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Economic planning is a resource allocation mechanism based on a computational procedure for solving a constrained maximization problem with an iterative process for obtaining its solution. Planning is a mechanism for the allocation of resources between and within organizations contrasted with the market mechanism. As an allocation mechanism for socialism, economic planning replaces factor markets with a procedure for direct allocations of resources within an interconnected group of socially owned organizations which together comprise the productive apparatus of the economy.
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There are various forms of economic planning that vary based on their specific procedures and approach. The level of centralization or decentralization in decision-making depends on the specific type of planning mechanism employed. In addition, one can distinguish between centralized planning and decentralized planning. An economy primarily based on 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. Planning can also take the form of indicative planning within a market-based economy, where the state employs market instruments to induce independent firms to achieve development goals.
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.
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