Economic Calculation DebateA continuing debate on the practicality of Socialist economics.
Many liberal thinkers, especially those of the Austrian School believed Marxist economics to be impractical because it denied private ownership of productive property. Prices represented information about market conditions, so were necessary for any sort of economic activity. A socialist economy, therefore, would require a price system in order to operate. The socialist economy could not set prices as efficiently as private owners as private property owners would seek the best returns for whichever factors of production they owned in constantly changing circumstances. It would be this process that would ensure the best use of resources.
Hayek further refined this by pointing out that by the time all the relevant information had been gathered in the situation would have changed and so the government would be chasing a moving target. Prices in a free market on the other hand instantly conveyed information on the demand and scarcity of products. The free market was effectively "self organising" in a way that a centrally planned one could never be.
This was attacked on two fronts. Firstly by the believers in the general equilibrium theory who maintained that all that mattered was the knowledge of the most effective use of materials (who denied the marginalist theories which are now more widely accepted) as long as the price system was in use and early Marxists who saw the price mechanism as in itself inefficient (something discarded by later Marxists).
One of the more surprising entries in the debate was this from Trotsky:
"If there existed the universal mind, that projected itself into the scientific fancy of Laplace; a mind that would register simultaneously all the processes of nature and of society, that could measure the dynamics of their motion, that could forecast the results of their inter-reactions, such a mind, of course, could a priori draw up a faultless and an exhaustive economic plan, beginning with a number of hectares of wheat and down to the last button for a vest. In truth, the bureaucracy often conceives that just such a mind is at its disposal; that is why it so easily frees itself from the control of the market and of Soviet democracy."
"The innumerable living participants of economy, State as well as private, collective as well as individual, must give notice of their needs and of their relative strength not only through the statistical determinations of plan commissions but by the direct pressure of supply and demand. The plan is checked and to a considerable measure, realized through the market. The regulation of the market itself must depend upon the tendencies that are brought out through its medium. The blueprints produced by the offices must demonstrate their economic expediency through commercial calculation."
Economic accounting is unthinkable without market relations."
Leon Trotsky, "Soviet Economy in Danger", New York, 1933. Quoted in "Real Socialism Wouldn't Work Either".