Mises and Hayek argued that economic calculation is only possible by information provided through market how to debate effectively pdf, and that bureaucratic or technocratic methods of allocation lack methods to rationally allocate resources. 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.
This was only feasible in an economy where most decisions were decentralised. Trotsky argued that central planners would not be able to respond effectively to local changes in the economy because they operate without meaningful input and participation by the millions of economic actors in the economy, and would therefore be an ineffective mechanism for coordinating economic activity. The price system is therefore said to promote economically efficient use of resources by agents who may not have explicit knowledge of all of the conditions of production or supply. The resulting decisions, it is claimed, would therefore be made without sufficient knowledge to be considered rational. The use of money as a medium of exchange and unit of account is necessary to solve the first two problems of economic calculation. Marginal consumer expenditures represent the marginal utility or additional consumer satisfaction expected by consumers as they spend money.
So the exchange of consumer goods establishes prices that represent the marginal utility of consumers, and money therefore is representative of consumer satisfaction. If money is also spent on capital goods and labor, then it is possible to make comparisons between capital goods and consumer goods. These first elements of the Calculation Critique of Socialism are the most basic element: economic calculation requires the use of money across all goods. This is a necessary but not a sufficient condition for successful economic calculation. Without a price mechanism, Mises argues, socialism lacks the means to relate consumer satisfaction to economic activity. The incentive function of prices allows diffuse interests, like the interests of every household in cheap, high quality, shoes, to compete with the concentrated interests of the cobblers in expensive, poor quality shoes. Entrepreneurship therefore brings prices closer to marginal costs.
The activities of entrepreneurs make prices more accurate in terms of how they represent the marginal utility of consumers. Prices act as guides to the planning of production. Those who plan production use prices to decide which lines of production should be expanded or curtailed. Without the price system to match consumer utility to incentives for production, or even indicate those utilities “without providing incentives”, state planners are much less likely to invest in new ideas to satisfy consumers’ desires. The fourth condition for successful economic calculation is plan coordination among those who plan production. The planning could either be done in a decentralised fashion, requiring some mechanism to make the individual plans coherent, or centrally, requiring a lot of information.
Within capitalism, the overall plan for production is composed of individual plans from capitalists in large and small enterprises. Since capitalists purchase labour and capital out of the same common pool of available but scarce labor and capital, it is essential that their plans fit together in at least a semi-coherent fashion. Entrepreneurs acquire data on the plans from others through the price system. The price system is an indispensable communications network for plan coordination among entrepreneurs. Increases and decreases in prices inform entrepreneurs about the general economic situation, to which they must adjust their own plans. If decentralized socialism cannot work, central authorities must plan production. Mises and Hayek saw centralization as inevitable in socialism.
Opponents argued that in principle an economy can be seen as a set of equations. Thus, there should be no need for prices. Using information about available resources and the preferences of people, it should be possible to calculate an optimal solution for resource allocation. This is partly because individuals possess useful knowledge but do not realise its importance, may have no incentive to transmit the information, or may have incentive to transmit false information about their preferences.
It may be impossible to make long-term predictions for a highly complex system such as an economy. Lange and Lerner conceded that prices were necessary in socialism. In principle, claim market socialists, socialist managers of state enterprises could use a price system, as an accounting system, in order to minimize costs and convey information to other managers. However, while this can deal with existing stocks of goods, providing a basis for values can be ascertained, it does not deal with the investment in new capital stocks. Hayek responded by arguing that the simulation of markets in socialism would fail due to a lack of genuine competition and entrepreneurship. Central planners would still have to plan production without the aid of economically meaningful prices.