The Socialist Calculation Debate: In Search of a Planned Society

By Jason Kuznicki

The socialist calculation debate pitted members of the Austrian School of economics and a few others against those who proposed that a nation’s economy could be centrally and mathematically planned. This was a huge undertaking, and it presented many difficulties, but it also promised great rewards. Some facets of the problem might even be soluble with today’s computing technology. Yet the prospect of socialist calculation remains illusory. This paper explains why, with reference to real-world attempts at solving the calculation problem as well as the seminal works of F. A. Hayek and Ludwig von Mises.

• Language: English
• Publisher: Cato Institute
• Release date: Apr 29, 2014
• ISBN: 9781939709554

Jason Kuznicki

Jason Kuznicki is a research fellow and editor of Cato Unbound at the Cato Institute.His ongoing interests include censorship, church-state issues, and civil rights in the context of libertarian political theory. He was an Assistant Editor of The Encyclopedia of Libertarianism.

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A Libertarianism.org Book

THE SOCIALIST CALCULATION DEBATE

By Jason Kuznicki

Cato Institute Press

9781939709554_0004_001

Copyright © 2014 by the Cato Institute

All rights reserved.

Ebook ISBN: 978-1-939709-55-4

Cover design: Jon Meyers

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TABLE OF CONTENTS

INTRODUCTION

1. GENERAL EQUILIBRIUM SOLUTIONS

2. WHAT'S A GOOD?

3. THE PRACTICE AND THEORY OF CAPITAL GOODS IN A PLANNED ECONOMY

4. CONSUMER PREFERENCES AND DATA

5. AND EQUILIBRIUM, TOO

6. BEYOND THE MARKET

ABOUT THE AUTHOR

INTRODUCTION

Imagine that you are running a business. You’ll need to purchase supplies and secure a space for the work. You’ll need to market your goods, including setting prices for them. You will need to hire workers and sometimes fire them. You’ll need plans for what to do if your goods fail to sell and if they succeed. It’s possible for a businessman to make mistakes in any of these choices, of course, and many small businesses will fail within the first year of operation.

Now imagine that instead of running one business, you’re running all the businesses—every business in an entire country, large and small. No doubt you would want to delegate nearly all of the decisions to your subordinates, but this doesn’t eliminate the problem. You will still need to know how to allocate resources among them, what to do when one of them fails, and how to respond to successes. You’ll need to know where to put which resources, and at what times, and in what quantities.

These are enormous tasks. They are also the tasks that central economic planners would need to accomplish to do their jobs well. Economists call this proposed process socialist calculation, and the debate over whether socialist calculation is or is not possible was one of the key episodes in the 20th-century history of economic thought.

Socialists, of course, often wanted to pursue central economic planning in practice, but supporters of the free market have also found the question of central planning very useful to examine, if only in theory. In the course of the debate between them, it was found that a central planning agency would face a large number of previously unanticipated problems. Many of them now appear insoluble.

And yet the very insolubility of these problems points out one of the most remarkable things about markets: markets had been doing these things all along, and almost no one had noticed it or put that fact into words.

The realization that markets were achieving many desirable objectives unnoticed and in the background came about in part by imagining the existence of a socialist planning agency that would have to do all of those things consciously and in an articulable manner. Economists were then forced to ask exactly what those things were and how they might be accomplished and expressed in formal terms.

It is sometimes objected that today's computers can do many things that early 20th-century economists assumed could never be done. Our computers, we are told, potentially solve one aspect of the socialist calculation problem. Yet, as we will discover, much additional