Economic Planning is a confusing subject for many people. This article attempts to demystify the topic and make it easier for you to understand.
What Exactly Is It?
Economic Planning is a process of resource allocation that originated under the socialist paradigm. It has several methods that are all affected by the level of centralization of the decision-making process. Most models of socialist economic plans are theoretical as it hasn’t been possible to implement them in today’s capitalistic system. For example, there are some socialist models that eliminate the market system and the need for money as a means of exchange. This would be impossible to implement as how would we pay for goods and services?
Centralized Versus Decentralised Planning Systems
There are several methods of economic planning and most fall either under centralized or decentralized decision-making systems. Centralized decision-making is whereby a few people in charge develop all the plans. On the other hand, the wider population of an economy or an organization formulates decentralized plans through consensus.
Economic Planning In Socialist And Capitalist Regimes
Although planning is a socialist concept it is in use in both socialist and capitalistic environments. Under socialist principles of planning goods should be produced according to the needs of the market unlike in capitalism whereby goods are produced and sold for a profit not necessarily per need.
Capitalistic organizations are increasingly being forced to use planning to allocate resources. For example, many companies now use complex statistics to predict market demand and therefore produce an optimal amount of goods or services to meet the market demand. Some companies like Apple even manufacture goods in such a way that they become obsolete after a certain amount of time thus ensuring demand for future versions of the product. Both these are examples of economic planning.
Benefits Of Economic Planning
Many economies including the United States, the Soviet Union, France, Malaysia, and North Korea have successfully used variants of economic planning to rapidly develop their economies. Proponents of this concept argue that it makes the best and most ethical use of an economy’s or country’s resources. This is due to the fact that plans focus on benefitting the entire society, not a small section of it. Consequently, economic planning leads to a smaller gap between the rich and poor.
Criticisms Of Economic Planning
The main criticism is that it has been impossible for planners to get all the market information they need to accurately predict factors like consumer demand. The market is dynamic and changes on a whim thus plans laid out based on information gathered yesterday may fail if current market demands are different.
Additionally, planners that are guided by centralized decision making do not reflect the opinions of millions of people in the population who make up the market and therefore influence how it behaves. The plans they make without considering the population’s opinion would, therefore, be ineffective.