Chapter 26. The Impossibility of Economic Calculation Under Socialism
1. The Problem
The director wants to build a house.
Now there are many methods that can be resorted to.
Each of them offers, from the point of view of the director, certain advantages and disadvantages
with regard to the utilization of the future building,
Building, and results in a different duration of the building's serviceableness.
Each of them requires other expenditures of building materials and labor and absorbs other
periods of production.
Which method should the director choose?
He cannot reduce to a common denominator the items of various materials and various kinds
of labor to be expended.
Therefore, he cannot compare them.
He cannot attach either to the waiting time, period of production, or to the duration of
serviceableness, a definite numerical expression.
In short, he cannot, in comparing costs to be expended and gains to be earned, resort
to any arithmetical operation.
The plans of his architects enumerate a vast multiplicity of various items in kind.
They refer to the physical and chemical qualities of various materials, and to the physical
productivity of various machines, tools and procedures.
But all their statements remain unrelated to each other.
There is no means of establishing any connection between them.
Imagine the plight of the director when faced with a project.
What he needs to know is whether or not the execution of the project will increase well-being,
that is, add something to the wealth available without impairing the satisfaction of wants
which he considers more urgent.
But none of the reports he receives give him any clue to the solution of this problem.
We may for the sake of argument at first disregard the dilemmas involved in the choice of consumers
of Money and Credit, The Theory of Money and Credit, The Theory of Money and Credit, The
Formulas for the production of this energy should be applied.
All these problems are raised daily in thousands and thousands of cases.
Each case offers special conditions and requires an individual solution appropriate to these
special data.
The number of elements with which the director's decision has to deal is much greater than
would be indicated by a merely technological description of the available producer's goods
in terms of Physics and Chemistry.
The location of each of them must be taken into consideration, as well as the serviceableness
of the capital investments made in the past for their utilization.
The director does not simply have to deal with coal as such, but with thousands and
thousands of pits already in operation in various places, and with the possibilities
is for digging new pits, with the various methods of mining in each of them, with the
different qualities of the coal in various deposits, with the various methods for utilizing
the coal for the production of heat, power and a great number of derivatives.
It is permissible to say that the present state of technological knowledge makes it
possible to produce almost anything out of almost everything.
Our ancestors, for instance, knew only a limited number of employments for wood.
Modern technology has added a multitude of possible new employments.
Wood can be used for the production of paper, of various textile fibers, of foodstuffs,
drugs and many other synthetic products.
Today, two methods are resorted to for providing a city with clean water.
Either one brings the water over long distances in aqueducts, an ancient method long practiced,
or one chemically purifies the water available in the city's neighborhood.
Why does one not produce water synthetically in factories?
Modern technology could easily solve the technological problems involved.
The average man in his mental inertia is ready to ridicule such projects as sheer lunacy.
However, the only reason why the synthetic production of drinking water today, perhaps
not at a later day, is out of the question, is that economic calculation in terms of money
shows that it is a more expensive procedure than other methods.
Eliminate economic calculation and you have no means of making a rational choice between
the various alternatives.
The socialists, it is true, object that economic calculation is not infallible.
They say that the capitalists sometimes make mistakes in their calculation.
Of course, this happens, and will always happen.
For all human action points to the future, and the future is always uncertain.
The most carefully elaborated plans are frustrated if expectations concerning the future are
dashed to the ground.
However, this is quite a different problem.
Today, we calculate from the point of view of our present knowledge and of our present
anticipation of future conditions.
We do not deal with the problem of whether or not the director will be able to anticipate
future conditions.
What we have in mind is that the director cannot calculate from the point of view of
his own present value judgments and his own present anticipations of future conditions,
whatever they may be.
If he invests today in the canning industry, it may happen that a change in consumers'
tastes or in the hygienic opinions concerning the wholesomeness of canned food will one
One day turn his investment into a malinvestment. But how can he find out today how to build
and equip a cannery most economically? Some railroad lines constructed at the turn of
the century would not have been built if people had at that time anticipated the impending
advance of motoring and aviation. But those who at that time built railroads knew which
Which of the various possible alternatives for the realization of their plans they had
to choose, from the point of view of their appraisements and anticipations, and of the
market prices of their day in which the valuations of the consumers were reflected?
It is precisely this insight that the director will lack.
