Economic planning
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.
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. 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 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.
A distinction can be made between physical planning and financial planning. 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.
In socialism
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.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 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 or to maximize profits 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 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.
In the May 1949 issue of the Monthly Review titled "Why Socialism?", Albert Einstein wrote:
I am convinced there is only one way to eliminate grave evils, namely through the establishment of a socialist economy, accompanied by an educational system which would be oriented toward social goals. In such an economy, the means of production are owned by society itself and are utilized in a planned fashion. A planned economy, which adjusts production to the needs of the community, would distribute the work to be done among all those able to work and would guarantee a livelihood to every man, woman, and child. The education of the individual, in addition to promoting his own innate abilities, would attempt to develop in him a sense of responsibility for his fellow-men in place of the glorification of power and success in our present society.
Administrative-command system
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 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. The term administrative-command economy gained currency as a more accurate descriptor of Soviet-type economies.
Decentralized planning
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. This model involves economic decision-making based on self-governance from the bottom-up 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 to agents, 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.
Lange–Lerner–Taylor model
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
was the type of economic planning employed by Soviet-type economies. This system emerged in a haphazard manner during the collectivization drive under Joseph Stalin and emphasized rapid growth and industrialization. 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 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. In the case of the Soviet Union, this task fell on Gosplan and its subsidiaries: the industrial ministries and the regional sovnarkhozy. The ministries in turn were subdivided into Chief Industrial Administrations, under which each enterprise was finally subordinated.Input-Output Models
, developed by Wassily Leontief, take advantage of linear programming and matrices by dividing the economy into interdependent sectors that produce products for both themselves and other sectors; the production in one sector relies in the input of goods from another. The flow of goods strictly between sectors is modelled by a Leontief closed model where the resultant expression takes the form of where as a variable may represent the optimal payment for each instance of production encoded in the matrix. More sophisticated methods include open models where production satisfies exterior demand, and generally takes the form, where is the demand matrix. This is a modelling method proposed by some socialist economists such as Paul Cockshott, who argue that the advent of modern computer technology since the times of Victor Glushkov negates the computational difficulty faced by 20th-century attempts at economic planning.In capitalism
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 forcing customers to buy replacements. The internal structures of corporations have therefore 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 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 and intrapreneurship. Galbraith stated that both the obsolete notion of entrepreneurial capitalism and democratic socialism 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 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.