of a nation, sometimes shortened IP, "denotes a nation's declared, official, total strategic effort to influence sectoral development and, thus, national industry portfolio." These interventionist measures comprise "policies that stimulate specific activities and promote...
during their rapid development. However, the latter is better described as interventionist
Economic interventionism
Economic interventionism is an action taken by a government in a market economy or market-oriented mixed economy, beyond the basic regulation of fraud and enforcement of contracts, in an effort to affect its own economy...
because the government intervened in a mainly market-based, rather than planned, economy.
Iran
Economy of Iran
The economy of Iran is the eighteenth largest in the world by purchasing power parity and according to Iranian officials' claims is going to become the 12th largest by 2015. The economy of Iran is a mixed and transition economy with a large public sector and some 50% of the economy centrally planned...
practices a degree of economic planning, but has experienced shortages of oil at pumping stations despite enormous natural reserves.
France
Under dirigismeDirigisme
Dirigisme is an economy in which the government exerts strong directive influence. While the term has occasionally been applied to centrally planned economies, where the state effectively controls both production and allocation of resources , it originally had neither of these meanings when...
, France practiced indicative planning
Indicative planning
Indicative planning is a form of central economic planning implemented by a state in an effort to solve the problem of imperfect information in economies and thus increase economic performance...
and nationalized or established a number of state 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 modified in a timely fashion to reduce the incidence of market disequilibrium, with the goal being a concerted economy.
Criticisms
The most notable critique of economic planning came from Austrian economists Friedrich HayekFriedrich Hayek
Friedrich August Hayek CH , born in Austria-Hungary as Friedrich August von Hayek, was an economist and philosopher best known for his defense of classical liberalism and free-market capitalism against socialist and collectivist thought...
and Ludwig von Mises
Ludwig von Mises
Ludwig Heinrich Edler von Mises was an Austrian economist, philosopher, and classical liberal who had a significant influence on the modern Libertarian movement and the "Austrian School" of economic thought.-Biography:-Early life:...
. 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 in the particular time and place that take place in an economy, and are unfamiliar with these circumstances. Transmitting all the necessary information to planners to accumulate and form a comprehensive plan is therefore inefficient.
Centralized economic planning has also been criticized by proponents of de-centralized economic planning. For example, Leon Trotsky
Leon Trotsky
Leon Trotsky , born Lev Davidovich Bronshtein, was a Russian Marxist revolutionary and theorist, Soviet politician, and the founder and first leader of the Red Army....
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 understand/respond to local conditions and changes in the economy would be unable to effectively coordinate all economic activity.
Proponents of technocratic planning have responded by saying democratic planning would be inefficient due to the time it takes to deliberate and vote on action in a direct democratic setting. Democratic planning would also be ineffective because various economic decisions require specialized knowledge, which the majority of voters lack.
See also
- Calculation in kindCalculation in kindCalculation in kind is a type of accounting based on physical magnitudes and physical quantities rather than a common unit of accounting for economic calculation. Calculation in kind, or valueless calculation, is often described as the form of calculation that would supersede monetary calculation...
- Council democracy
- DirigismeDirigismeDirigisme is an economy in which the government exerts strong directive influence. While the term has occasionally been applied to centrally planned economies, where the state effectively controls both production and allocation of resources , it originally had neither of these meanings when...
- Economic democracyEconomic democracyEconomic democracy is a socioeconomic philosophy that suggests a shift in decision-making power from a small minority of corporate shareholders to a larger majority of public stakeholders...
- EconometricsEconometricsEconometrics has been defined as "the application of mathematics and statistical methods to economic data" and described as the branch of economics "that aims to give empirical content to economic relations." More precisely, it is "the quantitative analysis of actual economic phenomena based on...
- Indicative planningIndicative planningIndicative planning is a form of central economic planning implemented by a state in an effort to solve the problem of imperfect information in economies and thus increase economic performance...
- Industrial policyIndustrial policyThe Industrial Policy plan of a nation, sometimes shortened IP, "denotes a nation's declared, official, total strategic effort to influence sectoral development and, thus, national industry portfolio." These interventionist measures comprise "policies that stimulate specific activities and promote...
- Material balance planningMaterial balance planningMaterial balance accounting is a form of economic accounting based on balancing inputs with outputs in terms of natural units...
- Mixed economyMixed economyMixed economy is an economic system in which both the state and private sector direct the economy, reflecting characteristics of both market economies and planned economies. Most mixed economies can be described as market economies with strong regulatory oversight, in addition to having a variety...
- Participatory planningParticipatory planningParticipatory planning is an urban planning paradigm that emphasizes involving the entire community in the strategic and management processes of urban planning; or, community-level planning processes, urban or rural...
- Planned economyPlanned economyA planned economy is an economic system in which decisions regarding production and investment are embodied in a plan formulated by a central authority, usually by a government agency...
- Socialization (economics)Socialization (economics)In economic discourse, socialization has several different but related connotations. In socialist economics, the term usually refers to the process whereby production is reorganized away from producing for private profit to producing goods and services directly for use, along with the end of the...
- Socialist economicsSocialist economicsSocialist economics are the economic theories and practices of hypothetical and existing socialist economic systems.A socialist economy is based on public ownership or independent cooperative ownership of the means of production, wherein production is carried out to directly produce use-value,...