Economic planning

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Economic planning refers to any directing or planning of economic activity outside the mechanisms of the market. Planning is an economic mechanism for resource allocation and decision-making held in contrast with the market mechanism, where planning refers to a direct allocation of resources.[1] Most economies are mixed economies, incorporating elements of markets and planning for distributing inputs and outputs. The level of centralization of decision-making in the planning process ultimately depends on the type of planning mechanism employed; as such planning need not be centralized and may be based on either centralized or decentralized decision-making.[2]

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.[3]

A distinction can be made between physical planning (as in pure socialism), meaning economic coordination and planning conducted in terms if disaggregated physical units or by a common natural unit, and between financial planning (as practiced by governments and private firms within capitalism).

Socialist economic planning

Different forms of economic planning have been featured in 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.[4] 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 versus Gross domestic product).

Socialists and Marxists differentiate the concept of a command economy, which existed in the Soviet Union, from economic planning, defining a command economy as a top-down administrative allocation based on bureaucratic organization akin to organizing the economy as a single capitalist firm.[5]

Classical socialists and Marxists defined economic planning as directly producing use-values, as opposed to indirectly producing use-value as a byproduct of pursuing profits. This is considered to be a fundamental element of a socialist economy. Economic planning in this definition implies production for use, social control over the allocation of the surplus product, and in its most extensive theoretical form, calculation-in-kind in place of financial calculation and money. For Marxists in particular, planning entails control of the surplus product (profit) by the associated producers in a democratic manner.[6] This differs from planning within the framework of capitalism, which is based on the planned accumulation of capital 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.

Both Marxists and early technocratic socialists held 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 political or class-based control, thereby ceasing to be a state in the traditional sense.[7] In Marxist theory, the public institutions that comprised the former state would cease to be a state after this transformation.

Libertarian socialists, Syndicalists, Trotskyists 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 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. 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 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 economics and the field of comparative economic systems, socialist planning usually refers to the Soviet-type command economy, regardless of whether or not this economic system actually constituted a type of socialism or state capitalism or a third, non-socialist and non-capitalist type of system.

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 obsolescence 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 had become increasingly specialized and bureaucratized. The internal structure of a corporation had 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 with formal bureaucratic procedures have replaced the individual entrepreneur's role. He states that both the obsolete notion of "entrepreneurial capitalism" and democratic socialism (defined as democratic management) are impossible for managing the modern industrial system.[8]

Joseph Schumpeter, an economist associated with the Austrian school and Institutional school, argued that the changing nature of economic activity – specifically the increasing bureaucratization and specialization required in production – was the major reason capitalism would eventually evolve into socialism. The role of the businessman was increasingly bureaucratic, and specific functions within the firm required increasingly specialized knowledge, which can just as easily be supplied by the state functionaries and the state apparatus.

In the first volume of Capital, Karl Marx identified a tendency for capital to accumulate under capitalism, which contributes 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,[9] necessitating a socialist economy of the means of production and cooperative worker control over the surplus value.[10] 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 planned production on the level of the national economy.

Economic planning in practice

Command 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. A command economy is a type of planned economy whereby plan directives are enforced through inducements in a vertical power-structure.

Soviet Union

United States

The United States 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.[11] 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 (R&D), often initially through the Department of Defense. The government performs 50% of all R&D in the United States,[12] with a dynamic state-directed public-sector developing most of the technology that later becomes the basis of the private sector economy.[13] Examples include laser technology, the internet, telecommunications and computers.


The government of Malaysia instituted a series of macroeconomic plans to develop and industrialize its mixed economy. Singapore and South Korea were also partially based on economic planning involving active government industrial policies during their period of rapid development. However, the latter is better described as a form of interventionism rather than planning because the government intervened in a mainly market-based, rather than planned, economy.


Under dirigisme, 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.


