36. The Calculation Debate
The original
socialist theories envisioned an abolition of not only privately owned property
but also money and prices.
However, in 1920 Ludwig von Mises shocked the socialists with his
demonstration that such a socialist economy would be unable to rationally
allocate production. Production in
a socialist economy without money and prices would be arbitrary and lacking any
rational foundation. Money and
prices provide a value measure with which to choose between competing
options.
As an example, in
deciding whether or not to insulate your attic, you must compare the price of
the insulation with the price of the energy to be saved. In an economy without money and prices
to convey relative values--that is, an economy with just the goods, insulation and natural gas, you
would not know if it made sense to insulate or not. Should you repair your old lawnmower or buy a new one? Obviously, what makes good economic
sense depends on the prices of the repair and the new mower. An absence of money and prices wreaks
havoc with consumer decisions--that alone is bad enough for economic
well-being.
But even more
dramatically disruptive is this same absence at the production level of the
economy. Does it make sense to add
a bakery to the city--the socialists would have no way of knowing since, again,
all they have before them are the goods:
land, concrete, flour, the anticapted future bread, etc. Taken a step further in the production
process, should the socialist managers build a bulldozer to move dirt rather
than using men with shovels; should the bulldozer be made of steel, or iron or
some parts wood? Should the steel
be made of newly mined ore, or from reprocessed steel; should the mine work be
powered by natural gas, steam, or electricity? Should the natural gas be transported by truck, train, or
pipeline? There's a nearly endless
number of economic decisions to be made in an advanced industrial economy. In the money-less and price-less
socialist economy, these decisions
could not be made in any rational manner.
After thanking Mises
for pointing out a flaw in their theory (and suggesting the erection of a
statue in a future socialist square to Mises for his contribution!), the
socialists attempted to solve this problem. What was their ultimate answer? Quoting from any Dave Barry column: "I'm not making
this up!": The socialist's
ultimate answer to the calculation problem was to have the socialist factory managers
"play" market--that is, to pretend that the resources and outputs had
prices and then adjust production accordingly!
Of course this was no
answer (though the socialists quickly then retired from the debate feeling they
had fully addressed the issue).
Playing at business decision making will come nowhere near to that of
actually investing real privately owned money and resources--money and
resources which have a real impact on the well-being of the decision maker.
-
Hayek, F. A.
Individualism and Economic Order,
(Chicago: Henry Regnery Company, 1972)
pp. 119 - 208.
-
Hoff, Trygve J. B.
Economic Calculation in the Socialist Society,
(Indianapolis: LibertyPress, 1981)
-
Mises, Ludwig von
Economic Calculation in the Socialist Commonwealth,
(Auburn, Alabama: Ludwig von Mises Institute, 1990)
-
Mises, Ludwig von
Human Action,
(Chicago: Henry Regnery Company, 1966)
pp. 698 - 715.
-
Rothbard, Murray N.
"Ludwig von Mises and Economic Calculation under Socialism" in The Economics of Ludwig von Mises edited by Laurence S. Moss,
(Kansas City: Sheed and Ward, Inc., 1976)
pp. 67 - 78.
-
Rothbard, Murray N.
Man, Economy, and State,
(Los Angeles: Nash Publishing, 1962)
pp. 548 - 549.
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