Economic planning has been defined as the making of major economic decisions – what and how much is to be produced, how, when and where it is to be produced and to whom it is to be allocated by the conscious decision of a determinate authority on the basis of a comprehensive survey of the economic system as a whole.
In a plan less society, consumer demand largely, if not exclusively, determines what is produced. In a planned economy where the state determines the pattern of production and the allocation of resources, consumers’ sovereignty is bound to suffer.
Nature and scope of planning is largely determined by the type of economic system within which it is practised.
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Economic planning can be practised in a capitalist, socialist and mixed economy. Planning in a capitalist economy is of an indicative type.
In this planning, the sphere of state intervention is limited to (1) formulation of a plan and (ii) adoption of indirect controls. The government lays down production and investment targets and in their task seeks the assistance of the private enterprises.
Planning in a socialist economy, on the other hand, is of an imperative type. In this type of planning all means of production are owned by the state.
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The centralised all powerful Central Planning Board is vested with all the powers to formulate a plan which lays down production and investment targets for all the individual production enterprises.
Planning in a mixed economy is a difficult task. In this type of economic system the ownership of the means of production is distributed between the state and the private entrepreneurs.
Economic planning to be meaningful cannot merely be of an indicative type nor can it be an imperative type. It has to be a judicious mixture of the two. There are two major divisions of the economy – the public sector and the private sector.
In the plan the targets of production and investment are laid down for the public sector. The public sector enterprises should follow the path defined for them in the plan. Though targets are fixed for the private enterprises, they are nevertheless free to reach economic decisions which suit them most.