He will be like a sailor on the high seas, unfamiliar with the methods of navigation,
More like a medieval scholar entrusted with the technical operation of a railroad engine.
We have assumed that the director has already made up his mind with regard to the construction
of a definite plant or building.
However, in order to make such a decision, he already needs economic calculation.
If a hydroelectric power station is to be built, one must know whether or not this is
is the most economical way to produce the energy needed.
How can he know this if he cannot calculate costs and output?
We may admit that in its initial period a socialist regime could to some extent rely
upon the experience of the preceding age of capitalism.
But what is to be done later as conditions change more and more?
Of what use could the prices of 1900 be for the director in 1949?
And what use can the director in 1980 derive from the knowledge of the prices of 1949?
The paradox of planning is that it cannot plan because of the absence of economic calculation.
What is called a planned economy is no economy at all.
It is just a system of groping about in the dark.
There is no question of a rational choice of means for the best possible attainment
of the ultimate end sought.
What is called conscious planning is precisely the elimination of conscious purposive action.
2.
Past Failures to Conceive the Problem
For more than a hundred years, the substitution of socialist planning for private enterprise
has been the main political issue.
Thousands and thousands of books have been published for and against the communist plans.
No other subject has been more eagerly discussed in private circles, in the press, in public
gatherings, in the meetings of learned societies, in election campaigns and in parliaments.
Wars have been fought and rivers of blood have been shed for the cause of socialism.
Yet in all these years, the essential question has not been raised.
It is true that some eminent economists, Hermann Heinrich Goessen, Albert Scheffler, Alfredo
Pareto, Nicolas G. Pearson, Enrico Barone, touched upon the problem.
But with the exception of Pearson, they did not penetrate to the core of the problem,
and they all failed to recognize its primordial importance.
Neither did they venture to integrate it into the system of the theory of human action.
It was these failures which prevented people from paying attention to their observations.
They were disregarded and soon fell into oblivion.
It would be a serious mistake to blame the historical school and institutionalism for
this neglect of mankind's most vital problem.
These two lines of thought fanatically disparage economics, the dismal science, in the interests
of their interventionist or socialist propaganda.
However, they have not succeeded in suppressing the study of economics entirely.
The puzzling thing is not why the detractors of economics failed to recognize the problem,
but why the economists were guilty of the same fault.
It is the two fundamental errors of mathematical economics that must be indicted.
The mathematical economists are almost exclusively intent upon the study of what they call economic
equilibrium and the static state.
Recourse to the imaginary construction of an evenly rotating economy is, as has been
pointed out, an indispensable mental tool of economic reasoning.
It is a grave mistake to consider this auxiliary tool as anything else than an imaginary construction,
and to overlook the fact that it has not only no counterpart in reality, but cannot even
be thought through consistently to its ultimate logical consequences.
The mathematical economist, blinded by the prepossession that economics must be constructed
According to the Pattern of Newtonian Mechanics, and is open to treatment by mathematical methods,
misconstrues entirely the subject matter of his investigations.
He no longer deals with human action, but with a soulless mechanism mysteriously actuated
by forces not open to further analysis.
In the imaginary construction of the evenly rotating economy, there is, of course, no
No Room for the Entrepreneurial Function Thus the mathematical economist eliminates
the entrepreneur from his thought.
He has no need for this mover and shaker whose never ceasing intervention prevents the imaginary
system from reaching the state of perfect equilibrium and static conditions.
He hates the entrepreneur as a disturbing element.
The prices of the factors of production, as the mathematical economist sees it, are determined
by the intersection of two curves, not by human action.
Moreover, in drawing his cherished curves of cost and price, the mathematical economist
fails to see that the reduction of costs and prices to homogeneous magnitudes implies the
use of a common medium of exchange.
Thus, he creates the illusion that calculation of costs and prices could be resorted to even
in the absence of a common denominator of the exchange ratios of the factors of production.
The result is that from the writings of the mathematical economists, the imaginary construction
of a socialist commonwealth emerges as a realizable system of cooperation under the division of
of Labor, as a full-fledged alternative to the economic system based on private control
of the means of production.
The director of the socialist community will be in a position to allocate the various factors
of production in a rational way, that is, on the ground of calculation.
Men can have both socialist cooperation under the division of labor and rational employment
of the factors of production.
They are free to adopt socialism without abandoning economy and the choice of means.
