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economic calculation

EconomicsPosted by Jan Lester Thu, April 03, 2014 11:19:55

economic calculation Perhaps the most important criticism of *state control is that it is incapable of being *economic, even if transmogrified into a *libertarian, *contractual *government. The reason for this is sometimes referred to as the economic calculation problem. This was first expounded at length by Ludwig von Mises (1881-1973) in 1920, later in a book (1922) and translated into English as Socialism (1936).

In the *market, innumerable, polycentric and protean interactions of *supply and *demand produce a *price. The *knowledge of the particular circumstances by which these interactions are caused, could not be gathered by any one central agency. In any case, as Friedrich von Hayek (18991992) explained, many individual circumstances are only tacitly understood and not in an explicitly communicable linguistic form. Thus market price is the only known indication of relative *scarcity. Without the numeraire of *money in the market we would have no way of determining such scarcity for all items. All we would know is that people want more of everything and better quality too. Post-scarcity levels of *wealth are impossible *Utopianism.

Any attempt by the state to override the market, and *charity, is ignoring this implicit knowledge of relative scarcity. To the extent that it ignores prices, the state has absolutely no economic way of deciding what should be produced, when, where, how many, and with what combinations of *factors of production. These would be entirely arbitrary decisions from the point of view of *efficiency (though probably not arbitrary with respect to *corrupt, political *vote-buying). In reality, the market must be largely tolerated by the state as its abolition would mean a complete breakdown of all production, just because there is no known economic way to allocate resources in a mass industrial society without it.

This latter point is often conceded. However, it is usually overlooked that it follows that every single state intervention in the market is itself a prima facie destruction of economic calculation. It means taking resources from their ostensibly most highly valued uses and doing something else with them without any tangible evidence of increasing *welfare, especially long-term. There are only conflicting political intuitions, which are uninformed by economic analysis particularly the *opportunity cost of a market project (although they know their own opportunity costs as *politicians and *bureaucrats).

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