It was first proposed by Ludwig von Mises in his 1920 article "Economic Calculation in the Socialist Commonwealth" and later expanded upon by Friedrich Hayek.
Mises' initial criticism received multiple reactions and led to the conception of trial-and-error market socialism, most notably the Lange–Lerner theorem.
Notable critics of both Mises's original argument and Hayek's newer proposition include Anarcho-capitalist economist Bryan Caplan,[4] computer programmer and Marxist Paul Cockshott, as well as other communists.
"[1] This, paired with his consistent mention of nationalization alongside socialization, would make the economic calculation problem one solely concerning an administrative-command system.
As a means of exchange, money enables buyers to compare the costs of goods without having knowledge of their underlying factors; the consumer can simply focus on his personal cost-benefit decision.
Therefore, the price system is said to promote economically efficient use of resources by agents who may not have explicit knowledge of all of the conditions of production or supply.
[6] Without the market process to fulfill such comparisons, critics of non-market socialism say that it lacks any way to compare different goods and services and would have to rely on calculation in kind.
Without a price mechanism, Mises argues, socialism lacks the means to relate consumer satisfaction to economic activity.
According to Israel Kirzner (1973) and Don Lavoie (1985), entrepreneurs reap profits by supplying unfulfilled needs in all markets.
Entrepreneurs lack the profit motive to take risks under socialism and so are far less likely to attempt to supply consumer demands.
As for socialism, Mises (1944) and Hayek (1937) insisted that bureaucrats in individual ministries could not coordinate their plans without a price system due to the local knowledge problem.
Friedrich von Hayek responded that the system of equations required too much information that would not be easily available, and the ensuing calculations would be too difficult.
[citation needed] Hayek responded by arguing that the simulation of markets in socialism would fail due to a lack of genuine competition and entrepreneurship.
Lange and Lerner also admitted that socialism would lack any simulation of financial markets, and that this would cause problems in planning capital investment.
[This] is essentially a matter of the capitalists who buy and sell stocks and shares, who make loans and recover them, who speculate in all kinds of commodities.
Entrepreneurs who commit relatively large errors in investment waste their funds over expanding some lines of production at the cost of other more profitable ventures where consumer demand is higher.
The entrepreneurs who commit the worst errors by forming the least accurate expectations of future consumer demands incur financial losses.
Entrepreneurs who commit smaller errors by anticipating consumer demand more correctly attain greater financial success.
The entrepreneurs who form the most accurate opinions regarding the future state of markets (i.e. new trends in consumer demands) earn the highest profits and gain greater control of industry.
Robin Cox has argued that the economic calculation argument can only be successfully rebutted on the assumption that a moneyless socialist economy was to a large extent spontaneously ordered via a self-regulating system of stock control which would enable decision-makers to allocate production goods on the basis of their relative scarcity using calculation in kind.
Nonetheless, Hahnel commended current policies pursued by free market capitalist societies against these inefficiencies (e.g. Pigouvian taxes, antitrust laws etc.
[24] Allin Cottrell, Paul Cockshott and Greg Michaelson argued that the contention that finding a true economic equilibrium is not just hard but impossible for a central planner applies equally well to a market system.
This line of argument thus attempts to show that any claim to impossibility must necessarily involve a local knowledge problem, because the planning system is no less capable than the market if given full information.
However, if not coordinated by a capital market, this information exists in a fundamentally distributed form, which would be difficult to utilize on the planners' part.
If the planners decided to utilize the information, it would immediately become stale and relatively useless, unless reality somehow imitated the changeless monotony of the equilibrium model.
Otto Neurath and Hillel Ticktin argued that with detailed use of real unit accounting and demand surveys a planned economy could operate without a capital market in a situation of abundance.
It appears that in order for economic planners to have any useful data by which they might be guided, a market must be hauled in, and with it analogues of private property, inequality and exploitation.
Both entail formulating data-driven economic objectives but the latter precludes it from occurring within a free-market context and delegates the task to centralized bodies.
[37] Karras J. Lambert and Tate Fegley argue that artificial intelligence systems, no matter how advanced, cannot assume the role of central planners because they do not fulfill the prerequisites of effective economic calculation.
This includes the ability to convert the ordinal preferences of producers and consumers into commensurate cardinal utility values, which are available and agreed upon, and forecast future market interactions.