Economic calculation problem Totally Explained

Everything about Economic Calculation Debate totally explained

The economic calculation problem is a criticism of socialist economics. It was first proposed by Ludwig von Mises in 1920 and later expounded by Friedrich Hayek. According to this criticism, without information provided by market prices it's impossible to rationally allocate resources. Those who agree with this criticism argue it's a refutation of socialism and that it shows that a socialist planned economy could never work. The debate raged in the 1920s and 1930s, and that specific period of the debate has come to be known by economic historians as the The Socialist Calculation Debate. Ludwig von Mises argued in a famous 1920 article "Economic Calculation in the Socialist Commonwealth" that the pricing systems in socialist economies were necessarily deficient because if government owned the means of production, then no prices could be obtained for capital goods as they were merely internal transfers of goods in a socialist system and not "objects of exchange," unlike final goods. Therefore, they were unpriced and hence the system would be necessarily inefficient since the central planners wouldn't know how to allocate the available resources efficiently. He contended that the only rational solution is to utilize all the dispersed knowledge in the market place through the use of price signals. The early debates were made before the much greater calculating powers of modern computers became available but also before research on chaos theory. It may be impossible to make long-term predictions for a highly complex system such as an economy.
One criticism, though, has been that proponents of the problem overstate the strength of their case, in describing socialism as impossible, rather than inefficient. It has also been claimed that the contention that finding a true economic equilibrium isn't just hard but impossible for a central planner applies equally well to a market system; As any Universal Turing Machine can do what any other Turing machine can, a system of dispersed calculators (for example a market) has no in principle advantage over one central calculator. Some writers have gone on to suggest that with detailed use of real unit accounting and demand surveys a planned economy could operate without a capital market, in a situation of abundance, The purpose of the price mechanism is to allow individuals to recognise the opportunity cost of decisions: in a state of abundance, there's no such cost. Market socialism was developed in response to the calculation argument. Oskar Lange created the Lange Model and argued that prices can be seen merely as an accounting practice. In principle, claim market socialists, socialist managers of state enterprises could use a price system, as an accounting system, in order to minimize costs and convey information to other managers.

Implementation of central planning decisions

Hayek (1944) also argues that the central administrative resource allocation, which often must take away resources and power from subordinate leader and groups, necessarily requires and therefore selects ruthless leaders and the continued strong threat of coercion and punishment in order for the plans to be somewhat effectively implemented. This, in combination of the failures of the central planning, slowly leads socialism down the road to an oppressive dictatorship.

Markets not efficient

Another counter-argument is to dispute the claim that a free market is efficient at resource allocation. Alec Nove argues that in "Economic Calculation in the Socialist Commonwealth" von Mises "tends to spoil his case by the implicit assumption that capitalism and optimum resource allocation go together", and Joan Robinson further avers that "private property in the means of production, combined with rights of inheritance produces a totally irrational distribution of purchasing power within society which completely undermines the whole conception" that markets rationally allocate resources. She further claims many prices in modern capitalism are effectively "administered prices" created by "quasi monopolies", thus challenging the connection between capital markets and rational resource allocation.
Mainstream economists, such as Paul Samuelson have argued however that markets are, on the whole, allocatively efficient and Milton Friedman has argued that, due to the pressure from free trade of potential competition, monopolies still have to behave in a competitive manner.

Steady state

Robinson also noted that in a non-growth economy (what Marxists would call a situation of simple reproduction) there would be an effective abundance of means of production, and so markets wouldn't be needed. Von Mises acknowledged such a theoretical possibility in his original tract: He contended, however, that stationary conditions never prevail in the real world. Changes in economic conditions are inevitable.

Real World Examples

Project Cybersyn is an example of attempting to plan the Chilean Economy through computer-aided calculation. It consisted of Telex machines located in workplaces communicating information in real time to a central control system. Its overall impact is difficult to assess, as it was destroyed after the military coup on September 11, 1973 before the system was fully completed.

Bibliography

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MacKenzie, DW 2008 "Social Dividends, Bureacratic Rules, and Entrepreneurial Discretion" Eastern Economic Journal
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Mises 1933 Planned Economy and Socialism; reprinted in Selected Writings of Ludwig von Mises, The Liberty Fund (2002) Richard M Ebeling ed.
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Yunker, James A. Post-Lange Market Socialism" 1995, Journal of Economic Issues

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