Economic calculation problem

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The economic calculation problem (ECP) is a criticism of using central economic planning (rather than market-based mechanisms) for the allocation of the factors of production. First proposed by Ludwig von Mises (1881–1973) in his 1920 article "Economic Calculation in the Socialist Commonwealth", it was later elaborated by Friedrich Hayek (1899-1992), who reframed the issue as a knowledge problem: the relevant economic information is dispersed, tacit, constantly changing, and thus cannot be centralized. In his 1920 article, Mises described the nature of the price system under capitalism and described (while criticizing other theories of value) how individual subjective values translate into the objective information necessary for rational allocation of resources in society. He argued that central planning necessarily leads to an irrational and inefficient allocation of resources. In market exchanges, prices reflect the supply and demand of resources, labor and products. In the article,...

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