The Concise Guide To Economics
by Jim Cox
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.