Economic Planning
Overview
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, contrasted with the indirect allocation mechanism of a market economy. The most notable forms of economic planning are centralized planning and decentralized planning. An economy primarily based on planning is referred to as a planned economy. In a centrally planned economy, the central planning organization makes all decisions about the production of goods and services. In a decentralized planned economy, planning may take a dispersed form, such as in market socialism.
History
The concept of economic planning was a central theme in the socialist economics of the early 20th century. The Soviet Union, in particular, adopted a system of five-year plans that were designed to coordinate all aspects of the economy, from agriculture to industry. Other socialist states, such as the People's Republic of China, also adopted economic planning as a means to manage their economies.
Types of Economic Planning
Economic planning can be practiced in various forms, including centralized planning, decentralized planning, indicative planning, and material balances planning.
Centralized Planning
In a centrally planned economy, decisions regarding the quantity of goods and services to be produced are planned in advance by a planning agency. This type of economic planning is often associated with the Soviet-type socialism seen in the 20th-century economies of the Soviet Union and Eastern Bloc, but is also used by organizations such as large corporations.
Decentralized Planning
In a decentralized planned economy, decision-making is distributed amongst various economic agents or localized within production units. Decentralized planning is held in contrast to centralized planning where economic information is aggregated and used to formulate a plan for production, investment and resource allocation by a central authority. Decentralized planning can take various forms, such as participatory planning and market socialism.
Indicative Planning
Indicative planning is a form of economic planning implemented by a state in an effort to solve the problem of imperfect information in markets and to stimulate economic growth. Indicative planning is most closely associated with the French economy from the post-Second World War period until the end of the Trente Glorieuses, the thirty years following the end of the War.
Material Balances Planning
Material balances planning was a type of economic planning used in socialist economies in which an economy-wide, integrated balance of supply and demand was constructed for material flows in the economy. Material balances planning was pioneered by the Soviet Union, and was also used by the People's Republic of China, Poland, and other socialist economies.
Criticisms and Challenges
Economic planning is not without its criticisms. Critics argue that economic planning is an inefficient and unnecessary form of economic management that leads to waste of resources and stifles innovation. They argue that market economies are more efficient in managing resources and responding to changes in consumer demand.