The economic calculation problem (ECP) is a criticism of using central
economic planning
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 ...
as a substitute for
market-based allocation of the
factors of production
In economics, factors of production, resources, or inputs are what is used in the production process to produce output—that is, goods and services. The utilised amounts of the various inputs determine the quantity of output according to the rela ...
. It was first proposed by
Ludwig von Mises
Ludwig Heinrich Edler von Mises (; ; September 29, 1881 – October 10, 1973) was an Austrian-American political economist and philosopher of the Austrian school. Mises wrote and lectured extensively on the social contributions of classical l ...
in his 1920 article "
Economic Calculation in the Socialist Commonwealth" and later expanded upon by
Friedrich Hayek
Friedrich August von Hayek (8 May 1899 – 23 March 1992) was an Austrian-born British academic and philosopher. He is known for his contributions to political economy, political philosophy and intellectual history. Hayek shared the 1974 Nobe ...
.
In his first article, Mises described the nature of the price system under
capitalism
Capitalism is an economic system based on the private ownership of the means of production and their use for the purpose of obtaining profit. This socioeconomic system has developed historically through several stages and is defined by ...
and described how individual
subjective values (while criticizing
other theories of value) are translated into the objective information necessary for
rational
Rationality is the quality of being guided by or based on reason. In this regard, a person acts rationally if they have a good reason for what they do, or a belief is rational if it is based on strong evidence. This quality can apply to an ...
allocation of resources in society.
He argued that central planning necessarily leads to an irrational and inefficient
allocation of resources
In economics, resource allocation is the assignment of available resources to various uses. In the context of an entire economy, resources can be allocated by various means, such as markets, or planning.
In project management, resource allocation ...
. In market exchanges, prices reflect the
supply and demand
In microeconomics, supply and demand is an economic model of price determination in a Market (economics), market. It postulates that, Ceteris_paribus#Applications, holding all else equal, the unit price for a particular Good (economics), good ...
of resources, labor and products. In the article, Mises focused his criticism on the deficiencies of the
socialisation of capital goods, but he later went on to elaborate on various different forms of socialism in his book ''
Socialism
Socialism is an economic ideology, economic and political philosophy encompassing diverse Economic system, economic and social systems characterised by social ownership of the means of production, as opposed to private ownership. It describes ...
''. He briefly mentioned the problem in the 3rd book of ''
Human Action: a Treatise on Economics'', where he also elaborated on the different types of
socialism
Socialism is an economic ideology, economic and political philosophy encompassing diverse Economic system, economic and social systems characterised by social ownership of the means of production, as opposed to private ownership. It describes ...
, namely the
"Hindenburg" and
"Lenin" models, which he viewed as fundamentally flawed despite their ideological differences.
Mises and Hayek argued that economic calculation is only possible by information provided through market prices and that centralist methods of allocation lack methods to rationally allocate resources. Mises's analysis centered on price theory while Hayek went with a more feathered analysis of information and entrepreneurship. The debate raged in the 1920s and 1930s and that specific period of the debate has come to be known by
economic historians
Economic history is the study of history using methodological tools from economics or with a special attention to economic phenomena. Research is conducted using a combination of historical methods, statistical methods and the application of ...
as the
socialist calculation debate. Mises' initial criticism received multiple reactions and led to the conception of trial-and-error
market socialism
Market socialism is a type of economic system involving social ownership of the means of production within the framework of a market economy. Various models for such a system exist, usually involving cooperative enterprises and sometimes a mix ...
, most notably the
Lange–Lerner theorem
The Lange model (or Lange–Lerner theorem) is a Neoclassical economics, neoclassical economic model for a hypothetical socialist economy based on public ownership of the means of production and a trial-and-error approach to determining output tar ...
.
In the 1920 paper, Mises argued that the pricing systems in state socialist economies were necessarily deficient because if a public entity owned all the
means of production
In political philosophy, the means of production refers to the generally necessary assets and resources that enable a society to engage in production. While the exact resources encompassed in the term may vary, it is widely agreed to include the ...
, no rational prices could be obtained for
capital goods
In economics, capital goods or capital are "those durable produced goods that are in turn used as productive inputs for further production" of goods and services. A typical example is the machinery used in a factory. At the macroeconomic level, ...
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
commonwealth
A commonwealth is a traditional English term for a political community founded for the common good. The noun "commonwealth", meaning "public welfare, general good or advantage", dates from the 15th century. Originally a phrase (the common-wealth ...
".
Mises developed his critique of socialism more completely in his 1922 book ''
Socialism
Socialism is an economic ideology, economic and political philosophy encompassing diverse Economic system, economic and social systems characterised by social ownership of the means of production, as opposed to private ownership. It describes ...
'', arguing that the market price system is an expression of
praxeology
In philosophy, praxeology or praxiology (; ) is the theory of human Action (philosophy), action, based on the notion that humans engage in purposeful behavior, contrary to Reflex, reflexive behavior and other unintentional behavior.
