What is Socialist Calculation Debate
The Socialist Calculation Debate, also known as the Planning Debates, emerged at the end of the 19th Century. Many schools of thought (socialism, marxism, laissez-faire) argued that free markets had failed and that a government with control over the means of production and distribution could allocate goods in a more efficient manner.
Prior to 1920, the economics of socialism was largely unexplored. Marxists, following the lead of Karl Marx, knew virtually nothing about how a socialist economy worked (Vaughn, 1980). Austrian economist, Ludwig von Mises published his first piece of literature, “Economic Calculation in the Socialist Commonwealth” (Mises, 1920), in 1920 to address this issue. Mises believed that “rational economic calculation” or essentially, the efficiency in production, would deem impossible from a socialist perspective without a set of market-generated prices to guide the factors of production (Mises, 1920). His written claims were devastating to the cause of socialism. The Marxist perspective of socialism involved the abolition of private property in the means of production and the abolition of money, but Mises argued that “every step that takes us away from private ownership of the means of production and the use of money also takes us away from rational economics” (Mises, 1920).
Mises argued that there could be no market-generated prices for the resources owned by the state under the Socialist rule of law. Without relative prices, it would be impossible to choose among the array input combinations. In effect, central planners would being to struggle because of their inability to decide on the most efficient methods of production. Without efficient production, the socialist economy would be unable to deliver on the promises of well-produced inputs.
Marxists then argued that rational planning was beneficial to the anarchy of the market. Mises, however, believed that the eradication of the market would destroy the economic calculation, namely market prices. This being said, socialist planners would simply lack any basis for taking sensible economic decisions, because after all, socialism was nothing other than the “abolition of rational economy”.
Ludwig Von Mises arrived at his conclusion by arguing what economic rationality is all about, listing the possible means of rational economic decision-making. Mises identified three possible candidates: planning in kind (in natura), planning with the aid of an ‘objectively recognizable unit of value’ independent of market prices and money, such as labor time, and economic calculation based on market prices.
