Socialism’s Calculation Problem

In the historical debates over socialism, its opponents would raise the problems described in previous posts and the proponents would usually respond by arguing that people would learn to work for the benefit of their neighbors; that the “Socialist Man” would emerge, who was not selfish as people under capitalism were. The opponents argued that even if socialists had the best intentions and everything worked out as they planned, it would still be inefficient. The government owns everything, therefore there is no market for resources and the government has no way of knowing if a particular project was making good use of the resources it consumed, or if it would help more to shut down that project and use the resources for something else. In a market economy, accountants use the market prices to determine if an operation is profitable or not.

The only way to fix this is if there was feedback from the customers. They would be allowed to choose the goods they wanted by receiving voting points and voting for each good. But that would only show feedback after the goods are made and we need to know it before they are made. It would also be possible to make more of one good and less of another good next time. But if there is a bigger demand of TVs than there is of tuna cans, is it more sensible to make more TVs and assign them a lower price or make fewer TVs and assign them a higher price? To solve this, the planners might also give voting points to the TV and tuna producers. However giving the same amount of points to each factory would be silly. That would be ensuring that society devoted as many resources to TV production as tuna production, which wouldn’t be very clever in a world with scarce resources. The planners could then award point to each factory manager, proportional to the amount of points that the citizens earmarked for those goods at the distribution centers. In other words, if the citizens used five times as many of their points to order television sets as they did to order cans of tuna fish, then in the next period the socialist planners could award five times as many voting points to the TV factory managers as they did to the tuna producers. This rule would allow citizens to give feedback to the planners not only of already-finished goods, but also in the decision of how many units of each good to produce in the future.

By now you have probably realized that we’re yet again headed towards capitalism.

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