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Economic calculation problem

The economic calculation problem is a criticism of socialist economics. It was first proposed by Ludwig von Mises in 1920. Those who agree with this criticism claim it is a refutation of socialism and that it shows why a socialist command economy could never work.

The argument goes roughly as follows:

  1. The variation and selection, in the market, of prices for goods and services (including capital goods) are the means by which consumers and producers become aware of needs and the availability of supplies.
  2. Without private property in the means of production of goods and services, there will be no market system and hence no pricing mechanism.
  3. Without the information the pricing mechanism provides, participants in the economy will be unable to calculate efficient use of capital to produce the goods and services proportionally with demand, or to efficiently choose among goods.

The ostensible result is that socialisms produce inefficient distributions of production. Historical examples include the Soviet Union's cyclical shortages of various goods, and efforts to resolve the economic calculation problem was one of the main goals of Chinese economic reform in the 1980's. On

This argument served as a starting point for F. A. Hayek's work on the use of knowledge in society.

Criticism via decentralized socialism

Some socialists respond that this argument rests on the assumption that socialism would be a completely centralised economy based on society wide planning, but that in fact it need not necessarily be so. This counter-argument suggests a decentralized form of socialism with different levels of planning -- local, regional and global. This, they claim, would allow for a self regulating mechanism of stock control to come into play (which cannot happen in the case of society-wide or central planning).

In this model, distribution points replenish stock as it is removed from the shelves by signalling to producers orders for new stock. Producers in turn contact their own suppliers of inputs as and when it is required and so on down the production.

According to the law of the minimum (after Justus von Liebig) those factors that are most scarce in relation to demand, that constitute the "limiting factor" which proximately limits the production of any good, are precisely those that need most to be economised. The shortage of such factors as revealed via the self regulating system of stock control will trigger the search for more abundant substitutes. This, some socialists claim, would overcome the economic calculation problem.

One response to this criticism is that fundamentally the calculation problem does not in fact rest on an assumption of centralization of decision making. Indeed, problems very similar can occur in decentralized systems, wherever the persons making choices are insulated from the inefficiencies of those choices.

Another response is to point out that the "stock control plus law of the minimum" proposal ignores the key difficulty identified by the economic calculation problem: the measurement of costs of production according to a common unit. For efficient allocation, it's necessary to have a common unit of cost for all the many thousands of productive inputs. Such a unit is given by market prices, but is not given by stock control or by the law of the minimum.

However, decentralist socialists would argue in response that while the calculation problem may not in itself rest on the assumption of society-wide or central planning, the resolution of that "problem" in a non-market society will remain obfuscated or hidden from view if one assumes such a society to be a central planned one in this sense. This is because the notion of central planning necessarily precludes the operation of a self regulating system of stock control which is a key component of an effective counter-argument to the economic calculation argument along with calculation in kind (Otto Neurath) and the Law of the Minimum.

Furthermore, decentralist socialists would argue that there is no need for a common unit of accounting or, rather, that such a need only derives from the exigencies of economic exchange i.e. as a more efficient form of exchange than barter. In capitalism costs are measured in monetary terms. It is a tautology to argue that only a monetary-based system can measure costs in this fashion. On the other hand, if monetary accounting is supposed to "capture" costs in some other substantive sense one would then have to demonstrate a correlation between these two kinds of "costs". Since this would entail measuring costs directly and not in terms of money, if follows that the economic calculation argument is logically inapplicable.

For elucidation of the economic calculation problem, see D.R. Steele, From Marx to Mises (Chicago: Open Court, 1992). Alternative views on this subject can be gleaned from a number of anarcho-socialist, and anarchist websites (Spunk Press, John Gray website, World Socialist Movement, The World in Common Group, Mike Hubel's "Critiques of Libertarianism" etc)

Chinese socialism

The method used by China to resolve the economic calculation problem is that of a socialist market economy, in which the goals and the ownership are largely public, but this exists within a market pricing system.