Wednesday, 5 September 2012

The Infeasibility of Socialism and the Economic Calculation Problem

The Austrian School of Economics argues socialism based on economic planning is unfeasible due to the weaknesses of central planning with its corresponding "economic calculation problem" caused by a lack of price signals and a free price system. Below are a few explanations on this subject.

F A Hayek, in the video below, explains that "Socialism assumes that all the available knowledge can be used by a single central authority" and "Just distribution is impossible unless the distributor knows all the facts" and claims that socialist supporters overlook this fact.

Ludwig von Mises in his book "Human Action" writes,
The socialists, it is true, object that economic calculation is not infallible. They say that the capitalists sometimes make mistakes in their calculation. Of course, this happens and will always happen. For all human action points to the future and the future is always uncertain. The most carefully elaborated plans are frustrated if expectations [p. 700] concerning the future are dashed to the ground. However, this is quite a different problem. Today we calculate from the point of view of our present knowledge and of our present anticipation of future conditions. We do not deal with the problem of whether or not the director will be able to anticipate future conditions. What we have in mind is that the director cannot calculate from the point of view of his own present value judgements and his own present anticipations of future conditions, whatever they may be. If he invests today in the canning industry, it may happen that a change in consumers' tastes or in the hygienic opinions concerning the wholesomeness of canned food will one day turn his investment into a malinvestment. But how can he find out today how to build and equip a cannery most economically?
The paradox of "planning" is that it cannot plan, because of the absence of economic calculation. What is called a planned economy is no economy at all. It is just a system of groping about in the dark. There is no question of a rational choice of means for the best possible [p. 701] attainment of the ultimate ends sought. What is called conscious planning is precisely the elimination of conscious purposive action.
The above explains much of the reason why Austrian economics strongly opposes for example governments bailing out businesses and manipulation of financial markets by central banks,
They [Austrian economists] voice serious concerns about the distorting and damaging effects of government involvement in commerce, arguing that few government regulations in this area are necessary or desirable and often trigger a "ratchet effect" as problems associated with existing regulations are often blamed on the free market, thereby justifying further damaging, coercive incursions into the market. They are particularly critical of long-standing governmental incursions into the area of private money production, advocating instead the immediate abolition of all coercive legal tender laws and the return to full reserve - or free - banking, where the financial system is decentralized and not dominated or controlled by coercive monopoly government or a monopoly central bank.


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