Economic planning is a mechanism for the allocation of resources between and within organizations which is held in contrast to the market mechanism. As an allocation mechanism for socialism, economic planning replaces factor markets with a direct allocation of resources within a single or interconnected group of socially-owned organizations.[1]
There are various forms of economic planning. The level of centralization in the decision-making depends on the specific type of planning mechanism employed. As such, one can distinguish between centralized planning and decentralized planning.[2] An economy primarily based on central 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.[3] Planning may also take the form of directive planning or indicative planning.
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.
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.[5] 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 exist as theoretical constructs that have not been implemented fully by any economy, partially because they depend on vast changes on a global scale (see mode of production). In the context of mainstream economics and the field of comparative economic systems, "socialist planning" usually refers to the Soviet-type 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.