According to Wikipedia, the Economic Calculation Problem as coined by Austrian economist Von Mises states:
[…] pricing systems in socialist economies were necessarily deficient because if a public entity owned all the means of production, no rational prices could be obtained for capital goods as they were merely internal transfers of goods and not “objects of exchange”, unlike final goods. Therefore, they were unpriced and hence the system would be necessarily irrational, as the central planners would not know how to allocate the available resources efficiently. He wrote that “rational economic activity is impossible in a socialist commonwealth”.
After a plethora of centrally planned socialist and Communist economic collapses, the usual cry from stubborn sympathizers is that “it wasn’t real socialism/Communism!” and it was some perversion of the ideal system that is to blame, usually the corrupt figurehead of said failed regime.
The Economic Calculation Problem refutes that no matter how “ideal” the system is implemented, it is economically doomed to fail. It can never work.
Even in a society where every citizen is completely brainwashed to be on board with socialism or Communism, such that game theory does not apply as I note in Parts 1 and 2 and all citizens are on board doing 120 hour work weeks of menial labour for the “good of the people”, that system will still fail.
As pointed out in Part 3, the central government does not have the capacity to know the demands of hundreds of millions of individuals operating under the socialist system. It must resort to gross generalizations by class identity and must ignore individual needs.
In an ideal Marxist system, Marx states that the means of production must be commonly held by the whole nation. Everyone owns everything together in equal proportion. In practice, because such an ideal allocation is unenforceable in reality (due to game theory), the government owns it. But even for arguments sake, if there was no government lethal force backing the system and everyone is brainwashed to do their assigned work, the concepts of profit and loss, buying and selling no longer exist because everyone owns everything.
Buying and selling, profits and losses, are what drives prices in a free market. Goods and production are priced based on demand, that is, how much people desire it at a given point in time. Prices also dictate what a producer will want to make at a given point in time. Prices can be numerically represented by money, as money is representative of an intermediate store of value. Money facilitates an exchange between two parties that produced things that were desirable for one another, at any two points in time, perceived to be equal in value.
Without money, buying, selling and the natural incentives of making a profit and avoiding a loss, producers have no idea what needs to be produced and how efficiently it needs to be produced. If everyone owns everything and prices are absent, there does not exist any incentive to avoid losses (since prices and break-even points set a benchmark to measure against), thus no one can tell whether production of a certain good is worthwhile and whether exchanges of particular goods are unfair or not.
Everyone, including the central planners in the government/dictatorship, are without a clue as to what needs to be produced, and who needs what and in what quantity. It is a complete guess, and thus gives way to the use of gross generalizations.
The A/B testing that drives entrepreneurship due to pricing and free markets is virtually absent in an ideal socialist economy. The only objective, measurable output producers and the central government have is the death toll: how many people are dying because of the poor quality of food being produced? How do producers and central planners efficiently sort out the thousands of combinations of food allergies and dietary needs of hundreds of millions of people without using a pricing system and free market? What motivates farmers to improve or disband their means of production of a certain crop, without knowing its consequences until a generation afterward because it only has life expectancy and illness as measurable outputs? What happens when desirable crops face a shortage?
In an abundant world where there are infinite resources and an infinite amount of manpower to harvest and process those resources into consumables, the pricing system perhaps can be ignored. But that discards the whole field of economics in the first place, for without scarcity there is no problem to be solved by economics, and such a world does not exist in reality.
In an ideal socialist utopia, the world would be drained of its resources immediately, for without price controls, all the desirable consumables would be mass produced and consumed in such an inefficient, wasteful manner, resulting in devastation in the long run. The free market would regulate excessive consumption of a rare commodity by making it more expensive. Lethal force would have to regulate the same wastefulness in a socialist regime.
Without a pricing model to drive efficient A/B testing, the allocation of finite resources in finite time is terribly inefficient in a socialist economy. The system is too slow to manage the fluctuating, dynamic nature of hundreds of millions of individual needs and wants while balancing real world finite supply. The economic inefficiencies always lead to famine and despotism: the hallmark denouement of all attempts at pure socialism or Communism.
Any form of central economic planning, no matter how pure or “real”, is an attempt to solve incredibly complex multivariate problems with approximated univariate equations — a mathematical impossibility with fatal consequences.
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