Economic Calculation Problem
The economic calculation problem was a very important step that involved the criticism of central economic planning. It was proposed by Ludwig von Mises in 1920. Economic calculation problem was later expounded in detail by Friedrich Hayek. The two argued that the only effective way to enhance rational distribution of resources could be done in a free market with a specific price mechanism.
In socialist economy, distribution of resources was a problem. This is because the government owned and controlled the means of production. Therefore, it was very difficult to obtain prices. The system was also inefficient because central economic planners did not know how to allocate different resources to relevant parties.
When socialists planned the economy, it was always bound to fail. The fall of Soviet Union in the 1990s occurred as a results of poor economic planning by the socialists.
By early 1900s, different economists were already holding talks on free exchange system. It was seen as an effective way to ensure that resources are evenly distributed. A capitalist mode of production was proposed. However, dissidents accused the system of detrimental outcomes because of the way in which market power was wielded by large businesses.
Critics on the other hand maintained that shortcomings were inevitable because of the system of production. The system was also characterized by collective ownership of major means of production of different resources. If distribution of resources was done in an even way, there would also be even distribution of wealth.
However, Mises felt that it is impossible for socialists to ensure sufficient production of materials to ensure free exchange system. His claim was debated by economists and in different academic circles in 1920s to 1930s. Some scholars and socialists in the end agreed that working on a good price system was very important because it would enhance distribution of resources.
The market system uses different prices to ensure allocation or distribution of resources. It helps to balance the costs involved in the production and distribution of the resources depending on the desires of consumers. With a proper understanding of how market systems deals efficiently with an economic problem, it becomes easy to balance the costs.
Free market will also help consumers to purchase what they want and at a favorable price. However, if resources are limited, they have to allocate in a way that ensures that consumers do not face financial constraints. This means that economic calculation problem is an efficient market system that determines efficiency of resource distribution.
Socialism could not achieve this goal because the government owns lands, buildings and capital. Therefore, whatever that is being produced in socialist system, there will be no efficiency it its distribution even if the government allows the market to determine the price of goods.
However, under a free market system, distribution of resources is even across different parts. It is efficient because the means of production are usually included in the costs of a final product. On the other hand if the government solely owns means of production, the cost can never be established. This also means it will be hard to achieve an efficient pricing system and resources cannot be allocated efficiently.
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