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.
This debate was first discussed by Walrasian economist Enrico Barone in 1908, where he argued that a socialist economy could do as well as a capitalist one as prices should be seen merely as the solution to a set of equations in a Walrasian system. Following this thought, Ludwig Von Mises argued that pricing in socialist economies were inefficient because if the government owned the means of production, then prices would be seen as internal transfers of goods and not objects of exchange, thus causing an inefficient system. Friedrich von Hayek argued that the system proposed by the Walraisian school required too much information that would not be available and the calculations would be difficult. He also went on to say that a market economy can encounter market failures, such as imperfect competition, externalities, or transaction costs, that prevent the price mechanism from achieving an efficient allocation. A government which set prices “as if” in a fully competitive system would be more efficient. Hayek continued by saying that a state-run economy could not achieve greater efficiency in resource allocation than a capitalist one largely because the information conveyed by the price-mechanism of a market economy was greater than the information any planner could possibly acquire.
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 to him was the absence of a 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.
Hayek agreed with Mises. Hayek, noting that constant change is inevitable, states that "whether and how far anything approaching the desirable equilibrium is ever reached depends entirely on the speed with which the adjustments can be made" (1949, 188). Hayek goes on to argue that centrally-dictated prices cannot respond to change as easily as market prices. Essentially, if the calculations required for socialist planning take too long, in comparison to the pace of changes in consumer demand, then planning is in trouble. He concludes that the socialist calculations would face practical difficulties, being unable to complete necessary equations, while the market mechanism could.
