Economic Calculation problem

Economic Calculation problem

• Also known as the socialist calculation debate.
• It refers to an important academic debate on the question of whether centrally planned economies can allocate scarce resources efficiently.
• The debate was between the Austrian school economists Ludwig von Mises and Friedrich Hayek on the one side and socialist economists Oscar Lange and Abba Lerner on the other in the first half of the twentieth century.

Austrian school argument:

• The resources in any economy are scarce when compared to the unlimited desires of human beings. So, these limited resources need to be allocated towards the most urgent needs of society in order to maximise social welfare.
• For example- timber can be allocated for literally thousands of different uses, some a lot more urgent than others.
• In a market economy the resource owners sell their resources to whoever is ready to pay the highest price, they thus ensure that the resource is allocated to those who need it the most.
• Mises and Hayek argued that in the absence of prices(in a centrally planned economies) which act as crucial signals to producers in a market economy, central planners would be unable to allocate resources.

The socialist argument:

• The market economy was not essential for the rational allocation of resources.
• They argued that a central planning board can allocate resources according to a plan that takes into account the genuine needs of society.

They further noting the importance of price as a signal-argued that a socialist economy can use the market mechanism to allocate resources even when all resources are owned by the state