French socia ...
and cannot be replicated by any form of
bureaucracy
Bureaucracy ( ) is a system of organization where laws or regulatory authority are implemented by civil servants or non-elected officials (most of the time). Historically, a bureaucracy was a government administration managed by departments ...
.
Notable critics of both Mises's original argument and Hayek's newer proposition include
Anarcho-capitalist
Anarcho-capitalism (colloquially: ancap or an-cap) is a political philosophy and economic theory that advocates for the abolition of Sovereign state, centralized states in favor of Stateless society, stateless societies, where systems of p ...
economist
Bryan Caplan
Bryan Douglas Caplan (born April 8, 1971) is an American economist and author. He is a professor of economics at George Mason University, a senior research fellow at the Mercatus Center, an adjunct scholar at the Cato Institute, and a former c ...
,
computer programmer and Marxist
Paul Cockshott
William Paul Cockshott (born 16 March 1952) is a Scottish academic in the fields of computer science and Marxist economics. He is a Reader at the University of Glasgow. Since 1993 he has authored multiple works in the tradition of scientif ...
, as well as other
communists
Communism () is a sociopolitical, philosophical, and economic ideology within the socialist movement, whose goal is the creation of a communist society, a socioeconomic order centered on common ownership of the means of production, d ...
.
Theory
Subject
The economic calculation problem is primarily applied to centrally planned economies. Mises had utilized ''Economic Calculation in the Socialist Commonwealth'' to counterargue
Otto Neurath's statements concerning central planning's feasibility, invoking "the supreme economic council" and equating socialism to "a society where the means of production are State controlled."
This, paired with his consistent mention of
nationalization
Nationalization (nationalisation in British English)
is the process of transforming privately owned assets into public assets by bringing them under the public ownership of a national government or state. Nationalization contrasts with p ...
alongside
socialization
In sociology, socialization (also socialisation – see American and British English spelling differences#-ise, -ize (-isation, -ization), spelling differences) is the process of Internalisation (sociology), internalizing the Norm (social), norm ...
, would make the economic calculation problem one solely concerning an
administrative-command system
The administrative-command system (), also known as the command-administrative system, is the system of management of an economy of a state characterized by the rigid centralization of economic planning and distribution of goods, based on the sta ...
.
Comparing heterogeneous goods
Since capital goods and
labor are highly heterogeneous (i.e. they have different characteristics that pertain to physical productivity), economic calculation requires a common basis for comparison for all forms of capital and labour.
As a
means of exchange,
money
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are: m ...
enables buyers to compare the costs of goods without having knowledge of their underlying factors; the consumer can simply focus on his personal cost-benefit decision. Therefore, the price system is said to promote economically efficient use of resources by agents who may not have explicit knowledge of all of the conditions of production or supply. This is called the
signalling
A signal is both the process and the result of transmission of data over some media accomplished by embedding some variation. Signals are important in multiple subject fields including signal processing, information theory and biology.
In ...
function of
price
A price is the (usually not negative) quantity of payment or compensation expected, required, or given by one party to another in return for goods or services. In some situations, especially when the product is a service rather than a ph ...
s as well as the
rationing
Rationing is the controlled distribution (marketing), distribution of scarcity, scarce resources, goods, services, or an artificial restriction of demand. Rationing controls the size of the ration, which is one's allowed portion of the resourc ...
function which prevents over-use of any resource.
Without the market process to fulfill such comparisons, critics of non-market socialism say that it lacks any way to compare different goods and services and would have to rely on
calculation in kind
Calculation in kind or calculation in-natura is a way of valuating resources and a system of accounting that uses disaggregated physical magnitudes as opposed to a common unit of calculation. As the basis for a socialist economy, it was proposed ...
. The resulting decisions, it is claimed, would therefore be made without sufficient knowledge to be considered rational.
Relating utility to capital and consumption goods
The common basis for comparison of capital goods must also be connected to
consumer welfare
Welfare economics is a field of economics that applies microeconomics, microeconomic techniques to evaluate the overall well-being (welfare) of a society.
The principles of welfare economics are often used to inform public economics, which f ...
. It must also be able to compare the desired trade-off between present consumption and delayed consumption (for greater returns later on) via investment in capital goods. The use of money as a medium of exchange and unit of account is necessary to solve the first two problems of economic calculation. Mises (1912) applied the
marginal utility theory developed by
Carl Menger to money.
Marginal consumer expenditures represent the marginal utility or additional consumer satisfaction expected by consumers as they spend money. This is similar to the equi-marginal principle developed by
Alfred Marshall
Alfred Marshall (26 July 1842 – 13 July 1924) was an English economist and one of the most influential economists of his time. His book ''Principles of Economics (Marshall), Principles of Economics'' (1890) was the dominant economic textboo ...
