Question

In your own words describe in depth (1-2 pages) Friedrich A. Hayek's economic calculation problem.

Answer 1

The economic calculation problem is a criticism of using economic planning as a substitute for market-based allocation of the factors of production. It was first proposed by Von Mises and later carry forwarded by Friedrich A. Hayek's. Von described the criticisms in socialist market in the economy and later on desrcibed the types of socialism prevails in the economy. He later on described how capitalist system manages the price system and how people react for efficient allocation of resources in society.

Both of them suggested that economic calculation can only be done through the information which can be attained through the prices of goods in the market. Mises argued that the pricing systems in socialist economies were necessarily problematic as if a public ownsership manages all the means of production, no rational prices can be settled for capital goods as they were merely internal transfers of goods. The system would be necessarily irrational as the central planners would not know how to allocate the available resources efficiently and he wrote that it is barely impossible to calculate it where bureaucrats interfares.

Prices in the market are not only dependent on some informations line in socialism happens but it really depends upon many factors. Hayek took the case of tin prices rises, there could be many possibilities for this. All he needs to know is that tin is more expensive, which means he must give up more resources to acquire the same quantity as before. He is led to economize on tin, saving what amount remains for uses that bring a greater return. Even after giving many valuable insights to the market Hayek’s arguments were either ignored or misinterpreted.