We have written at length about Mises’ Calculation Problem, the problem he proved will doom communism and socialism. Many people [well, at least one] have thanked me for those articles. But Smiling Dave is always out there, ready to help those who need it. And some people will benefit by first getting rid of some subtle misconceptions before tackling that series of brilliant, if simple, articles.
Without further ado, the Top Seven Misconceptions, the boo-boos you will find on the internet and the literature, about the Calculation Problem.
Mistake 1: The Calculation Problem is about finding a price of a pound of apples, or a TV set, or consumer goods in general.
Nope. The calculation problem is indeed about a socialist economy not being able to fix prices, but it is not talking about the prices of consumer goods. If something is sold in Walmart or a shopping mall, the calculation problem is not talking about it.
It’s talking about finding the price for things most people will never buy, or want, or even see. Mises was saying that under a socialist economy, the prices of producer goods, of raw materials, of factors of production [not of consumer goods], will be all wrong. In fact they won’t even exist.
A price is what a buyer and seller agree on. But in socialist economy, these things, producer goods, will not be for sale, because it will be illegal to own them. The very definition of a communist or socialist economy is that “the people” own the means of production. Nobody will buy raw steel, because nobody will be allowed to own a factory to make something with that steel. “The people”, meaning the govt, owns all the factories and all the steel. The govt does not sell steel to anyone, and does not need to buy it from anyone. Same thing with all the other means of production. No prices for any of them.
Devil’s Advocate: And what’s wrong with that?
Smiling Dave: Nothing, except that the economy cannot function without prices for those things. Get ready for mass starvation and the like.
DA: What are you talking about? Why is it so important to have prices for precisely that group of goods?
SD: You’ll have to read my earlier articles, where it is all laid out in simple language.
Mistake 2: The Calculation Problem is talking about finding the best mix of raw materials to make an object, a problem that engineers solve daily as a matter of course.
Some people think Mises was saying that without prices for raw materials, nobody will know whether to to mix 2 pounds of copper with 1 pound of tin, or vice versa, to make the strongest possible bronze.
No. Mises is granting, for the sale of argument, that the interested parties will have all technical knowledge. And he proves that they will still mess everything up.
Mistake 3. Supercomputers can solve the calculation problem.
No. Even granting a super-duper computer, the calc problem cannot be solved.
Mistake 4. Mises and Hayek were talking about the same calculation problem.
No. Hayek argued the socialists will not be able to find all the data they needed to calculate, and even if they did, it would be too massive too deal with.
Mises raised the stakes. he granted for the sake of argument, that they had all the data available at their disposal, but argued that one vital set of data will be non existent in a socialist economy, by it’s very nature. Explained at length here: https://smilingdavesblog.wordpress.com/2014/05/27/what-are-the-knowledge-problem-and-the-calculation-problem/
Mistake 5. Rothbard claimed that big businesses have a calculation problem, too, the bigger they get.
No. He was talking about if they got a total monopoly on a factor of production, from start to finish, to the extent that there was no market price for it, because they were not selling except to themselves. Which is an unlikely theoretical.
Mistake 6. Plenty of primitive tribes have no money, and they do fine, which refutes the calculation problem.
No. Mises admits that a mom and pop sized economy has no calculation problem, only big modern complicated ones.
Mistake 7. Socialist economists have long since solved the calculation problem.
No. Mises in Human Action exposes all their proposed solutions as untenable.