Economic planning is a resource allocation mechanism based on a computational procedure for solving a constrained maximization problem with an iterative process for obtaining its solution. Planning is a mechanism for the allocation of resources between and within organizations contrasted with the market mechanism. As an allocation mechanism for socialism, economic planning replaces factor markets with a procedure for direct allocations of resources within an interconnected group of socially owned organizations which together comprise the productive apparatus of the economy.[1][2]
There are various forms of economic planning that vary based on their specific procedures and approach. The level of centralization or decentralization in decision-making depends on the specific type of planning mechanism employed. In addition, one can distinguish between centralized planning and decentralized planning.[3] 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.[4] Planning can also take the form of indicative planning within a market-based economy, where the state employs market instruments to induce independent firms to achieve development goals.[5]
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.[6]
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.[7] 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 such as a socialist mode of production exist as theoretical constructs that have not been implemented fully by any economy, partially because they depend on vast changes on a global scale. 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.[8] 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 Marxist sense.[9]
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.[citation needed]
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. The term administrative-command economy gained currency as a more accurate descriptor of Soviet-type economies.[10]
Decentralized economic planning is a planning process that starts at the user-level in a bottom-up flow of information. Decentralized planning often appears as a complement to the idea of socialist self-management, most notably by democratic socialists and libertarian 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.[11] 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.
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.
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 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.[12]
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 rather they 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.[13]
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 and 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.[14]
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,[15] necessitating the emergence of a socialist economy in which means of production are socially owned and the surplus value is controlled by the workforce.[16] 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 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".[17]
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, in particular its administrative-command system, government planning of the economy can also happen under other political philosophies to industrialise and modernise the economy. 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.
East Asia
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 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.
France
Under dirigisme (dirigism), 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 was the first national economy to attempt economic planning as a substitute for factor market allocation. Soviet-type economic planning took form in the 1930s and largely remained unchanged despite mild reforms until the Soviet Union's dissolution. Soviet economic planning was centralized and organized hierarchically, with a state planning agency such as the Gosplan establishing target rates for growth and the Gossnab allocating factor inputs to enterprises and economic units throughout the national economy. The national plan was broken down by various ministries, which in turn used the plan to formulate directives for local economic units which implemented them. 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.[18]
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, with actual planning playing little functional role in the allocation of resources. Owing to difficulties in transmitting information in a timely fashion and disseminating information on demand throughout the whole economy, administrative mechanisms of decision-making and resource allocation played the dominant role in allocating factor inputs as opposed to planning.[10]
United Kingdom
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, namely the broad bipartisan agreement on major policies.[19]
A long-term economic plan was a phrase often used in British politics.
United States
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.[20] 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,[21] with a dynamic state-directed public-sector developing most of the technology that later becomes the basis of the private sector economy. Noam Chomsky has referred to the United States economic model as a form of state capitalism.[22] 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.[23]
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 without a price system for the means of production.[24] Mises also had a similar opinion. In his analysis of socialism in 1938, Oskar R. Lange addressed this theoretical issue by pointing out that planners could gain much of the information they required by monitoring changes in plant inventory levels. In practice, economic planners in Soviet-typed planned economies were able to make use of this technique.[25]
Proponents of decentralized economic planning have also criticized central economic planning. 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.[26] Trotsky further specified the need for Soviet democracy in relation to the industrialisation period to the Dewey Commission:
“The successes are very important, and I affirmed it every time. They are due to the abolition of private property and to the possibilities inherent in planned economy. But, they - I cannot say exactly - but I will say two or three times less than they could be under a regime of Soviet democracy”.[27]
↑ Gregory, Paul R.; Stuart, Robert C. (2003). Comparing Economic Systems in the Twenty-First Century. Boston: Houghton Mifflin. pp.23–24. ISBN978-0-618-26181-9.
↑ Ellman, Michael (1989). Socialist Planning. Cambridge University Press. p.25. ISBN978-0-521-35866-8.
↑ Bockman, Johanna (2011). Markets in the Name of Socialism: The Left-Wing Origins of Neoliberalism. Stanford University Press. p.35. ISBN978-0-8047-7566-3.
↑ 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.
↑ P. B. Baltes, N. J. Smelser. (November 21, 2001). International Encyclopedia of Social & Behavioral Sciences. Pergamon. pp 11483-11485. ISBN9780080430768. "Under Stalin and his successors, central Soviet economic planning was organized hierarchically. The top state planning agency, Gosplan, established the target rate of national economic growth and the allocation of production across industrial sectors and geographic regions. This overall national plan was then broken down by various ministries into directives assigned to local economic units. Finally, managers and engineers at the factory or farm level were required to implement particular instructions."
