economic planning

economic planning, control and direction of economic activity by a central public authority. In its modern usage, economic planning tends to be pitted against the laissez-faire philosophy which developed in the 18th cent. Proponents of laissez faire believed that an economy works best when there is little government interference. The contemporary economic model of rational expectations offers perhaps the strongest critique of economic planning in its assertion that economic forecasting, both by individuals and competing businesses, is generally rational. In this model, government control of economic policy can only lead to complication, since any change instituted by central authorities has already been anticipated by the market. The level and type of central planning in any economy is generally connected to the sort of political regime that dominates. In recent years, heavily structured economic programs have been associated in particular with socialism, communism, and fascism. Economic planning also became an important part of public policy in nations that did not adopt those doctrines, even in Western capitalist societies where the notion of a free market is a fundamental tenet. Central planning under the Western capitalist governments came into particular importance to combat the economic hardships that existed in many nations between World War I and World War II. In most societies, the occurrence of war tends to subordinate all private activity to a unified national effort and thus increases national economic planning. Central planning increases in importance during a recession, or any serious economic decline. Planning can involve the use of direct controls—such as rationing and price, rent, and wage limits—or indirect controls, such as monetary and fiscal policy. Since the 1930s the U.S. government has used a variety of direct and indirect controls. The limited economic success and ultimate collapse of Communism in Eastern Europe has opened up intense debate about the perils of total central planning.

Bibliography

See A. Cairncross, Economics and Economic Policy (1987); R. N. Copper, Economic Policy in an Interdependent World (1987).

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economic planning

Use of government to make economic decisions with respect to the use of resources. In communist countries with a state planning apparatus, detailed and rigid planning results in a command economy; land, capital, and the means of production are publicly owned and centrally allocated, and the government makes both micro- and macroeconomic decisions. Microeconomic decisions include what goods and services to produce, the quantities to produce, the prices to charge, and the wages to pay. Macroeconomic decisions include the rate of investment and the extent of foreign trade. In most industrialized countries, governments influence their economies indirectly through monetary and fiscal policies. A few key economic sectors may be publicly owned, but the trend has been toward the privatization of industries that were socialized in the aftermath of the Great Depression and World War II. Japan is the most notable example of economic planning in a capitalist framework; government and industry cooperate closely in planning patterns of capital investment, research and development, and export strategies. See also capitalism, communism, socialism, zaibatsu.