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A Response to the economic calculation problem

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A Response to the economic calculation problem

Post by OceanSeal on 13th January 2012, 8:45 am

If you guys haven't heard it before, Misean capitalists often like to point out that socialism doesn't work because of central planning. A friend of mine on another forum was keen enough to type out a response.


Well to begin with it's probably important to keep in mind that Mises is typically talking about the problem of allocating what he calls 'higher order goods', or the factors of production, not consumption goods, since he admits that it's not unfeasible for a socialist economy to work out whether it wants so many litres of wine, or so many barrels of oil, and indeed in small economic units (Mises cites the example of a small houselhold) where the process of production is not highly developed, rational economic calculation is not impossible without money. The problem which Mises' percieves emerges in societies with advanced processes of production, where there are many different uses to which different resources can be allocated in the process of production.

In such an advanced society it is necessary to make decisions about the allocation of productive resources in order to produce goods in the most economically efficient way. Within capitalist society, this is done through the mechanism of profit. Money acts as an objective unit which values goods in terms of prices, which are established through the free exchange of goods and the interplay of subjective evaluations, and economically efficient ventures will be those which yield a high profit and allow the business to keep running, whereas economically inefficient ventures will yield low profits and be driven out of business.

However, in the socialist economy, by contrast to the private economy, productive resources are owned and allocated to various uses by the community as a whole. Since there is no exchange of the productive resources, monetary relationships cannot arise in the sphere of production, and even if they did apear in small isolated instances in the sphere of consumption, Mises notes that the continued collectivisation of the means of production would safegard against the elevation of money back to the same status which it enjoys in capitalist society. Since money and the profit motive are gone however, the question is what new measure will be used to allocate resources in an economically efficient manner. Mises argument, in a nutshell, is that there is none. Without the profit motive, the socialist commonwealth will have no initiative to upgrade it's production methods to more resource efficient methods, economic rationality will dissapear and chaos will reign until the re-introduction of market mechanisms.

Of course in actual fact there is an objective unit which can be used for economic calculation in socialism, which Mises himself notes, although he dismisses it, which is labour time. Marx believed that in socialist society, all economy would be reduced to the economy of time, and society would organise production and innovate with the motive of decreasing labour time and expanding the sphere of free time. Mises' arguments against this mostly hinge on his theory of value and understanding of the nature of money in capitalist society, for Marx money is the objectification of human activity, a mechanism which apportions out socially necessary labour-time behind the backs of the producers, and socialism involves the removal of this mediator, with the apportionment now being effected directly, consciously and therefore more rationally, whereas for Mises money is an indicator of the subjective worth which is placed upon goods, and since this is inexpressible in units except through the development of a monetary system, the removal of the monetary system means the end of the possibility of rational economic calculation. I haven't read it yet but I'm going to go out on a wild guess and say that ZN's latest post in the weekly quotes thread on Value will probably give you more information on this topic than you can handle.

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Re: A Response to the economic calculation problem

Post by Soviet on 13th January 2012, 12:08 pm

Interesting. What forum is this being posted on? And would your friend be interested in joining up here? I think he'd be a wonderful contributor to our Economics section.

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