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Central planning

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Central planning

Economic planning refers to a coordinating mechanism outside the mechanisms of the market. There are various types of planning procedures and different ways of conducting economic planning. As a coordinating mechanism for socialism and an alternative to the market, planning is defined as a direct allocation of resources; contrasted to the indirect allocation of the market.[1]

The level of centralization in decision-making in planning depends on the specific type of planning mechanism employed. As such, there is a distinction to be made between centralized planning and decentralized planning.[2] An economy primarily based on central 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.[3] Planning may also take the form of directive planning or indicative planning.

Most modern economies are mixed economies incorporating various degrees of markets and planning.

A distinction can be made between physical planning (as in pure socialism) and financial planning (as practiced by governments and private firms in capitalism). Physical planning involves economic planning and coordination conducted in terms if disaggregated physical units; whereas financial planning involves plans formulated in terms of financial units.[4]

Socialist economic planning

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.[5] 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).

In general, the various models of socialist economic planning exist as theoretical constructs that have not been implemented fully by any economy, partially because they depend on vast changes 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.

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 byproduct 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, 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.[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.

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, thereby ceasing to be a state in the traditional sense.[7]

Planning versus Command

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.[8]

Decentralized planning

Decentralized economic planning is advocated by various socialists who often see it as a complement to the idea of socialist self-management, most notably libertarian socialists, democratic socialists and Trotskyists. This model involves economic decision-making based on self-governance from the bottom-up (by employees and consumers) without any directing central authority. This is often contrasted with Leninists, Marxist-Leninists and Social democrats who 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.

Two contemporary models of decentralized planning are Participatory economics and negotiated coordination, developed by the economist Pat Devine.

Material balances

Material balance planning 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, 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 was emulated by other Socialist states in the latter half of the 20th century. Material balancing involves a planning agency (Gosplan in the case of the USSR) taking a survey of available inputs and raw materials, using a balance sheet to balance them with output targets specified by industry, thereby achieving a balance of supply and demand.[9]

Lange-Lerner model

Polish economist Oskar Lange and American economist Abba Lerner outlined a model of socialism where a central planning board set prices for producer goods through a trial-and-error method until the price matched the marginal cost. This system of planning enhanced the market mechanism by achieving pareto efficient outcomes.

Planning in capitalism

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 prices 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.

The internal structure of corporations have been described as centralized command economies based on planning and hierarchical organization. J. Bradford DeLong states that a significant portion of transactions in Western economies do not pass through anything resembling a market. Many transactions are actually movements of value among different branches and divisions within corporations, companies and agencies. Furthermore, a significant portion of economic activity is planned in a centralized manner by managers within firms, in the form of production planning and marketing management where consumer demand is estimated, targeted and included in the firm's overall plan.[10]

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.[11]

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,[12] necessitating a socialist economy of the means of production and cooperative worker control over the surplus value.[13] 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.

State development planning

State development planning or national planning refers to 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."[14]

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).

Economic planning in practice

Soviet Union

Main articles: Analysis of Soviet-type economic planning and Economy of the Soviet Union

The Soviet model of economic planning is an economic system in which decisions regarding production and investment are embodied in a plan formulated by a central authority called Gosplan by aggregating economic information, including consumer demand and enterprise resource requirements. The planning process consisted of material balance planning, involving balancing supply (from available resource inventories) with demand (based on requirements for individual economic units and enterprises) through a system of iterations.

The Soviet economy operated in a centralized manner where directives and commands were issued to lower-level organizations in a hierarchy. As a result, this type of planned economy was often referred to as a "command economy" because plan directives were enforced through inducements in a vertical power-structure.

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.[15] During the Second World War, the economy experienced staggering growth under a similar system of planning. In the postwar period, US governments utilized such measures as the Economic Stabilization Program to directly intervene in the economy to control prices, wages, etc. in different economic sectors.

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,[16] with a dynamic state-directed public-sector developing most of the technology that later becomes the basis of the private sector economy.[17] Examples include laser technology, the internet, telecommunications and computers.

East Asian Tigers

The East Asian Tiger economies involved a series of economic planning and state-directed investment sometimes described as "state development capitalism".

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 economy.


Under dirigisme, France utilized 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 modified in a timely fashion to reduce the incidence of market disequilibrium, with the goal of sustaining stable economic development and growth. Under this system, France experienced its "Trente Glorieuses" period of economic prosperity.


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.[18]

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.[19]

See also


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