. Consumers equalize the marginal utility (amount of satisfaction) to the last dollar spent on each good. Thus, the exchange of consumer goods establishes prices that represent the marginal utility of consumers and money is representative of consumer satisfaction.
If money is also spent on capital goods and labor, then it is possible to make comparisons between capital goods and consumer goods. The exchange of consumer and capital/labor goods does not imply that capital goods are valued accurately, only that it is possible for the valuations of capital goods to be made. These are foundational elements of economic calculation, namely that it requires the use of money across all goods. This is a necessary, but not a sufficient condition for successful economic calculation. Without a price mechanism, Mises argues, socialism lacks the means to
relate consumer satisfaction to economic activity. The incentive function of prices allows diffuse interests, like the interests of every household in cheap, high-quality shoes to compete, among buyers, with the concentrated interests of the cobblers in expensive, poor-quality shoes. Without it, a panel of experts set up to "rationalise production", likely closely linked to the cobblers for expertise, would tend to support the cobblers' interests in a "conspiracy against the public". However, if this happens to all industries, everyone would be worse off than if they had been subject to the rigors of
market competition
In economics, competition is a scenario where different Economic agent, economic firmsThis article follows the general economic convention of referring to all actors as firms; examples in include individuals and brands or divisions within the s ...
. The latter forces producers to produce superior products at appropriate prices to please their consumers.
The Mises theory of money and calculation conflicts directly with Marxist
labour theory of value
The labor theory of value (LTV) is a theory of value that argues that the exchange value of a good or service is determined by the total amount of " socially necessary labor" required to produce it. The contrasting system is typically known as ...
. Marxist theory allows for the possibility that labour content can serve as a common means of valuing capital goods, a position now out of favour with economists following the success of the theory of
marginal utility
Marginal utility, in mainstream economics, describes the change in ''utility'' (pleasure or satisfaction resulting from the consumption) of one unit of a good or service. Marginal utility can be positive, negative, or zero. Negative marginal utilit ...
.
Entrepreneurship
The third condition for economic calculation is the existence of genuine
entrepreneurship
Entrepreneurship is the creation or extraction of economic value in ways that generally entail beyond the minimal amount of risk (assumed by a traditional business), and potentially involving values besides simply economic ones.
An entrepreneu ...
and
market rivalry.
According to
Israel Kirzner (1973) and
Don Lavoie (1985), entrepreneurs reap profits by supplying unfulfilled needs in all markets. Thus, entrepreneurship brings prices closer to marginal costs. The adjustment of prices in markets towards equilibrium (where supply and demand equal) gives them greater utilitarian significance. The activities of entrepreneurs make prices more accurate in terms of how they represent the marginal utility of consumers. Prices act as guides to the planning of production. Those who plan production use prices to decide which lines of production should be expanded or curtailed.
Entrepreneurs lack the
profit motive
In economics, the profit motive is the motivation of firms that operate so as to maximize their profits. Mainstream microeconomic theory posits that the ultimate goal of a business is "to make money" - not in the sense of increasing the firm ...
to take risks under socialism and so are far less likely to attempt to supply consumer demands. Without the price system to match consumer utility to incentives for production, or even indicate those utilities "without providing incentives", state planners are much less likely to invest in new ideas to satisfy consumers' desires. Entrepreneurs would also lack the ability to economize within the production process, causing repercussions for consumers.
Coherent planning
The fourth condition for successful economic calculation is plan coordination among those who plan production. The problem of planning production is the knowledge problem explained by Hayek (1937, 1945), but first mentioned and illustrated by his mentor Mises in ''Socialism'' (1922), not to be mistaken with ''
Socialism: An Economic and Sociological Analysis'' (1951). The planning could either be done in a decentralised fashion, requiring some mechanism to make the individual plans coherent, or centrally, requiring a lot of information.
Within capitalism, the overall plan for production is composed of individual plans among capitalists in large and small enterprises. Since capitalists purchase labour and capital out of the same common pool of available yet scarce labor and capital, it is essential that their plans fit together in at least a semi-coherent fashion. Hayek (1937) defined an efficient planning process as one where all decision makers form plans that contain relevant data from the plans from others. Entrepreneurs acquire data on the plans from others through the price system. The price system is an indispensable communications network for plan coordination among entrepreneurs. Increases and decreases in prices inform entrepreneurs about the general economic situation, to which they must adjust their own plans.
As for socialism, Mises (1944) and Hayek (1937) insisted that bureaucrats in individual ministries could not coordinate their plans without a price system due to
the local knowledge problem. Opponents argued that in principle an economy can be seen as a set of equations. Thus, using information about available resources and the preferences of people, it should be possible to calculate an optimal solution for resource allocation.