Socialism does not enjoin the renunciation of rationality in the employment of the factors
of production.
It is a variety of rational social action.
An apparent verification of these errors was seen in the experience of the socialist governments
of Soviet Russia and Nazi Germany.
People did not realize that these were not isolated socialist systems.
They were operating in an environment in which the price system still worked.
They could resort to economic calculation on the ground of the prices established abroad.
Without the aid of these prices, their actions would have been aimless and planless.
Only because they were able to refer to these foreign prices were they able to calculate,
to keep books and to prepare their much-talked-about plans.
3.
Recent Suggestions for Socialist Economic Calculation
The socialist tracks deal with everything except the essential and unique problem of
socialism, namely economic calculation.
It is only in the last years that socialist writers have no longer been able to avoid
paying attention to this primordial matter.
They have begun to suspect that the Marxian technique of smearing bourgeois economics
is not an entirely sufficient method for the realization of the socialist utopia.
They have tried to substitute a theory of socialism for the scurrilous Hegelian metaphysics
of the Marxian doctrine.
They have embarked upon designing schemes for socialist economic calculation.
Of course, they have lamentably failed in this task.
It would hardly be necessary to deal with their spurious suggestions were it not for
the fact that such examination offers a good opportunity to bring into relief fundamental
features both of the market society and of the imaginary construction of a non-market
society.
The various schemes proposed can be classified in the following way.
1. Calculation in kind is to be substituted for calculation in terms of money. This method
is worthless. One cannot add or subtract numbers of different kinds, heterogeneous quantities.
2. Starting from the ideas of the labor theory of value, the labor hour is recommended as
as the unit of calculation.
This suggestion does not take into account the original material factors of production
and ignores the different qualities of work accomplished in the various labor hours worked
by the same and by different people.
3.
The unit is to be a quantity of utility.
However, acting man does not measure utility.
He arranges it in scales of gradation. Market prices are not expressive of equivalence,
but of a divergence in the valuation of the two exchanging parties. It is impermissible
to neglect the fundamental theorem of modern economics, namely that the value attached
to one unit of a supply of n minus one units is greater than that attached to one unit
of a Supply of N Units 4. Calculation is to be made possible by the
establishment of an artificial quasi-market. This scheme is dealt with in section 5 of
this chapter. 5. Calculation is to be made with the aid of
the differential equations of mathematical catallactics. This scheme is dealt with in
in Section 6 of this chapter 6.
Calculation is to be made superfluous by resorting to the method of trial and error.
This idea is dealt with in Section 4 of this chapter.
4.
Trial and Error
The entrepreneurs and capitalists do not have advance assurance about whether their plans
Methods are the most appropriate solution for the allocation of factors of production
to the various branches of industry.
It is only later experience that shows them, after the event, whether they were right or
wrong in their enterprises and investments.
The method they apply is the method of trial and error.
Why, say some socialists, should not the socialist director resort to the same method?
The method of trial and error is applicable in all cases in which the correct solution
is recognizable as such by unmistakable marks not dependent on the method of trial and error
itself.
If a man mislays his wallet, he may hunt for it in various places.
If he finds it, he recognizes it as his property.
There is no doubt about the success of the method of trial and error applied.
He has solved his problem.
When Ehrlich was looking for a remedy for syphilis, he tested hundreds of drugs until
he found what he was searching for, a drug that killed the spirochetes without damaging
the human body.
The mark of the correct solution, the drug number 606, was that it combined these two
qualities, as could be learned from laboratory experiment and from clinical experience.
Things are quite different if the only mark of the correct solution is that it has been
reached by the application of a method considered appropriate for the solution of the problem.
The correct result of a multiplication of two factors is recognizable only as the result
of a correct application of the process indicated by arithmetic.
One may try to guess the correct result by trial and error, but here the method of trial
and error is no substitute for the arithmetical process.
It would be quite futile if the arithmetical process did not provide a yardstick for discriminating
what is incorrect from what is correct.
If one wants to call entrepreneurial action an application of the method of trial and
error, one must not forget that the correct solution is easily recognizable as such.
It is the emergence of a surplus of proceeds over costs.
Profit tells the entrepreneur that the consumers approve of his ventures.
Loss that they disapprove.
