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Economic planning refers to any directing or planning of economic activity by an economic actor, usually the state, in an attempt to achieve specific economic or social outcomes. Planning is an economic mechanism for resource allocation and decision-making in contrast with the market mechanism; however most economies incorporate elements of both mechanisms for distributing inputs and outputs. An economy primarily based on centralized planning is a planned economy, where resource allocation and quantity of goods to be produced is determined by a comprehensive plan of production specifying mandatory output requirements.
Economic planning can be centralized or localized, and can apply to production, investment, distribution or all three. Economic planning can also mean a state-directed economy that does not conform to any comprehensive plan of production. In contrast to directive planning is indirect planning (indicative planning), also known as a planned market economy.
Classical socialists and Marxists define economic planning as directing production to maximize use-values and coordination of production, and consider this to be a fundamental element of a socialist economy. For Marxists in particular, planning also entails control of the surplus product (profit) by the associated producers in a democratic fashion. State-oriented and technocratic socialists hold the view that in a socialist society based on economic planning, the primary function of the state apparatus will change from one of political rule over men (via the creation and enforcement of laws) into a scientific administration of things and a direction of processes of production; that is the state would become a coordinating economic entity rather than a mechanism of class or political control. Other socialists, such as Libertarian socialists, Syndicalists and democratic socialists, advocate de-centralized democratic planning. In a de-centralized planned economy, economic decision-making takes place in a democratic manner in every cooperative enterprise in the economy.
In some socialist theories, economic planning completely substitutes the market mechanism and supposedly renders monetary relations and the price system obsolete. In other theories, planning is utilized as a complement to markets. Polish economist Oskar Lange and American economist Abba Lerner proposed a form of market socialism where a central planning board would adjust prices of publicly-owned firms to equal marginal cost to enhance the market mechanism by achieving pareto efficient outcomes.
Large corporations allocate resources internally among different divisions and subsidiaries through planning. Many modern firms also utilize regression analysis to measure market demand in order to adjust price and decide on the optimal quantity of output to be supplied.
In The New Industrial State, economist John Kenneth Galbraith posited that large firms can managed prices and consumer demand, and because of increasing technological capacity, management has become increasingly specialized and bureaucratized. The internal structure of a corporation has been reorganized in what he calls a "technostructure", where specialized groups and committees are the primary decision-makers and specialized managers, directors and financial advisers and formal, bureaucratic procedures have replaced the individual entrepreneur's role. He states that both the obsolete notion of "entrepreneurial capitalism" and democratic socialism are impossible for managing the modern industrial system.
Austrian economist Joseph Schumpeter argued that the changing nature of economic activity; the increasing bureaucratization and specialization of production; was one of the main reasons capitalism would eventually evolve into socialism. The role of the businessman was increasingly bureaucratic and specific functions within the firm required increasing specialized knowledge, which can just as easily be supplied by the state apparatus.
In the first volume of Capital, Karl Marx identifies a tendency for capital to accumulate under capitalism, which leads to increasing industrial capacity due to increasing returns to scale. Capitalism eventually socializes labor and production to a point where the traditional notion of private ownership and commodity production are insufficient for managing and further expanding the productive capabilities of society, necessitating a socialist economy of the means of production and cooperative worker control over the surplus value. Socialists see this as evidence of the increasing obsolescence and inapplicability of notions of perfect competition and as evidence of the increasingly trend toward economic planning in some form or another, the next stage of evolution being planning production on the level of the national economy.
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.
From the start of the Cold War to the present, the United States Federal Government directs a significant amount of investment and funding into research and development, 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. Examples include laser technology, the internet, telecommunications and computers.
The government of Malaysia instituted a series of macroeconomic plans to develop its mixed economy.
Under dirigisme, France practiced indicative planning and nationalized or established a number of state 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 being a concerted economy.
The most notable critique of economic planning came from Austrian economists Fredrich 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. Transmitting all the necessary information to planners to accumulate and form a comprehensive plan is therefore inefficient.
Centralized economic planning has also been criticized by proponents of de-centralized 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 understand/respond to local conditions and changes in the economy would be unable to effectively coordinate all economic activity. Proponents of technocratic planning have responded by saying democratic planning would be inefficient due to the time it takes to deliberate and vote on action in a direct democratic setting. Democratic planning would also be ineffective because various economic decisions require specialized knowledge, which the majority of voters lack.