Friedrich von Hayek responded that the system of equations required too much information that would not be easily available, and the ensuing calculations would be too difficult. This is partly because individuals possess useful knowledge but do not realize its importance, may have no incentive to transmit the information, or may have incentive to transmit false information about their preferences. 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
A computer is a machine that can be programmed to automatically carry out sequences of arithmetic or logical operations ('' computation''). Modern digital electronic computers can perform generic sets of operations known as ''programs'', ...
became available but also before research on
chaos theory
Chaos theory is an interdisciplinary area of Scientific method, scientific study and branch of mathematics. It focuses on underlying patterns and Deterministic system, deterministic Scientific law, laws of dynamical systems that are highly sens ...
. In the 1980s,
Alexander Nove argued that the calculations would take millions of years even with the best computers. It may be impossible to make long-term predictions for a highly complex system such as an economy.
Hayek (1935, 1937, 1940, 1945) stressed the knowledge problem of central planning, partly because decentralized socialism seemed indefensible. Part of the reason that Hayek stressed the knowledge problem was also because he was mainly concerned with debating the proposal for
market socialism
Market socialism is a type of economic system involving social ownership of the means of production within the framework of a market economy. Various models for such a system exist, usually involving cooperative enterprises and sometimes a mix ...
and the
Lange model by
Oskar R. Lange (1938) and Hayek's student
Abba Lerner (1934, 1937, 1938) which was developed in response to the calculation argument. Lange and Lerner conceded that prices were necessary in socialism. Lange and Lerner thought that socialist officials could simulate some markets (mainly spot markets) and the simulation of spot markets was enough to make socialism reasonably efficient. Lange 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. However, while this can deal with existing stocks of goods, providing a basis for values can be ascertained, it does not deal with the investment in new capital stocks. Hayek responded by arguing that the simulation of markets in socialism would fail due to a lack of genuine competition and entrepreneurship. Central planners would still have to plan production without the aid of economically meaningful prices. Lange and Lerner also admitted that socialism would lack any simulation of financial markets, and that this would cause problems in planning capital investment.
However, Hayek's argumentation is not only regarding computational complexity for the central planners. He further argues that much of the information individuals have cannot be collected or used by others. First, individuals may have no or little
incentive
In general, incentives are anything that persuade a person or organization to alter their behavior to produce the desired outcome. The laws of economists and of behavior state that higher incentives amount to greater levels of effort and therefo ...
to share their information with central or even local planners. Second, the individual may not be aware that he has valuable information; and when he becomes aware, it is only useful for a limited time, too short for it to be communicated to the central or local planners. Third, the information is useless to other individuals if it is not in a form that allows for meaningful comparisons of value (i.e. money prices as a common basis for comparison). Therefore, Hayek argues, individuals must acquire data through prices in real markets.
Financial markets
The fifth condition for successful economic calculation is the existence of well-functioning
financial market
A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial marke ...
s. Economic efficiency depends heavily upon avoiding errors in capital investment. The costs of reversing errors in capital investment are potentially large. This is not just a matter of rearranging or converting capital goods that are found to be of little use. The time spent reconfiguring the structure of production is time lost in the production of consumer goods. Those who plan capital investment must anticipate future trends in consumer demand if they are to avoid investing too much in some lines of production and too little in other lines of production.
Capitalists plan production for profit. Capitalists use prices to form expectations that determine the composition of
capital accumulation
Capital accumulation is the dynamic that motivates the pursuit of profit, involving the investment of money or any financial asset with the goal of increasing the initial monetary value of said asset as a financial return whether in the form ...
, the pattern of investment across industry. Those who invest in accordance with consumers' desires are rewarded with profits, those who do not are forced to become more efficient or go out of business.
Prices in
futures markets play a special role in economic calculation. Futures markets develop prices for commodities in future time periods. It is in futures markets that entrepreneurs sort out plans for production based on their expectations. Futures markets are a link between entrepreneurial investment decisions and household consumer decisions. Since most goods are not explicitly traded in futures markets, substitute markets are needed. The stock market serves as a ‘continuous futures market’ that evaluates entrepreneurial plans for production (Lachmann 1978). Generally speaking, the problem of economic calculation is solved in financial markets as Mises argued:
The existence of financial markets is a necessary condition for economic calculation. The existence of financial markets itself does not automatically imply that entrepreneurial speculation will tend towards efficiency. Mises argued that speculation in financial markets tends towards efficiency because of a "trial and error" process. Entrepreneurs who commit relatively large errors in investment waste their funds over expanding some lines of production at the cost of other more profitable ventures where consumer demand is higher. The entrepreneurs who commit the worst errors by forming the least accurate expectations of future consumer demands incur financial losses. Financial losses remove these inept entrepreneurs from positions of authority in industry.
