Ludwig Von Mises’ ‘Economic Calculation Problem’

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Ludwig Von Mises’ ‘Economic Calculation Problem’

In: Economics

Prices contain lots of information about 2 key things:

1) How hard it is to make a good or provide a service. If something is hard to make/do, this will increase its price.

2) How much people want a good or service. If people really want something, this will increase its price.

This is important information to have in economy, because economics is all about the question of how we allocate our resources to produce things. We could spend all our time making giant stone monuments, but those things are difficult to make, and people value them less than, for example, food.

In a market economy, which Von Mises supported, this is all worked out by individuals responding to prices in the market. The price of giant stone monuments would be too high for most people to think they were worth buying, so very few would get made.

In a socialist economy, production is instead organized by the state, and there are no real prices. One way to think about it is that the government sets prices. Von Mises argued that the government can never know enough to set prices correctly. Markets are able to aggregate a lot of information about fuzzy stuff like human wants and needs that government agents can’t see or incorporate into their economic models. It would be like trying to drive a car while only looking at a map.

There are some criticism of Von Mises’ idea – markets are not always perfect, and there’s no particular reason why all the information gathering and “calculation” currently done in markets could not be done in bureaucracies instead. However, history has largely borne him out, showing that full-on socialist economies often miss big on very basic stuff. Both the USSR and China suffered catastrophic famines when the government forced workers to farm less and work more in industrialized sectors. This was either a gross miscalculation or a misalignment of incentives between the governments (who like industrialization) and the people (who like eating).