The Consistency of Ludwig Von Mises's Formulation of the Socialist Calculation Problem

The great Austrian economist Ludwig von Mises insisted that economic analysis can only give qualitative, not quantitative laws. By implication, any Austrian economic analysis of socialism's failures would have to focus on socialism's differences in kind and not in degree from functional market economies. For Mises, one such difference in kind is manifested in the socialist calculation problem; unlike actors in market economies, socialist central managers are inherently unable to decide how to allocate resources efficiently because they do not have the market price mechanism to indicate to them the relative values of various goods.

Bryan Caplan, however, considers Mises's view of economics as solely qualitative and his analysis of the socialist calculation problem to be in contradiction. Mises himself wrote that Robinson Crusoe on a small island is easily able to efficiently allocate resources toward his needs. Crusoe would only be using "calculation-in-kind" by mentally comparing the various alternatives open to him and selecting the most desirable. Mises denies the functionality of this method for a larger economy, however. Calculation-in-kind, at best, can only extend to the most basic consumption goods; it cannot cover advanced factors of production.

In "Why I am not an Austrian Economist," Caplan argues that Mises makes a distinction of degree, not of kind, between Crusoe's "one-man socialism" and the impossibility of centrally planning an economy with millions of participants. Yet Mises himself denied the possibility of economics making such distinctions of degree; this means that pure economic theory did not give Mises a full understanding of the calculation problem. According to Caplan, the calculation problem ceases to be a unique and outstanding objection to socialism because of this; it assumes coequal standing with other valid insights as to why socialist systems fail.