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Economic planning is a resource allocation system 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 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]

Notes

The development mo

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 in both Malaysia and South Korea were instituted by a series of macroeconomic government plans (Malaysia and South Korea were instituted by a series of macroeconomic government plans (First Malaysia Plan and Five-Year Plans of South Korea) that rapidly developed and industrialized their mixed economies.

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.

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.

Soviet Union

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 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

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]