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WillowOne's Positions

Economic calculation problem

Overview

The economic calculation problem is the argument, made by Ludwig von Mises in "Economic Calculation in the Socialist Commonwealth" (1920) and developed by Friedrich Hayek in "The Use of Knowledge in Society" (1945), that a centrally planned economy cannot allocate resources rationally because it has abolished the one mechanism that tells a planner what things are worth relative to one another: market prices.

A price is not merely a way of distributing goods. It is a signal that compresses an enormous amount of dispersed information (how much of a thing there is, how badly it is wanted, what it costs to make more, what else the inputs could have been used for) into a single number that anyone can act on. No planner has access to that information, because it exists only in the heads of millions of people and only in the moment of their choosing. Without prices the planner is, in Mises's phrase, "groping in the dark".

Notes

  • The argument is the strongest reason I regard Communism as not implementable, as distinct from merely undesirable. Every planned economy in history has either reintroduced markets by the back door or suffered chronic shortage and surplus, which is what the argument predicts.
  • It is an argument against central planning, not against all state action. Regulation, taxation, public provision of goods the market under-supplies, and a welfare floor all operate within a price system and do not abolish it. This is why I favour regulated capitalism rather than either pole.
  • Hayek's version of the argument is also an argument about knowledge: that the information needed to run an economy is not the kind of thing that can be centralised, however powerful the computer. This is a point about epistemology as much as economics.

Also see