Economic Calculation Problem

CORE DEFINITION

The economic calculation problem is a critique of the use of economic planning as a substitute for market-based allocation of the factors of production. It was first proposed by Ludwig von Mises in his 1920 article "Economic Calculation in the Socialist Commonwealth" and later expanded by Friedrich Hayek. In his first article, Mises described the nature of the price system under capitalism and how the subjective values of individuals in society are transformed into the objective information necessary for the rational allocation of resources. In market transactions, prices reflect the supply and demand for resources, labor, and products. In his first article, Mises focused on the inevitable scarcity of capital goods under socialism, but later, in "Socialism," he detailed various forms of socialism. Mises and Hayek pointed out that economic calculation is only possible through the information provided by market prices, and that bureaucratic or technical allocation methods lack a rational method for allocating resources. The debate took place during the 1920s and 1930s, and this specific period is referred to by economic historians as the "economic calculation debate." Mises's initial criticism received many rebuttals and led to the exploration of market socialism, most notably the Lange model.