The problem of economic calculation summarized by JGH

The best-known element of Mises’s theory of economic calculation is without any doubt the socialist-calculation argument. Mises presented it in a 1920 paper on “Economic Calculation in the Socialist Commonwealth,” in which he defended two propositions:

One, socialist societies could not rely on an economic calculus of the sort known from market economies, because entrepreneurial calculations are based on money prices for factors of production. But money prices for factors of production cannot exist in socialism because prices can only come into existence in exchanges, and exchanges presuppose the existence of at least two owners. Now, the very nature of socialism—and, as it were, its usual definition— is that all means of production are under a unified control. They all belong to one economic entity: to the collective, or the socialist commonwealth, or the state, or however else this entity might be called. The crucial fact is that, from the economic point of view, there is in any socialist regime only one owner of all factors of production. Consequently, no factor of production can here be exchanged. Further, there can be no money prices for factors of production in such regimes. And therefore no socialist community can allocate its factors of production on the basis of an economic calculus, such as is known from capitalism.

Two, there were no other means of performing an economic calculus. Economic calculation required money prices for factors of production, and it could therefore only come into existence where factors of production were privately owned.

Jörg Guido Hülsmann


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