Entrepreneurs who commit smaller errors by anticipating consumer demand more correctly attain greater financial success. The entrepreneurs who form the most accurate opinions regarding the future state of markets (i.e. new trends in consumer demands) earn the highest profits and gain greater control of industry. Those entrepreneurs who anticipate future market trends therefore waste the least amount of real capital and find the most favorable terms for finance on markets for financial capital. Minimal waste of real capital goods implies the minimization of the opportunity costs of capital's economic calculation. The value of capital goods is brought into line with the value of future consumer goods through competition in financial markets, because competition for profits among capitalist financiers' rewards entrepreneurs who value capital more correctly (i.e. anticipating future prices more correctly) and eliminates capitalists who value capital least correctly. To sum things up, the use of money in trading all goods (capital/labor and consumer) in all markets (spot and financial) combined with profit driven entrepreneurship and Darwinian natural selection in financial markets all combine to make rational economic calculation and allocation the outcome of the capitalist process.
Mises insisted that socialist calculation is impossible because socialism precludes the exchange of capital goods in terms of a generally accepted medium of exchange, or money. Investment in financial markets determines the capital structure of modern industry with some degree of efficiency. The egalitarian nature of socialism prohibits speculation in financial markets. Therefore, Mises concluded that socialism lacks any clear tendency towards improvement in the capital structure of industry.
Example
Mises gave the example of choosing between producing wine or oil within a centrally planned economy, making the following point:
Such intermediate products would include land, warehouse storage, bottles, barrels, oil, transport, etc. Not only would these things have to be assembled, but they would have to compete with the attainment of other economic goals. Without pricing for capital goods, essentially, Mises is arguing, it is impossible to know how they should rationally/efficiently use it. And since the absence of pricing necessitates the prior absence of a current standard of exchange, investment becomes particularly impossible. In other words, the potential future outputs cannot be measured by any current standard, let alone a monetary one required for economic calculation. Likewise, the value consumers have for current consumption over future consumption cannot be expressed, quantified or implemented.
Implementation of central planning decisions
In ''
The Road to Serfdom'', Hayek 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.
John Jewkes, at the same time, made a similar analysis in ''Ordeal by Planning''.
Central planning was also criticized by socialist economists such as
Janos Kornai and
Alexander Nove.
Robin Cox 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.
Limitations and criticism
Efficiency of markets
Some academics and economists argue that the claim a
free market
In economics, a free market is an economic market (economics), system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of ...
is an efficient, or even the most efficient, method of resource allocation is incorrect.
Alexander Nove argued that Mises "tends to spoil his case by the implicit assumption that capitalism and optimum resource allocation go together" in Mises' "Economic Calculation in the Socialist Commonwealth".
Joan Robinson
Joan Violet Robinson ( Maurice; 31 October 1903 – 5 August 1983) was a British economist known for her wide-ranging contributions to economic theory. One of the most prominent economists of the century, Robinson incarnated the "Cambridge Sc ...
argued that many prices in modern capitalism are effectively "administered prices" created by "quasi monopolies", thus challenging the connection between capital markets and rational resource allocation.
Socialist
market abolitionists argue that whilst advocates of
capitalism
Capitalism is an economic system based on the private ownership of the means of production and their use for the purpose of obtaining profit. This socioeconomic system has developed historically through several stages and is defined by ...
and the
Austrian School
The Austrian school is a Heterodox economics, heterodox Schools of economic thought, school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result primarily from the motivat ...
in particular recognize
equilibrium prices do not exist in real life, they nonetheless claim that these prices can be used as a rational basis when this is not the case, hence markets are not efficient.
Robin Hahnel further argued that market inefficiencies, such as externalities and excess supply and demand, arise from buyers and sellers thoughtlessly maximizing their rational interests, which free markets inherently do not deter. Nonetheless, Hahnel commended current policies pursued by free market capitalist societies against these inefficiencies (e.g.
Pigouvian tax
A Pigouvian tax (also spelled Pigovian tax) is a tax on any Market (economics), market activity that generates negative externalities (i.e., external costs incurred by third parties that are not included in the market price). It is a method that ...
es, antitrust laws etc.), as long as they are properly calculated and consistently enforced.
Milton Friedman
Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and ...
agreed that markets with monopolistic competition are not efficient, but he argued that it is easy to force monopolies to adopt competitive behavior by
exposing them to foreign rivals.
Economic liberals and
libertarian capitalists also argue that monopolies and big business are not generally the result of a free market, or that they never arise from a free market; rather, they say that such concentration is enabled by governmental grants of franchises or privileges. That said,
protectionist
Protectionism, sometimes referred to as trade protectionism, is the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government regulations. ...
economies can theoretically still foster competition as long as there is strong
consumer switching.
Joseph Schumpeter
Joseph Alois Schumpeter (; February 8, 1883 – January 8, 1950) was an Austrian political economist. He served briefly as Finance Minister of Austria in 1919. In 1932, he emigrated to the United States to become a professor at Harvard Unive ...
additionally argued that economic advancement, through innovation and investment, are often driven by large monopolies.