The most notable critique of economic planning came from Austrian economists Friedrich Hayek 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. The process of transmitting all the necessary information to planners is therefore inefficient.[14]

Central 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 would therefore be unable to respond to local conditions quickly enough to effectively coordinate all economic activity.[15]

See also


  1. In Defense of Socialist Planning, by Mandel, Ernest. 1986. From "New Left Review": "Planning is not equivalent to ‘perfect’ allocation of resources, nor ‘scientific’ allocation, nor even ‘more humane’ allocation. It simply means ‘direct’ allocation, ex ante. As such, it is the opposite of market allocation, which is ex post."
  2. Comparing Economic Systems in the Twenty-First Century, 2003, by Gregory and Stuart. ISBN 0-618-26181-8. (P.23-24): "Centralization is commonly identified with plan and decentralization with market, but there is no simple relationship between the level of decision making and the use of market or plan as a coordinating mechanism. In some economies, it is possible to combine a considerable concentration of decision-making authority and information in a few large corporations with substantial state involvement and yet to have no system of planning as such...To identify an economy as planned does not necessarily reveal the prevalent coordinating mechanism, or for that matter, the degree of centralization in decision making. Both depend on the type of planning mechanism."
  3. Alec Nove (1987), "planned economy," The New Palgrave: A Dictionary of Economics, v. 3, pp. 879-80.
  4. Bockman, Johanna (2011). Markets in the name of Socialism: The Left-Wing origins of Neoliberalism. Stanford University Press. p. 35. . 
  5. "Command Economy", Glossary of Terms: For an overview of the Soviet experience, see Myant, Martin; Jan Drahokoupil (2010). Transition Economies: Political Economy in Russia, Eastern Europe, and Central Asia. Hoboken, New Jersey: Wiley-Blackwell. pp. 1–46. . 
  6. Market Socialism: The Debate Among Socialists, by Schweickart, David; Lawler, James; Ticktin, Hillel; Ollman, Bertell. 1998. From "Definitions of market and socialism" (P.58-59): "For an Anti-Stalinist Marxist, socialism is defined by the degree to which the society is planned. Planning here is understood as the conscious regulation of society by the associated producers themselves. Put it differently, the control over the surplus product rests with the majority of the population through a resolutely democratic process...The sale of labour power is abolished and labour necessarily becomes creative. Everyone participates in running their institutions and society as a whole. No one controls anyone else."
  7. Socialism: Utopian and Scientific, on "In 1816, he declares that politics is the science of production, and foretells the complete absorption of politics by economics. The knowledge that economic conditions are the basis of political institutions appears here only in embryo. Yet what is here already very plainly expressed is the idea of the future conversion of political rule over men into an administration of things and a direction of processes of production."
  8. John Kenneth Galbraith - Part I: The History and Nature of the New Industrial State, 1972
  9. Marx and Engels Selected Works, Lawrence and Wishart, 1968, p. 40. Capitalist property relations put a "fetter" on the productive forces.
  10. Capital, Volume 1, by Marx, Karl. From "Chapter 32: Historical Tendency of Capitalist Accumulation": "Self-earned private property, that is based, so to say, on the fusing together of the isolated, independent laboring-individual with the conditions of his labor, is supplanted by capitalistic private property, which rests on exploitation of the nominally free labor of others, i.e., on wage-labor. As soon as this process of transformation has sufficiently decomposed the old society from top to bottom, as soon as the laborers are turned into proletarians, their means of labor into capital, as soon as the capitalist mode of production stands on its own feet, then the further socialization of labor and further transformation of the land and other means of production into socially exploited and, therefore, common means of production, as well as the further expropriation of private proprietors, takes a new form. That which is now to be expropriated is no longer the laborer working for himself, but the capitalist exploiting many laborers."
  11. Hugh Rockoff - U.S. Economy in World War I, 2010
  12. Herbert J. Zeh - The Federal Funding of R&D: Who Gets the Patent Rights?
  13. Noam Chomsky - State and Corp., 2005
  15. Writings 1932-33, P.96, Leon Trotsky.

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