Economic calculation problem

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The economic calculation problem or ECP refers to a number of arguments for the impossibility of rational allocation of resources within a planned or command economy, arguing that a money commodity is necessary to perform calculations involving the preferences of many economic actors. It is often referred to in the singular, suggesting that there is a single problem socialists have been unable to dissolve. In reality there have been various statements and revisions that deserve their own treatment, and due to these statements being wrapped in ideologically charged rhetoric, multiple interpretations of them are possible.

Variants of the economic calculationAttempts to understand such calculation problems are less common than vague references to them. They play an important role in anti-communist and right-libertarian ideology.

Leftists may find engaging calculation problems worthwhile in their ideological and economic education, since it requires them to consider various modes of socialist calculation and discover how capitalist political economy is often grounded in idealist thinking.

Formulation of the problem

Ludwig von Mises

The Economic Calculation Problem was first proposed by the Austrian economist Ludwig von Mises in his essay Economic Calculation in the Socialist Commonwealth published in 1920.[1] In it, Mises claims that Marxist socialism would not be economically feasible because of Marx's proposal to abolish money along with private ownership of the means of production, which he argues are the only way for society to distinguish between more and less valuable resources. Ultimately, he asserts "Socialism is the abolition of rational economy."[1] In the article, Mises intermittently refers to this ideal "rational economy" or "rational conduct", which he defines as "economically, to place the means [of production] at the service of the end", i.e. "...producing the maximum possible useful effect (satisfaction of wants) on the basis of a given set of economic resources." [2] A problem with this formulation arises in its imprecise reasoning. Mises never makes it clear as to whom the economic effects are useful for, or how they are defined.

Mises goes on to compare three different hypothetical means of planning and attempts to determine whether they meet the criteria for this ideal rational decision-making:

  • Planning in kind
  • Planning with an objectively recognizable unit of value (labor)
  • Planning based on market prices

While a Marxist analysis would naturally be inclined to defend the 2nd mode of production listed above, a defence of planning in kind is also feasible, especially given contemporary advancements. This is the case even if one assumes (as Mises does) that no intermediary accounting unit like money would be present in such an economy.

Planning in kind

In Economic Calculation in the Socialist Commonwealth, Mises speaks of planning in kind, which he considers a valid method of planning in simpler situations or more primitive economic systems, to wit: "In such a case the processes of production involved are relatively short and the expense and income entailed can be easily gauged." He provides examples of this in the section "The Nature of Economic Calculation", of which the following are a part:

  • a farmer choosing to expand pasture-farming rather than hunting
  • a father supervising the economy of his household

Mises, however, considers it impossible for more complex economic systems, as the human brain would not be able to grasp all the possible changes that could be made to the entire system of production "without the aid of some system of computation"

Planning with an objectively recognizable unit of value

Planning based on market prices

Friedrich von Hayek

External links

Statements of the ECP

Critiques of the ECP

References