Equilibrium
Allin Cottrell,
Paul Cockshott
William Paul Cockshott (born 16 March 1952) is a Scottish academic in the fields of computer science and Marxist economics. He is a Reader at the University of Glasgow. Since 1993 he has authored multiple works in the tradition of scientif ...
and Greg Michaelson argued that the contention that finding a true economic equilibrium is not just hard but impossible for a central planner applies equally well to a market system. As any
universal Turing machine
In computer science, a universal Turing machine (UTM) is a Turing machine capable of computing any computable sequence, as described by Alan Turing in his seminal paper "On Computable Numbers, with an Application to the Entscheidungsproblem". Co ...
can do what any other Turing machine can, a central calculator in principle has no advantage over a system of dispersed calculators, i.e. a market, or vice versa.
In some economic models, finding an equilibrium is hard, and finding an
Arrow–Debreu equilibrium is
PPAD-complete. If the market can find an equilibrium in polynomial time, then the equivalence above can be used to prove that P=PPAD. This line of argument thus attempts to show that any claim to impossibility must necessarily involve a
local knowledge problem, because the planning system is no less capable than the market if given full information.
Don Lavoie makes a local knowledge argument by taking this implication in reverse. The market socialists pointed out the formal similarity between the neoclassical model of
Walrasian general equilibrium and that of market socialism which simply replace the Walrasian auctioneer with a planning board. According to Lavoie, this emphasizes the shortcomings of the model. By relying on this formal similarity, the market socialists must adopt the simplifying assumptions of the model. The model assumes that various sorts of information are given to the auctioneer or planning board. However, if not coordinated by a capital market, this information exists in a fundamentally
distributed form, which would be difficult to utilize on the planners' part. If the planners decided to utilize the information, it would immediately become stale and relatively useless, unless reality somehow imitated the changeless monotony of the equilibrium model. The existence and usability of this information depends on its creation and situation within a
distributed discovery procedure.
Exaggerated claims
One criticism is that proponents of the theory overstate the strength of their case by describing socialism as impossible rather than inefficient. In explaining why he is not an
Austrian School
The Austrian school is a Heterodox economics, heterodox Schools of economic thought, school of economic thought that advocates strict adherence to methodological individualism, the concept that social phenomena result primarily from the motivat ...
economist,
anarcho-capitalist
Anarcho-capitalism (colloquially: ancap or an-cap) is a political philosophy and economic theory that advocates for the abolition of Sovereign state, centralized states in favor of Stateless society, stateless societies, where systems of p ...
economist
Bryan Caplan
Bryan Douglas Caplan (born April 8, 1971) is an American economist and author. He is a professor of economics at George Mason University, a senior research fellow at the Mercatus Center, an adjunct scholar at the Cato Institute, and a former c ...
argues that while the economic calculation problem is a problem for socialism, he denies that Mises has shown it to be fatal or that it is this particular problem that led to the collapse of authoritarian socialist states. Caplan also states the exaggeration of the problem; in his view, Mises did not manage to prove why economic calculation made the socialist economy 'impossible', and even if there were serious doubts about the efficiency of cost benefit analysis, other arguments are plentiful (Caplan gives the example of the incentive problem).
[Caplan, Bryan (2003)]
"Why I Am Not an Austrian Economist"
George Mason University. "Austrians have overused the economic calculation argument. In the absence of detailed empirical evidence showing that this particular problem is the most important one, it is just another argument out of hundreds on the list of arguments against socialism. How do we know that the problem of work effort, or innovation, or the underground economy, or any number of other problems were not more important than the calculation problem?" Retrieved 21 April 2020.
Steady-state economy
Joan Robinson
Joan Violet Robinson ( Maurice; 31 October 1903 – 5 August 1983) was a British economist known for her wide-ranging contributions to economic theory. One of the most prominent economists of the century, Robinson incarnated the "Cambridge Sc ...
argued that in a
steady-state economy
A steady-state economy is an economy made up of a constant stock of physical wealth (capital) and a constant population size. In effect, such an economy does not grow in the course of time. The term usually refers to the economy, national eco ...
there would be an effective abundance of means of production and so markets would not be needed. Mises acknowledged such a theoretical possibility in his original tract when he said the following: "The static state can dispense with economic calculation. For here the same events in economic life are ever recurring; and if we assume that the first disposition of the static socialist economy follows on the basis of the final state of the competitive economy, we might at all events conceive of a socialist production system which is rationally controlled from an economic point of view."
However, he contended that stationary conditions never prevail in the real world. Changes in economic conditions are inevitable; and even if they were not, the transition to socialism would be so chaotic as to preclude the existence of such a steady-state from the start.
The purpose of the price mechanism is to allow individuals to recognise the
opportunity cost
In microeconomic theory, the opportunity cost of a choice is the value of the best alternative forgone where, given limited resources, a choice needs to be made between several mutually exclusive alternatives. Assuming the best choice is made, ...
of decisions. In a state of abundance, there is no such cost, which is to say that in situations where one need not economize, economics does not apply, e.g. areas with abundant fresh air and water.
Otto Neurath and
Hillel Ticktin argued 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.
