Economic planning is a mechanism for the allocation of resources between and within organizations which is held in contrast to the market mechanism. As an allocation mechanism for socialism, economic planning replaces factor markets with a direct allocation of resources within a single or interconnected group of socially owned organizations.
In the words of H. D. Dikinson,“Economic planning is the making of major economic decisions— by the conscious decision of a determinate authority, on the basis of a comprehensive survey of a country’s existing and potential resources and a careful study of the needs of the people.”
There are various forms of economic planning. The level of centralization in the decision-making depends on the specific type of planning mechanism employed. As such, 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 may also take the form of directive planning or indicative 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 of disaggregated physical units whereas financial planning involves plans formulated in terms of financial units.
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 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-style 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 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 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 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 traditional sense.
Planning versus command
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. As a result, the phrase administrative command economy gained currency as a more accurate descriptor of Soviet-type economies.
Decentralized economic planning is a planning process that starts at the user-level in a bottom-up flow of information. As such, decentralized planning often appears as a complement to the idea of socialist self-management (most notably by libertarian socialists and democratic socialists).
The theoretical postulates for models of decentralized socialist planning stem from the thought of Karl Kautsky, 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 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.
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 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.
The economic models developed in the 1920s and 1930s by American economists Fred M. Taylor and Abba Lerner 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 outcomes. Although these models were often described as market socialism, they actually represented a form of market simulation planning.
Intra-firm and intra-industry planning
Large corporations use planning to allocate resources internally among their divisions and subsidiaries. Many modern firms also use regression analysis 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, many transactions in Western economies do not pass through anything resembling a market, but 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 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 (see also intrapreneurship). 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 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, Karl Marx 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 and the Soviet Union and the Eastern Bloc among others and in particular its administrative command form, government planning of the economy can also happen under other political philosophies to industrialise and modernise the economy. For instance, 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.
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 and South Korea were instituted by a series of macroeconomic government plans (First Malaysia Plan 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 and a mixture of state-owned industry and free-market economy.
Under dirigisme, 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.
The Soviet Union’s model of economic planning had decisions on production and investment are embodied in a plan formulated by the Gosplan, the state planning agency. The system used material balance planning. 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 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, but planning played little functional role in the allocation of resources.
The need for long-term economic planning to promote efficiency was a central component of Labour Party thinking until the 1970s. The Conservative Party largely agreed, producing the postwar consensus, nameley the broad bipartisan agreement on major policies.
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 (R&D), often initially through the United States 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. As a result, Noam Chomsky 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 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 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. Mises also had a similar opinion.
Proponents of decentralized economic planning have also criticized central 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 so they would be unable to respond to local conditions quickly enough to effectively coordinate all economic activity.
- ^Mandel, Ernest (September–October 1986). “In defense of socialist planning”. New Left Review. I (159): 5–37. 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. See also the PDF version.
- ^Gregory, Paul R.; Stuart, Robert C. (2003). Comparing Economic Systems in the Twenty-First Century. Boston: Houghton Mifflin. pp. 23–24. ISBN 978-0-618-26181-9. 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.
- ^Alec Nove (1987). “Planned economy”. The New Palgrave: A Dictionary of Economics. vol. 3. pp. 879–880.
- ^Ellman, Michael (1989). Socialist Planning. Cambridge University Press. p. 25. ISBN 978-0-521-35866-8. Planning in the traditional model is primarily an activity that takes place in physical terms. That is, it is concerned with allocating tonnes of this, cubic metres of that, etc. rather than being concerned with allocating financial flows.
- ^Bockman, Johanna (2011). Markets in the Name of Socialism: The Left-Wing Origins of Neoliberalism. Stanford University Press. p. 35. ISBN 978-0-8047-7566-3.
- ^Schweickart, David; Lawler, James; Ticktin, Hillel; Ollman, Bertell (1998). “Definitions of Market and Socialism”. Market Socialism: The Debate Among Socialists. New York: Routledge. pp. 58–59. ISBN 978-0-415-91967-8. 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.
- ^“Socialism: Utopian and Scientific”. Marxists.org. 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.
- ^“Glossary of Terms: Command Economy”. Marxists.org. Marxists Internet Archive Encyclopedia. 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. ISBN 978-0-470-59619-7.
- ^ Jump up to:ab Wilhelm, John Howard (1985). “The Soviet Union Has an Administered, Not a Planned, Economy”. Soviet Studies. 37 (1): 118–130. doi:10.1080/09668138508411571.
- ^Dowlah, Abu F. (1992). “Theoretical Expositions of Centralized versus Decentralized Strands of Socialist Economic Systems”. International Journal of Social Economics. 19(7/8/9): 210–258. doi:10.1108/EUM0000000000497.
- ^Montias, J. M. (1959). “Planning with Material Balances in Soviet-Type Economies”. American Economic Review. 49 (5): 963–985. JSTOR 1813077.
- ^ Bradford DeLong (1997). “The Corporation as a Command Economy” (PDF). UC Berkeley and National Bureau of Economic Research. Retrieved 27 May 2013.
- ^Galbraith, John K. (2007) . The New Industrial State. Princeton, New Jersey: Princeton University Press. ISBN 9780691131412. For the Abridge version, see “Part I: The History and Nature of the New Industrial State” (1972).
- ^Marx and Engels Selected Works, Lawrence and Wishart, 1968, p. 40. Capitalist property relations put a “fetter” on the productive forces.
- ^Marx, Karl. Capital, Volume I. 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 productionstands 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.”
- ^UNCTAD & UNIDO 2011, p. 34.
- ^O’Hara, Glen (2007). From Dreams to Disillusionment: Economic and Social Planning in 1960s Britain. Palgrave Macmillan. See also the PDF version.
- ^Rockoff, Hugh (2010). “U.S. Economy in World War I”. Archived 17 March 2010 at the Wayback Machine.
- ^Zeh Jr., Herbert J. (1990). “The Federal Funding of R&D: Who Gets the Patent Rights?”. JOM. 42 (4): 69. doi:10.1007/BF03220930.
- ^Chomsky, Noam (18 May 2005). “State and Corp”. Z Net. Z Communications. Archived from the original on 12 October 2012.
- ^Mazzucato, Mariana (25 June 2013). “The Myth of the “Meddling” State”. Public Finance International. Retrieved 5 January 2014.
- ^Hayek, Friedrich (September 1945). “The Use of Knowledge in Society”. The American Economic Review. 35 (4): 519–530. JSTOR 1809376. See the full text.
- ^Trotsky, Leon. Writings of Leon Trotsky (1932-33). p. 96.
Ofer Abarbanel is a 25 year securities lending broker and expert who has advised many Israeli regulators, among them the Israel Tax Authority, with respect to stock loans, repurchase agreements and credit derivatives. Founder of TBIL.co STATX Fund.