Before you read on: in 1920 Ludwig von Mises argued that a fully planned economy would lack something vital. What?
Mises argued that when the state owns all capital goods, nobody trades them, so they have no prices to calculate with.
- The market side
- Ludwig von Mises (1881 to 1973) and Friedrich Hayek (1899 to 1992), economists of the Austrian school
- The plan side
- Socialist economists such as Oskar Lange and Abba Lerner, Soviet planners, and later advocates of computer planning
- Key texts
- Mises, Economic Calculation in the Socialist Commonwealth (1920); Lange and Fred Taylor, On the Economic Theory of Socialism (1938); Hayek, The Use of Knowledge in Society (1945)
- The question
- Should prices and markets, or a central plan, decide what an economy produces?
- Test cases
- Soviet planning from the First Five-Year Plan (1928); Britain's war economy (1939 to 1945); China's reforms from 1978
What the argument was about
Socialists wanted the state to own land, factories and machines. In 1920 Ludwig von Mises argued that such an economy could not be run rationally, because goods that nobody buys or sells have no market prices. His student Friedrich Hayek developed the argument in the 1930s and 1940s.
The Soviet Union put planning into practice. Its State Planning Committee, Gosplan, set up in 1921, took on full national planning in 1928 with the First Five-Year Plan, which called for rapid industrialisation.
The two cases
Market
The case
Hayek argued that prices carry information that no planner could collect. Knowledge about costs, tastes and local conditions is spread across millions of people, and much of it is never written down. When something becomes scarce, its price rises and users cut back without needing to know why. Profits and losses then give firms a reason to act on what prices tell them.
The evidence it points to
Soviet plans set targets in physical quantities, so managers chased tonnage over quality. In 1982 the Soviet government raised the price it paid for moleskin pelts to boost glove-making. Pelts then piled up unused, and some rotted in warehouses, but price officials, with millions of other prices to set, were too busy to lower it again. Soviet growth slowed in the 1970s.
Plan
The case
Lange argued that planners could copy a market. They could set prices, watch whether stocks of each good piled up or ran short, and adjust prices until supply matched demand. A plan can also steer investment towards national goals and mobilise resources quickly in an emergency. In 1993 Allin Cottrell and Paul Cockshott argued that modern computers can now handle the sums that critics of planning, Hayek among them, thought beyond any planner.
The evidence it points to
Soviet planning drove rapid industrialisation and supported the war effort against Nazi Germany; official figures put Soviet growth at about twice the American rate through the 1960s. Britain ran its own war economy largely by plan: the War Cabinet shared out workers through manpower budgets, and food and clothing were rationed.
Ideas from the debate
Can you name the four ideas, two from each side?
Comparing the costs of different ways of producing, using money prices. Mises argued that planners without market prices for capital goods cannot do it.
Can you think of an example?
Should steel go into cars or fridges? Without prices showing what each use costs and earns, a planner has no clear way to choose.
Knowledge needed to run an economy is spread across millions of people, so no planner can gather it. Hayek argued that prices pass it on.
Can you think of an example?
A drought cuts the wheat harvest in one country. Bread prices rise everywhere, and bakers in other countries buy less flour, though none of them has heard about the drought.
The state owns the means of production but uses prices to guide decisions. In Lange's version, planners adjust prices by trial and error.
Can you think of an example?
Unsold shoes pile up in state shops, so planners cut the price of shoes; where coats sell out, they raise it.
A central authority sets output targets, allocates raw materials to firms and decides how much output goes to investment instead of consumption.
Can you think of an example?
Gosplan sets a national tractor target, and a ministry turns it into orders for each factory.