Use of technology
In ''
Towards a New Socialism
''Towards a New Socialism'' is a 1993 non-fiction book written by Scottish computer scientist Paul Cockshott, co-authored by Scottish economics professor Allin F. Cottrell. The book outlines in detail a proposal for a complex planned socialist ...
s "Information and Economics: A Critique of Hayek" and "Against Mises",
Paul Cockshott
William Paul Cockshott (born 16 March 1952) is a Scottish academic in the fields of computer science and Marxist economics. He is a Reader at the University of Glasgow. Since 1993 he has authored multiple works in the tradition of scientif ...
and Allin Cottrell argued that the use of computational technology now simplifies economic calculation and allows planning to be implemented and sustained. Len Brewster replied to this by arguing that ''Towards a New Socialism'' establishes what is essentially another form of a market economy, making the following point:
In response, Cockshott argued that the economic system is sufficiently far removed from a capitalist free-market economy to not count as one, saying:
Leigh Phillips' and Michal Rozworski's 2019 book ''
The People's Republic of Walmart'' argues that multinational corporations like
Walmart
Walmart Inc. (; formerly Wal-Mart Stores, Inc.) is an American multinational retail corporation that operates a chain of hypermarkets (also called supercenters), discount department stores, and grocery stores in the United States and 23 other ...
and
Amazon
Amazon most often refers to:
* Amazon River, in South America
* Amazon rainforest, a rainforest covering most of the Amazon basin
* Amazon (company), an American multinational technology company
* Amazons, a tribe of female warriors in Greek myth ...
already operate centrally planned economies in a more technologically sophisticated manner than the Soviet Union, proving that the economic calculation problem is surmountable. There are some contentions to this view however, namely how economic planning and planned economy ought to be distinguished. Both entail formulating data-driven economic objectives but the latter precludes it from occurring within a free-market context and delegates the task to centralized bodies.
Karras J. Lambert and Tate Fegley argue that artificial intelligence systems, no matter how advanced, cannot assume the role of central planners because they do not fulfill the prerequisites of effective economic calculation. This includes the ability to convert the
ordinal preferences of producers and consumers into commensurate
cardinal utility
In economics, a cardinal utility expresses not only which of two outcomes is preferred, but also the intensity of preferences, i.e. ''how much'' better or worse one outcome is compared to another.
In consumer choice theory, economists originally ...
values, which are available and agreed upon, and forecast future market interactions.
One reason includes how they are dependent on
Big Data
Big data primarily refers to data sets that are too large or complex to be dealt with by traditional data processing, data-processing application software, software. Data with many entries (rows) offer greater statistical power, while data with ...
, which in turn is entirely based on past information. Hence, the system cannot make any meaningful conclusions about future consumer preferences, which are required for optimal pricing. This necessitates the intervention of the programmer, who is highly likely to be biased in their judgments. Even the manner by which a system can "predict" consumer preferences is also based on a programmer's creative bias. They further argue that even if artificial intelligence is able to ordinally rank items like humans, they would still suffer from the same issues of
not being able to conceive of a
pricing structure where meaningful pricing calculations, using a common cardinal utility unit, can be formed. Nonetheless, Lambert and Fegley acknowledge that entrepreneurs can benefit from Big Data's predictive value, provided that the data is based on past market prices and that it is used in tandem with free market-styled
bidding
Bidding is an offer (often competitive) to set a price tag by an individual or business for a product or service ''or'' a demand that something be done. Bidding is used to determine the cost or value of something.
Bidding can be performed b ...
.
See also
*
Decentralized planning (economics)
*
Economic planning
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 ...
*
Enrico Barone
Enrico Barone (; 22 December 1859, Naples, Kingdom of the Two Sicilies – 14 May 1924, Rome, Italy) was a soldier, military historian, and an economist.
Biography
Barone studied the classics and mathematics before becoming an army officer. He t ...
*
Input-output model
In computing, input/output (I/O, i/o, or informally io or IO) is the communication between an information processing system, such as a computer, and the outside world, such as another computer system, peripherals, or a human operator. Inputs ar ...
*
Lange model
*
Local knowledge problem
*
Market socialism
Market socialism is a type of economic system involving social ownership of the means of production within the framework of a market economy. Various models for such a system exist, usually involving cooperative enterprises and sometimes a mix ...
*
New Economic Policy
*
Otto Neurath
*
Post-scarcity economy
Post-scarcity is a theoretical economic situation in which most goods can be produced in great abundance with minimal human labor, so that they become available to all very cheaply or even freely.
Post-scarcity does not mean that scarcity ha ...
*
Production for use
Production for use is a phrase referring to the principle of economic organization and production taken as a defining criterion for a socialist economy. It is held in contrast to production for profit. This criterion is used to distinguish commun ...
