Mises’ Calculation Argument: a Clarification

IN THIS ARTICLE I WILL DISCUSS MISES’ FAMOUS argument concerning economic calculation under socialism. I will point out that there are in fact two components of this argument. The first part deals with the fact that in capitalist economies, factors of production are allocated based on profit-andloss calculations in terms of (money) prices. Inasmuch as such calculations cannot be performed under socialism (since there are no markets for such goods, and hence, no prices), socialism must resort to some other means of calculation to rationally allocate factors of production. The second part of the argument deals with the fact that previous proposals for socialist calculation (e.g. calculation in kind, calculation in terms of labor units, etc.) are highly deficient and, indeed, the very notion of a value calculus is chimerical. Thus can it be concluded that rational economic action under socialism is impossible. I further point out that much subsequent Austrian work on calculation has tended to conflate these two separate issues, and has consequently led to some confusion about the essence of Mises’ argument.