The problem of socialist economic calculation is precisely this, that in the absence of
market prices for the factors of production, a computation of profit or loss is not feasible.
We may assume that in the socialist commonwealth there is a market for consumers' goods, and
that money prices for consumers' goods are determined on this market.
We may assume that the director assigns periodically to every member a certain amount of money,
and sells the consumer's goods to those bidding the highest prices.
Or we may as well assume that a certain portion of the various consumer's goods in kind is
allotted to each member, and that the members are free to exchange these goods against other
are goods on a market in which the transactions are affected through a common medium of exchange,
a sort of money.
But the characteristic mark of the socialist system is that the producer's goods are controlled
by one agency only, in whose name the director acts, that they are neither bought nor sold,
and that there are no prices for them.
Thus, there cannot be any question of comparing input and output by the methods of arithmetic.
We do not assert that the capitalist mode of economic calculation guarantees the absolutely
best solution of the allocation of factors of production.
Such absolutely perfect solutions of any problem are out of reach of mortal men.
What the operation of a market not sabotaged by the interference of compulsion and coercion
can bring about is merely the best solution accessible to the human mind under the given
state of technological knowledge and the intellectual abilities of the ages' shrewdest men.
As soon as any man discovers a discrepancy between the real state of production and a
a Realizable Better State. The profit motive pushes him toward the utmost effort to realize
his plans. Better means, of course, more satisfactory from the point of view of the consumers buying
on the market. The sale of his products will show whether he was right or wrong in his
anticipations. The market daily tries the entrepreneurs anew and eliminates those who
who cannot stand the test. It tends to entrust the conduct of business affairs to those men
who have succeeded in filling the most urgent wants of the consumers. This is the only important
respect in which one can call the market economy a system of trial and error.
5. The Quasi-Market
The distinctive mark of socialism is the oneness and indivisibility of the will directing
all production activities within the whole social system.
When the socialists declare that order and organization are to be substituted for the
anarchy of production, conscious action for the alleged planlessness of capitalism, true
through cooperation for competition, production for use for production for profit, what they
have in mind is always the substitution of the exclusive and monopolistic power of only
one agency for the infinite multitude of the plans of the individual consumers and those
attending to the wishes of the consumers, the entrepreneurs and capitalists.
The essence of socialism is the entire elimination of the market and of catalactic competition.
The socialist system is a system without a market and market prices for the factors of
production and without competition.
It means the unrestricted centralization and unification of the conduct of all affairs
in the hands of one authority.
In the drafting of the unique plan that directs all economic activities, the citizens cooperate,
if at all, only by electing the director or the board of directors.
For the rest, they are only subordinates, bound to obey unconditionally the orders
issued by the director, and wards of whose well-being the director takes care.
All the excellences the socialists ascribe to socialism and all the blessings they expect
from its realization are described as the necessary outcome of this absolute unification
and centralization.
It is therefore nothing short of a full acknowledgement of the correctness and irrefutability of the
economists' analysis and devastating critique of the socialists' plans that the intellectual
Social leaders of socialism are now busy designing schemes for a socialist system in which the
market, market prices for the factors of production and catalactic competition are to be preserved.
The overwhelmingly rapid triumph of the demonstration that no economic calculation is possible under
a socialist system is without precedent indeed in the history of human thought.
The Socialists cannot help admitting their crushing final defeat.
They no longer claim that Socialism is matchlessly superior to Capitalism because it brushes
away markets, market prices and competition.
On the contrary, they are now eager to justify Socialism by pointing out that it is possible
to preserve these institutions even under Socialism.
They are drafting outlines for a socialism in which there are prices and competition.
This refers, of course, only to those socialists or communists who, like professors H.D. Dickinson
and Oskar Lange, are conversant with economic thought.
The dull hosts of the intellectuals will not abandon their superstitious belief in the
superiority of socialism.
Superstitions die hard.
What these neo-socialists suggest is really paradoxical.
They want to abolish private control of the means of production, market exchange, market
prices and competition.
But at the same time, they want to organize the socialist utopia in such a way that people
could act as if these things were still present.
They want people to play market as children play war, railroad or school.
They do not comprehend how such childish play differs from the real thing it tries to imitate.
It was, say these neo-socialists, a serious mistake on the part of the older socialists,
that is, of all socialists before 1920, to believe that socialism necessarily requires
the abolition of the market and of market exchange, and even that this fact is both
the essential element and the preeminent feature of a socialist economy.