*
Real prices and ideal prices
* ''
Red Plenty''
*
Self-managed economy
*
Socialism
Socialism is an economic ideology, economic and political philosophy encompassing diverse Economic system, economic and social systems characterised by social ownership of the means of production, as opposed to private ownership. It describes ...
*
Socialist calculation debate
*
Socialization (economics)
Social ownership is a type of property where an asset is recognized to be in the possession of society as a whole rather than individual members or groups within it. Social ownership of the means of production is the defining characteristic of ...
*
Tax choice
In public choice theory, tax choice (sometimes called taxpayer sovereignty, earmarking, participatory taxation or fiscal subsidiarity) is an emerging type of citizen sourcing in which individuals or groups of taxpayers decide how to allocate par ...
*
Transition economy
* ''
Why Socialism?
"Why Socialism?" is an article written by Albert Einstein in May 1949 that appeared in the first issue of the socialist journal ''Monthly Review''. It addresses problems with capitalism, predatory economic competition, and growing wealth inequali ...
'' - an article written by
Albert Einstein
Albert Einstein (14 March 187918 April 1955) was a German-born theoretical physicist who is best known for developing the theory of relativity. Einstein also made important contributions to quantum mechanics. His mass–energy equivalence f ...
which presents a critique of modern capitalism and advocates for a
planned economy
A planned economy is a type of economic system where investment, production and the allocation of capital goods takes place according to economy-wide economic plans and production plans. A planned economy may use centralized, decentralized, ...
.
References
Bibliography
* Boettke, Peter 1990 ''The Political Economy of Soviet Socialism''.
* Caldwell, B: 1997. Hayek and Socialism The Journal of Economic Literature V35 pp. 1856–1890.
* Cottrell, Allin and Cockshott W. Pau
"Calculation, Complexity and Planning: The Socialist Calculation Debate Once Again" Review of Political Economy
* Cox, Robin 2005
"The Economic Calculation Controversy: Unravelling of a Myth"
* Dickinson H. D. 1933 Price Formation in a Socialist Community in ''The Economic Journal''.
* Dickinson, H. D. 1939 ''The Economics of Socialism''.
* Hayek, F. A. 1935 ''Collectivist Economic Planning''.
* Hayek F. A. 1937 Economics and Knowledge ''Economica'' V4 N13 pp. 33–54.
* Hayek F. A. 1940 The Competitive "Solution" ''Economica'' V7 N26 pp. 125–149.
* Hayek, F. A. ''
The Road to Serfdom''.
* Hayek, F. A. 1945 "
The Use of Knowledge in Society" ''The American Economic Review''.
* Hayek, F. A. 1952 ''
The Counter Revolution of Science''.
*
*
*
* Lachmann, L: 1978 Capital and Its Structure. Sheed, Andrews, and McMeel, Kansas City.
*
*
*
* Lange, Oscar 1967 The Computer and the Market in Socialism, Capitalism, and Economic Growth Feinstein Ed.
* Lavoie, Don: 1981. A Critique of the Standard Account of the Socialist Calculation Debate Journal of Libertarian Studies N5 V1 pp. 41-87.
*
*
*
*
* MacKenzie, D. W. 200
"Oskar Lange and the Impossibility of Economic Calculation". ''Studia Economicze''.
* Mises L. E. 1912 ''
The Theory of Money and Credit''.
* Mises L. E. 1920
Economic Calculation in the Socialist Commonwealth, reprinted in Hayek (1935).
* Mises L. E. 1922
936''
Socialism: An Economic and Sociological Analysis''.
* Mises 1933 Planned Economy and Socialism; reprinted in Selected Writings of Ludwig von Mises, The Liberty Fund (2002) Richard M Ebeling ed.
* Mises L. E. 1944 ''
Bureaucracy
Bureaucracy ( ) is a system of organization where laws or regulatory authority are implemented by civil servants or non-elected officials (most of the time). Historically, a bureaucracy was a government administration managed by departments ...
''.
* Mises L. E. 1944 ''
Omnipotent Government''.
* Mises L. E. 1949 ''
Human Action''.
* Mises L. E. 1957 ''Theory and History''.
* Roemer, John (1994). ''A Future for Socialism'', Verso Press.
* Rothbard, M. N. 1991
The End of Socialism and the Calculation Debate Revisited ''The Review of Austrian Economics''.
* Spufford, Francis. 2010 ''Red Plenty'', Faber & Faber.
* Stiglitz, J: 1994. Whither Socialism? MIT Press.
* Vaughn, Karen. 1980. Economic Calculation under Socialism: The Austrian Contribution. Economic Inquiry 18 pp. 535–554.
* Yunker, James A. "Post-Lange Market Socialism" 1995, Journal of Economic Issues.
{{DEFAULTSORT:Economic Calculation Problem
Austrian School
Comparative economic systems
Criticisms of economics
Economic planning
Economic problems
History of economic thought
Management cybernetics
Socialism
Criticism of socialism
fr:Ludwig von Mises#Le calcul économique et l'économie socialiste