The Socialist Calculation Problem: Part 1

The battle between liberty and intervention in the economy, as well as people’s personal lives, is an immemorial one. The two sides have taken many different forms throughout history, but the fundamentals have changed little. More recently, thanks to advancements from the Enlightenment and the scientific revolution that originated in Europe, there has been an interesting series of debates between proponents of Socialism and Capitalism, beginning around the nineteenth century, and reaching its peak in the twentieth century.

During the nineteenth century, classical economists battled against the socialists, using the principles of economics established by men such as Carl Menger as a foundation for the debate. Capitalists and Liberals were those who favored private ownership over the means of production, whereas Socialists advocated for public ownership over said means. By the middle part of the century, the flaws of socialist central planning had become painfully apparent, and the debate appeared to have reached a conclusion. However, as one probably knows, the battle for the economy did not end here, for around this time Karl Marx and Friedrich Engels began publishing their works and ideas regarding socialism.

This resurgence of Socialist ideas spearheaded by Marx changed the framework of the debate. Whereas before, scientific principles and logic were used in the debate to judge the merits of both economic systems, now, under the advocacy of Marx, Socialism was exempted from such scrutiny. The arguments laid out by Marx centered around the notion of linear history, with the development of human civilization being a linear phenomenon, from hunter-gatherer to agricultural, to feudalistic, to capitalistic, and eventually, socialistic. In the current capitalistic era that the world was in, it was pointless to use the standards of the time to evaluate the merits and flaws of Socialism. Marx argued that because Socialism was the inevitable heir to Capitalism, and because we did not have the tools necessary to effectively evaluate Socialism, the debates between socialism and Capitalism were moot.

These Marxist arguments proved to be very effective at persuading many members of academia from evaluating Socialism properly and led to a lack of academic scrutiny on the matter for decades. It wasn’t until men like Ludwig Von Mises stepped up and reignited the debate. Mises published his book Socialism: an Economic and Sociological Analysis in 1922, and with it came damning arguments against the Socialists and Central Planners.

The crux of the Misean argument was centered around the epistemological flaw of a Socialistic order, namely the abolishment of prices. Prices, as Mises points out, are the mechanism through which massive aggregations of knowledge and information regarding the status, quantity, and demand for scarce resources is summarized and collected efficiently and effectively. In other words, by analyzing the prices of goods and services, one is able to, whether he is aware of this or not, gauge the current state of the economy and the demand it is placing on those scarce goods and services. Thus, by doing so, effective personal planning can be carried about. Aggregated onto a social level, and you have a thriving, functioning economy making the most efficient use of its scarce resources.

Prices, however, are intrinsic to private ownership over the means of production. The degree to which private ownership is present in a society positively correlates to the effectiveness of price signals in relaying information about the economy. In order to truly bring about a society whose means of production are owned publicly, one must abolish prices. Therefore, in this Socialist society, one is still left with the problem of managing scarcity.

However, without prices, it becomes effectively impossible to know with any certainty the appropriate allocation and demand of different resources across the economy, and efficient production of goods and services becomes impossible. Central planners, organizing an economy without price signals, are in effect working completely in the dark. The decisions they make are, at best, educated guesses with little more success than random chance. The debate over the economy did not, however, end here, and as will be covered in part two of this topic, would see F. A. Hayek stepping in and bringing an end to the economic arguments of Socialist central planning once and for all.

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