This idea is, as they reluctantly admit, preposterous, and its realization would result in a chaotic
muddle.
But fortunately, they say, there is a better pattern for socialism available.
It is possible to instruct the managers of the various production units to conduct the
The Affairs of their unit in the same way they did under capitalism.
The manager of a corporation operates in the market society not on his account and at his
own peril, but for the benefit of the corporation, that is, the shareholders.
He will go on under socialism in the same way, with the same care and attention.
The only difference will consist in the fact that the fruits of his endeavors will enrich
Watch the whole society, not the shareholders.
For the rest, he will buy and sell, recruit and pay workers, and try to make profits in
the same way he did before.
The transition from the managerial system of mature capitalism to the managerial system
of the planned socialist commonwealth will be smoothly affected.
Nothing will change except the ownership of the capital invested.
The cardinal fallacy implied in this and all kindred proposals is that they look at the
economic problem from the perspective of the subaltern clerk, whose intellectual horizon
does not extend beyond subordinate tasks.
They consider the structure of industrial production and the allocation of capital to
and the various branches and production aggregates as rigid, and do not take into account the
necessity of altering this structure in order to adjust it to changes in conditions.
What they have in mind is a world in which no further changes occur and economic history
has reached its final stage.
They fail to realize that the operations of the corporate officers consist merely in the
the loyal execution of the tasks entrusted to them by their bosses, the shareholders,
and that in performing the orders received, they are forced to adjust themselves to the
structure of the market prices, ultimately determined by factors other than the various
managerial operations.
The operations of the managers, their buying and selling, are only a small segment of the
totality of market operations.
The market of the capitalist society also performs all those operations which allocate the capital
goods to the various branches of industry.
The entrepreneurs and capitalists establish corporations and other firms, enlarge or reduce
their size, dissolve them or merge them with other enterprises.
They buy and sell the shares and bonds of already existing and of new corporations.
They grant, withdraw and recover credits.
In short, they perform all those acts, the totality of which is called the capital and
money market.
It is these financial transactions of promoters and speculators that direct production into
those channels in which it satisfies the most urgent wants of the consumers in the best
possible way.
These transactions constitute the market as such.
If one eliminates them, one does not preserve any part of the market.
What remains is a fragment that cannot exist alone and cannot function as a market.
The role that the loyal corporation manager plays in the conduct of business is much more
modest than the authors of these plans assume.
Mises is only a managerial function, a subsidiary assistance granted to the entrepreneurs and
capitalists which refers only to subordinate tasks.
It can never become a substitute for the entrepreneurial function.
The speculators, promoters, investors and money lenders in determining the structure
of the stock and commodity exchanges and of the money market circumscribe the orbit within
which definite minor tasks can be entrusted to the manager's discretion.
In attending to these tasks, the manager must adjust his procedures to the structure of
the market created by factors which go far beyond the managerial functions.
Our problem does not refer to the managerial activities.
It concerns the allocation of capital to the various branches of industry.
The question is, in which branches should production be increased or restricted?
In which branches should the objective of production be altered?
What new branches should be inaugurated?
With regard to these issues, it is vain to cite the honest corporation manager and his
well-tried efficiency.
Those who confuse entrepreneurship and management close their eyes to the economic problem.
In labor disputes, the parties are not management and labor, but entrepreneurship, or capital,
and the salaried and wage-receiving employees.
The capitalist system is not a managerial system.
It is an entrepreneurial system.
One does not detract from the merits of corporation managers if one establishes the fact that
and it is not their conduct that determines the allocation of the factors of production
to the various lines of industry.
Nobody has ever suggested that the socialist commonwealth could invite the promoters and
speculators to continue their speculations and then deliver their profits to the common
chest.
Those suggesting a quasi-market for the socialist system have never wanted to preserve the stock
and commodity exchanges, the trading in futures, and the bankers and money lenders as quasi-institutions.
One cannot play speculation and investment.
The speculators and investors expose their own wealth, their own destiny.
This fact makes them responsible to the consumers, the ultimate bosses of the capitalist economy.
If one relieves them of this responsibility, one deprives them of their very character.
They are no longer businessmen, but just a group of men to whom the director has handed
over his main task, the supreme direction of the conduct of affairs.
