Economic calculation problem
The economic calculation problem is a criticism of using central economic planning as a substitute for allocation of the . It was first proposed by in his 1920 article “” and later expanded upon by . F. A. Hayek, (1935), “The Nature and History of the Problem” and “The Present State of the Debate,” in F. A. Hayek, ed. Collectivist Economic Planning, pp. 1–40, 201–43.
In his first article, Mises describes the nature of the price system under capitalism and describes how individual are translated into the objective information necessary for allocation of resources in society.
In market exchanges, prices reflect the of resources, labor and products. In his first article, Mises focused his criticism on the inevitable deficiencies of the of capital goods, but Mises later went on to elaborate on various different forms of socialism in his book, . Mises and Hayek argued that economic calculation is only possible by information provided through market prices, and that bureaucratic or technocratic methods of allocation lack methods to rationally allocate resources. The debate raged in the 1920s and 1930s, and that specific period of the debate has come to be known by as The . Mises’ initial criticism received multiple reactions and led to the conception of trial-and-error , most notably the .
Mises argued in “Economic Calculation in the Socialist Commonwealth” that the pricing systems in socialist economies were necessarily deficient because if a public entity owned all the , no rational prices could be obtained for as they were merely internal transfers of goods and not “objects of exchange,” unlike final goods. Therefore, they were unpriced and hence the system would be necessarily irrational, as the central planners would not know how to allocate the available resources efficiently. He wrote that “rational economic activity is impossible in a socialist .” Mises developed his critique of socialism more completely in his 1922 book Socialism: An Economic and Sociological Analysis, arguing that the market price system is an expression of and can not be replicated by any form of bureaucracy.
However, it is important to note that central planning has been criticized by socialists who advocated decentralized mechanisms of economic coordination, including , , and before the critique. Central planning was later criticized by socialist economists such as and . has argued that the economic calculation argument can only be successfully rebutted on the assumption that a moneyless socialist economy was to a large extent spontaneously ordered via a self-regulating system of stock control which would enable decision-makers to allocate production goods on the basis of their relative scarcity using calculation in kind. This was only feasible in an economy where most decisions were decentralised. Trotsky argued that central planners would not be able to respond effectively to local changes in the economy because they operate without meaningful input and participation by the millions of economic actors in the economy, and would therefore be an ineffective mechanism for coordinating economic activity.