Economic calculation problem
As a problem
The economic calculation problem refers to the problem of determining how resources are to be allocated to productive uses in an economy.
Usual meaning as a criticism of central planning
The term economic calculation problem is typically used as a critique of central planning, i.e., the planning or direction of a large economy by a central actor (such as the government of a nation-state). The critique was first made by Ludwig von Mises and then elaborated on by Friedrich von Hayek, and it is a key ingredient of the Austrian school of economics.
Mises, Hayek, and others argued that the problem of resource allocation is solved in a market economy by means of the price mechanism, where a multitude of actors make use of their local knowledge and generate a spontaneous order.
Knowledge and incentives
The economic calculation problem, viewed as a critique of central planning, focuses on the knowledge aspect: the argument is that it is impossible for a single actor to capture all the knowledge necessary to decide how to allocated resources rationally in the economy. There is a related critique based on incentives:
|What the focus is on||Corresponding argument supporting a market economy||Corresponding argument against central planning|
|Knowledge||individual market actors use local knowledge and this is coordinated among multiple actors by means of the price mechanism||the economic calculation problem: it is impossible for a single actor to gather all the information necessary to allocate resources rationally across the economy.|
|Incentives||invisible hand: a market economy helps channel each individual's pursuit of self-interest to socially beneficial activities and outcomes, through the price mechanism (see market price for the interaction of supply and demand)||public choice economics (a branch of political economy): the incentives that government actors may lead them to act in self-interested ways that are not socially beneficial.|