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Economic planning is a resource allocation mechanism that is contrasted with the market mechanism. As a coordinating mechanism for socialist economics, economic planning substitutes factor markets and is defined as a direct allocation of resources. This is contrasted with the indirect allocation mechanism of a market economy. There are various types that economic planning procedures and forms planning can take.
The level of centralization in decision-making in planning 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 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. 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 of disaggregated physical units, whereas financial planning involves plans formulated in terms of financial units.
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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-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.
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.
The concept of a command economy is differentiated from the concept of a planned economy (or 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 former Soviet Union actually represented an administered 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 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 Marxist–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.
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 Unio) 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.
The economic models developed in the 1920s and 1930s by American economists Fred M. Taylor and Abba Lerner and by Polish economist Oskar 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.
Large corporations use planning to allocate resources internally among its divisions and subsidiaries. Many modern firms also utilize regression analysis to measure market demand in order 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 employed by large firms to increase demand for future products by deliberately limiting the operational lifespan of its products.
The internal structures of corporations have been described as centralized command economies that employ both planning and hierarchical organization and management. According to J. Bradford DeLong, 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; and in the form of production planning.
In The New Industrial State, the American economist John Kenneth Galbraith posited that large firms manage both their prices and consumer demand for their products through sophisticated statistical methods. Galbraith also pointed out that, because of the increasingly complex nature of technology and 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", where 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). He states 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 the Austrian school and 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 reason for why 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 could just as easily be supplied by state functionaries in publicly owned enterprises.
In the first volume of Capital, Karl Marx identified the process of capital accumulation as central to the law of motion of capitalism. Increased industrial capacity from increasing returns to scale further socializes production. Capitalism eventually socializes labor and production to a point where 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 where the 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 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".
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).
The Soviet model of economic planning is an economic system where decisions regarding production and investment are embodied in a plan formulated by Gosplan (state planning agency) through the process of material balances. Economic information, including consumer demand and enterprise resource requirements, are aggregated and used to balance 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 and hierarchical manner where directives were issued to lower-level organizations. As a result, the Soviet economic model was often referred to as a command economy or an administered economy because plan directives were enforced through inducements in a vertical power-structure, where planning played little functional role in the allocation of resources.
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. During the Second World War, the economy experienced staggering growth under a similar system of planning. In the postwar period, U.S. governments utilized such measures as the Economic Stabilization Program to directly intervene in the economy to control prices, wages, et cetera in different economic sectors.
From the start of the Cold War and up until the present day, the federal government of the United States has directed 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, 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. This includes research in other fields including healthcare and energy, with 75% of most innovative drugs financed through the National Institutes of Health.
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 governments of Malaysia and South Korea instituted a series of macroeconomic plans (First Malaysia Plan and Five-Year Plans of South Korea) to rapidly develop and industrialize their mixed economies.
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 need for long-term economic planning to promote efficiency was a central component of Labour Party thinking down to the 1970s. and the Conservative Party largely agreed, thus producing the post-war consensus or broad bipartisan agreement on major policies.
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.
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 would therefore be unable to respond to local conditions quickly enough to effectively coordinate all economic activity.
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.Pdf.
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.
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.
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.
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.