↑ O'Hara, Glen (2007). From Dreams to Disillusionment: Economic and Social Planning in 1960s Britain. Palgrave Macmillan. See also the PDF version.
↑ P. B. Baltes, N. J. Smelser. (November 21, 2001). International Encyclopedia of Social & Behavioral Sciences. Pergamon. pp 11483-11485. ISBN9780080430768. "Critics argue that the Soviet planned economy failed for two main reasons. The first is inadequate information. Very early on the free market economists Ludwig von Mises and Fredrich Hayek insisted that a socialist system was doomed to fail because central economic planners, lacking the price signals of a market system, would be unable to obtain the information required to promote economic efficiency (Von Mises 1935, Hayek 1948). In fact, economic planners in the Communist world—as Polish economist Oskar Lange anticipated in an important 1938 analysis of socialism—were often able to gain much of the information they needed by monitoring changes in plant inventory levels."
A planned economy is a type of economic system where the distribution of goods and services or the investment, production and the allocation of capital goods takes place according to economic plans that are either economy-wide or limited to a category of goods and services. A planned economy may use centralized, decentralized, participatory or Soviet-type forms of economic planning. The level of centralization or decentralization in decision-making and participation depends on the specific type of planning mechanism employed.
The economic calculation problem is a criticism of using economic planning as a substitute for market-based allocation of the factors of production. It was first proposed by Ludwig von Mises in his 1920 article "Economic Calculation in the Socialist Commonwealth" and later expanded upon by Friedrich Hayek.
A market economy is an economic system in which the decisions regarding investment, production and distribution to the consumers are guided by the price signals created by the forces of supply and demand. The major characteristic of a market economy is the existence of factor markets that play a dominant role in the allocation of capital and the factors of production.
A mixed economy is variously defined as an economic system blending elements of a market economy with elements of a planned economy, markets with state interventionism, or private enterprise with public enterprise. Common to all mixed economies is a combination of free-market principles and principles of socialism. While there is no single definition of a mixed economy, one definition is about a mixture of markets with state interventionism, referring specifically to a capitalist market economy with strong regulatory oversight and extensive interventions into markets. Another is that of active collaboration of capitalist and socialist visions. Yet another definition is apolitical in nature, strictly referring to an economy containing a mixture of private enterprise with public enterprise. Alternatively, a mixed economy can refer to a reformist transitionary phase to a socialist economy that allows a substantial role for private enterprise and contracting within a dominant economic framework of public ownership. This can extend to a Soviet-type planned economy that has been reformed to incorporate a greater role for markets in the allocation of factors of production.
An economic system, or economic order, is a system of production, resource allocation and distribution of goods and services within a society or a given geographic area. It includes the combination of the various institutions, agencies, entities, decision-making processes, and patterns of consumption that comprise the economic structure of a given community.
Oskar Ryszard Lange was a Polish economist and diplomat. He is best known for advocating the use of market pricing tools in socialist systems and providing a model of market socialism. He responded to the economic calculation problem proposed by Ludwig von Mises and Friedrich Hayek by claiming that managers in a centrally-planned economy would be able to monitor supply and demand through increases and declines in inventories of goods, and advocated the nationalization of major industries. During his stay in the United States, Lange was an academic teacher and researcher in mathematical economics. Later in socialist Poland, he was a member of the Central Committee of the Polish United Workers' Party.
The socialist market economy (SME) is the economic system and model of economic development employed in the People's Republic of China. The system is a market economy with the predominance of public ownership and state-owned enterprises. The term "socialist market economy" was introduced by Jiang Zemin during the 14th National Congress of the Chinese Communist Party (CCP) in 1992 to describe the goal of China's economic reforms. Originating in the Chinese economic reforms initiated in 1978 that integrated China into the global market economy, the socialist market economy represents a preliminary or "primary stage" of developing socialism. Some commentators describe the system as a form of "state capitalism", while others describe it as an original evolution of Marxism, in line with Marxism–Leninism similar to the "New Economic Policy" of the Soviet Union, adapted to the cohabitation with a globalized capitalist system.
Robin Eric Hahnel is an American economist and professor emeritus of economics at American University. He was a professor at American University for many years and traveled extensively advising on economic matters all over the world. He is best known for his work on participatory economics with Z Magazine editor Michael Albert.
In economics, a price system is a system through which the valuations of any forms of property are determined. All societies use price systems in the allocation and exchange of resources as a consequence of scarcity. Even in a barter system with no money, price systems are still utilized in the determination of exchange ratios between the properties being exchanged.
