The Calculation Problem And The Knowledge Problem: Two Sides Of One Coin

THE ANALYSES OF Mises and of Hayek as to the feasibility of a socialist economy are complementary. Mises showed that socialism is incapable of achieving an efficient use of society’s resources, because its economic planners have no means by which to perform economic calculation. Hayek showed that the reason market prices can be used for economic calculation is that they reflect the best possible estimate of how useful the various factors of production will prove to be in satisfying consumer demand. Today’s prices for the factors of production are largely determined by those entrepreneurs who previously estimated consumers’ wishes most successfully. Their past successes increased the funds at their disposal, giving them greater means with which to bid for currently available resources. Each entrepreneur is able to use his personal knowledge of his “particular circumstances of time and place” in deciding what price to offer for various factors of production.

A socialist planner could slap some arbitrary “price” on every good and then proceed to calculate the outcome of alternative ways of producing goods based on those numbers. However, since they have no relationship to the actual wishes of the consumers, they are prices in name only, merely a pale imitation of market prices. As Mises wrote in Human Action:

Even if, for the sake of argument, we assume that a miraculous inspiration has enabled the director [of a socialist economy] without economic calculation to solve all problems concerning the most advantageous arrangement of all production activities and that the precise image of the final goal he must aim at is present to his mind, there remain essential problems which cannot be dealt with without economic calculation. For the director’s task is not to begin from the very bottom of civilization and to start economic history from scratch. The elements with the aid of which he must operate are not only natural resources untouched by previous utilization. There are also the capital goods produced in the past and not convertible or not perfectly convertible for new projects… [in which] our wealth is embodied. Their structure, quality, quantity, and location is of primary importance in the choice of all further economic operations. Some of them may be absolutely useless for any further employment; they must remain “unused capacity.” But the greater part of them must be utilized if we do not want to start anew from the extreme poverty and destitution of primitive man… The director cannot merely erect a new construction without bothering about his wards’ fate in the waiting period. He must try to take advantage of every piece of the already available capital goods in the best possible way.
Lacking real prices, the socialist director has no clue as to that “best possible way.”

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