Then they, and not the nominal director, become the true directors, and have to face the same
In recognition of the fact that such an idea would be simply nonsensical, the advocates
of the quasi-market plan sometimes vaguely recommend another way out.
The directors should act as a bank lending the available funds to the highest bidder.
This again is an abortive idea.
All those who can bid for these funds have, as is self-evident in a socialist order of
society, no property of their own.
In bidding, they are not restrained by any financial dangers they themselves run in promising
too high a rate of interest for the funds borrowed.
They do not, in the least, alleviate the burden of responsibility incumbent upon the director.
The insecurity of the funds lent to them is in no way restricted by the partial guarantee
which the borrower's own means provide in credit transactions under capitalism.
All the hazards of this insecurity fall only upon society, the exclusive owner of all resources
available.
If the director were without hesitation to allocate the funds available to those who
If he would bid most, he would simply put a premium upon audacity, carelessness and unreasonable optimism.
He would abdicate in favor of the least scrupulous visionaries or scoundrels.
He must reserve to himself the decision on how society's funds should be utilized.
But then we are back again where we started.
The director, in his endeavors to direct production activities, is not aided by the division of intellectual labor, which, under capitalism, provides a practicable method for economic calculation.
The employment of the means of production can be controlled either by private owners or by the social apparatus of coercion and compulsion.
In the first case, there is a market, there are market prices for all factors of production,
and economic calculation is possible.
In the second case, all these things are absent.
It is vain to comfort oneself with the hope that the organs of the collective economy
will be omnipresent and omniscient.
We do not deal in praxeology with the acts of the omnipresent and omniscient deity, but
with the actions of men endowed with a human mind only.
Such a mind cannot plan without economic calculation.
A socialist system with a market and market prices is as self-contradictory as is the
notion of a triangular square.
Production is directed either by profit-seeking businessmen or by the decisions of a director
to whom supreme and exclusive power is entrusted.
There are produced either those things from the sale of which the entrepreneurs expect
the highest profits, or those things which the director wants to be produced.
The question is, who should be master, the consumers or the director?
With whom should the ultimate decision rest whether a concrete supply of factors of production
should be employed for the production of the consumer's good A, or the consumer's good
B. Such a question does not allow of any evasive answer. It must be answered in a straightforward
and unambiguous way.
6. The Differential Equations of Mathematical Economics
In order to appraise adequately the idea that the differential equations of mathematical
Economics, could be utilized for socialist economic calculation, we must remember what
these equations really mean.
In devising the imaginary construction of an evenly rotating economy, we assume that
all the factors of production are employed in such a way that each of them renders the
most highly valued services it can possibly render.
No further change in the employment of any of these factors could improve the state of
want satisfaction under prevailing conditions.
This situation, in which no further changes in the disposition of the factors of production
are resorted to, is described by means of differential equations.
However, these equations do not provide any information about the human actions by means
The Theory of Money and Credit
If we assume that A is perfectly divisible and take the unit of A as infinitesimal,
it would be a serious blunder to assert that the marginal utility of A is the same in both
employments.
This state of equilibrium is a purely imaginary construction.
In a changing world, it can never be realized.
differs from today's state as well as from any other realizable state of affairs.
In the market economy, it is entrepreneurial action that again and again reshuffles exchange
ratios and the allocation of the factors of production.
An enterprising man discovers a discrepancy between the prices of the complementary factors
and the future prices of the products as he anticipates them, and tries to take advantage
of this discrepancy for his own profit.
The future price which he has in mind is, to be sure, not the hypothetical equilibrium
price.
No actor has anything to do with equilibrium and equilibrium prices.
These notions are foreign to real life and action.
They are auxiliary tools of praxeological reasoning, for which there is no metal means
to conceive the ceaseless restlessness of action, other than to contrast it with the
notion of perfect quiet.
For the theorists' reasoning, every change is a step forward on a road, which, provided
no further new data appear, finally leads to a state of equilibrium.
Neither the theorists, nor the capitalists and entrepreneurs, nor the consumers, are
in a position to form, on the ground of their familiarity with present conditions, an opinion
about the height of such an equilibrium price.
There is no need for such an opinion.
What impels a man toward change and innovation is not the vision of equilibrium prices, but
the anticipation of the height of the prices of a limited number of articles as they will
prevail on the market on the date at which he plans to sell.
