Knowledge and Calculation Problems of Socialism

I wanna know what you're thinking
There are some things you can't hide
I wanna know what you're thinking
Tell me what's on your mind
--Information Society

Robert Murphy reviews two primary impediments to socialism. Hayek (1945) stressed the 'knowledge problem' facing central planners. The size and complexity of modern economies make it impossible for bureaucrats in a room to comprehend all of the relevant information necessary to direct production and distribution.

Mises (1949), on the other hand, emphasized the calculation problem facing socialists. Suppose that thru super computing technology central planners could process economic minutiae as if they were on the ground in millions of places at once. They would still be missing a calculation that the supercomputers could not undertake.

That missing information is the relative taste preferences of all individuals on the planet, as well as entrepreneurial perceptions about how to transform matter into different forms to satisfy those preferences. These cannot be calculated via a model.

In fact, the only way they can be determined is by setting up a market economy and letting people 'self-calculate.' The primary outcome of these calculations, prices, drives economizing.

Market prices, derived from dynamic economic calculations done inside people's heads, are phenomena that socialists cannot replicate.

References

Hayek, F.A. (1945). The use of knowledge in society. American Economic Review, 35: 519-530.

Mises, L. (1949). Human action. New Haven: Yale University Press.