Criticism of socialism is any critique of socialist models of economic organization and their feasibility as well as the political and social implications of adopting such a system. Some critiques are not directed toward socialism as a system, but rather toward the socialist movement, parties or existing states. Some critics consider socialism to be a purely theoretical concept that should be criticized on theoretical grounds while others hold that certain historical examples exist and that they can be criticized on practical grounds. Because there are many models of socialism, most critiques are focused on a specific type of socialism and the experience of Soviet-type economies that may not apply to all forms of socialism as different models of socialism conflict with each other over questions of property ownership, economic coordination and how socialism is to be achieved. Critics of specific models of socialism might be advocates of a different type of socialism.
The Lange model is a neoclassical economic model for a hypothetical socialist economy based on public ownership of the means of production and a trial-and-error approach to determining output targets and achieving economic equilibrium and Pareto efficiency. In this model, the state owns non-labor factors of production, and markets allocate final goods and consumer goods. The Lange model states that if all production is performed by a public body such as the state, and there is a functioning price mechanism, this economy will be Pareto-efficient, like a hypothetical market economy under perfect competition. Unlike models of capitalism, the Lange model is based on direct allocation, by directing enterprise managers to set price equal to marginal cost in order to achieve Pareto efficiency. By contrast, in a capitalist economy, private owners seek to maximize profits, while competitive pressures are relied on to indirectly lower the price, this discourages production with high marginal cost and encourages economies of scale.
The social dividend is the return on the natural resources and capital assets owned by society in a socialist economy. The concept notably appears as a key characteristic of market socialism, where it takes the form of a dividend payment to each citizen derived from the property income generated by publicly owned enterprises, representing the individual's share of the capital and natural resources owned by society.
Production for use is a phrase referring to the principle of economic organization and production taken as a defining criterion for a socialist economy. It is held in contrast to production for profit. This criterion is used to distinguish communism from capitalism, and is one of the fundamental defining characteristics of communism.
The socialist-oriented market economy is the official title given to the current economic system in the Socialist Republic of Vietnam. It is described as a multi-sectoral market economy where the state sector plays the decisive role in directing economic development, with the eventual long-term goal of developing socialism.
State socialism is a political and economic ideology within the socialist movement that advocates state ownership of the means of production. This is intended either as a temporary measure, or as a characteristic of socialism in the transition from the capitalist to the socialist mode of production or to a communist society. State socialism was first theorised by Ferdinand Lassalle. It advocates a planned economy controlled by the state in which all industries and natural resources are state-owned.
Social ownership is the appropriation of the surplus product, produced by the means of production, or the wealth that comes from it, to society as a whole. It is the defining characteristic of a socialist economic system. It can take the form of community ownership, state ownership, common ownership, employee ownership, cooperative ownership, and citizen ownership of equity. Traditionally, social ownership implied that capital and factor markets would cease to exist under the assumption that market exchanges within the production process would be made redundant if capital goods were owned and integrated by a single entity or network of entities representing society; but the articulation of models of market socialism where factor markets are utilized for allocating capital goods between socially owned enterprises broadened the definition to include autonomous entities within a market economy. Social ownership of the means of production is the common defining characteristic of all the various forms of socialism.
Market socialism is a type of economic system involving the public, cooperative, or social ownership of the means of production in the framework of a market economy, or one that contains a mix of worker-owned, nationalized, and privately owned enterprises. The central idea is that, as in capitalism, businesses compete for profits, however they will be "owned, or at least governed," by those who work in them. Market socialism differs from non-market socialism in that the market mechanism is utilized for the allocation of capital goods and the means of production. Depending on the specific model of market socialism, profits generated by socially owned firms may variously be used to directly remunerate employees, accrue to society at large as the source of public finance, or be distributed amongst the population in a social dividend.
Socialist economics comprises the economic theories, practices and norms of hypothetical and existing socialist economic systems. A socialist economic system is characterized by social ownership and operation of the means of production that may take the form of autonomous cooperatives or direct public ownership wherein production is carried out directly for use rather than for profit. Socialist systems that utilize markets for allocating capital goods and factors of production among economic units are designated market socialism. When planning is utilized, the economic system is designated as a socialist planned economy. Non-market forms of socialism usually include a system of accounting based on calculation-in-kind to value resources and goods.
The socialist calculation debate, sometimes known as the economic calculation debate, was a discourse on the subject of how a socialist economy would perform economic calculation given the absence of the law of value, money, financial prices for capital goods and private ownership of the means of production. More specifically, the debate was centered on the application of economic planning for the allocation of the means of production as a substitute for capital markets and whether or not such an arrangement would be superior to capitalism in terms of efficiency and productivity.
The administrative-command system, also known as the command-administrative system, is the system of management of an economy of a state characterized by the rigid centralization of economic planning and distribution of goods, based on the state ownership of the means of production and carried out by the governmental and communist party bureaucracies ("nomenklatura") in the absence of a market economy.
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