Central economic planning, or simply central planning, is the method of social or economic organization wherein key decisions are made or greatly influenced by a panel, committee, or individual members of a government entity.
Central planning is the antithesis of free market or anarcho-capitalism, and one of the hallmarks of a socialism, fascism, or mercantilism. Central planning can take any number of forms, and includes various levels of economic interventionism, ranging from central bank operations to manipulate interest rates, to certain tax incentives meant to encourage (or discourage) certain behavior. Friedrich Hayek wrote The Road to Serfdom largely as a repudiation of central planning; arguing that such a system eventually leads a society into rule by the total state.
Because there is no way for the planners to aggregate all of the information or knowledge required to make decisions, an inevitable component of central planning is that it always leads to unintended consequences. Examples of this are the business cycle, explained more thoroughly by the Austrian Business Cycle Theory, wherein artificially low interest rates encourage investment that otherwise wouldn’t be possible. This investment becomes unsustainable when it is revealed that requisite capital does not exist to support such expansion and a recession or depression follows.
Another common instance of central planning leading to unintended consequences is price fixing or rent control that leads to shortages and diminished quality. When the state determines the prices for a particular good, and that price is set below what the market would reflect based upon the law of supply and demand, consumers are able to buy more than they otherwise might. This can lead to shortages of the good or service, as entrepreneurs are not attracted to the market by rising prices. Quality is oftentimes degraded as well, as with the case of rent-controlled housing markets. Because property owners do not have the freedom to raise prices during times of increased demand, they must sacrifice improvements or maintenance in order not to lose the marginal gains of existing rent monies.
Beyond the pragmatic issues concerning central planning are the moral issues raised when one group attempts to engineer society into behaving a certain way. In Central Planning and Neomercantilism, David Elton Trueblood demonstrated that “in human life there are many valid principles, rather than one” and when central planners attempt to enforce their will on others, conflict will arise.
- .Reference The Fallacy of Central Economic Planning by David Elton Trueblood