What the entrepreneur, in embarking upon a definite project, has in mind, is only the
first steps of a transformation which, provided no changes in the data occur other than those
The values induced by his project would result in establishing the state of equilibrium.
But for a utilization of the equations describing the state of equilibrium, a knowledge of the
gradation of the values of consumers' goods in this state of equilibrium is required.
This gradation is one of the elements of these equations assumed as known.
Yet the director knows only his present valuations, not also his valuations under the hypothetical
state of equilibrium.
He believes that with regard to his present valuations, the allocation of the factors
of production is unsatisfactory and wants to change it.
But he knows nothing about how he himself will value on the day the equilibrium will
be reached.
These valuations will reflect the conditions resulting from the successive changes in production
he himself inaugurates.
We call the present day D1, and the day the equilibrium will be established Dn.
Accordingly, we name the following magnitudes corresponding to these two days.
The scale of valuation of the goods of the first order, V1 and VN.
The total supply of all original factors of production, O1 and ON.
The total supply of all produced factors of production, P1 and PN.
And summarize, O1 plus P1 as M1 and ON plus PN as MN.
Finally, we call the state of technological knowledge T1 and Tn.
For the solution of the equations, a knowledge of Vn, On plus Pn equals Mn and Tn is required.
But what we know today is merely V1, O1 plus P1 equals M1 and T1.
It would be impermissible to assume that these magnitudes for D1 are equal to those for Dn,
because the state of equilibrium cannot be attained if further changes in the data occur.
The absence of further changes in the data, which is the condition required for the establishment
of equilibrium, refers only to such changes as could derange the adjustment of conditions
to the operation of those elements which are already operating today.
The system cannot attain the state of equilibrium if new elements, penetrating from without,
divert it from those movements which tend toward the establishment of equilibrium.
But as long as the equilibrium is not yet attained, the system is in a continuous movement
which changes the data.
The tendency toward the establishment of equilibrium, not interrupted by the emergence of any changes
in the data coming from without, is in itself a succession of changes in the data.
P1 is a set of magnitudes that do not correspond to today's valuations.
It is the outcome of actions which were guided by past valuations and faced a state of technological
and of information about available resources of primary factors of production, which was different from the present state.
One of the reasons why the system is not in equilibrium is precisely the fact that P1 is not adjusted to present conditions.
There are plants, tools and supplies of other factors of production which would not exist under equilibrium,
and other plants, tools and supplies must be produced in order to establish equilibrium.
Equilibrium will emerge only when these disturbing parts of P1, as far as they are still utilizable,
will be worn out and replaced by items which correspond to the state of the other synchronous data,
namely V, O and T.
What acting man needs to know is not the state of affairs under equilibrium, but information
about the most appropriate method of transforming by successive steps P1 into PN.
With regard to this task, the equations are useless.
One cannot master these problems by eliminating P and relying only upon O.
It is true that the mode of utilizing the original factors of production uniquely determines
the quality and quantity of the produced factors of production, the intermediary products.
But the information that could be won in this way refers only to the conditions of equilibrium.
It does not tell us anything about the methods and procedures to be resorted to for the realization
of equilibrium.
Today we are confronted with a supply of P1 which differs from the state of equilibrium.
We must take into account real conditions, that is, P1, and not the hypothetical conditions
of Pn.
This hypothetical future state of equilibrium will appear when all methods of production
have been adjusted to the valuations of the actors and to the state of technological knowledge.
Then one will work in the most appropriate locations with the most adequate technological
methods.
Today's economy is different.
It operates with other means, which do not correspond to the equilibrium state and cannot
be taken into account in a system of equations describing this state in mathematical symbols.
The knowledge of conditions which will prevail under equilibrium is useless for the director
whose task it is to act today under present conditions.
What he must learn is how to proceed in the most economical way with the means available
Today, which are the inheritance of an age with different valuations, a different technological
knowledge and different information about problems of location.
He must know which step is the next he must make.
In this dilemma, the equations provide no help.
Let us assume that an isolated country whose economic conditions are those of Central Europe
in the Middle of the Nineteenth Century is ruled by a director who is perfectly familiar
with the American technology of our day.
This director knows by and large to what goal he should lead the economy of the country
entrusted to his care.
Yet even a full knowledge of today's American conditions could not be of use to him in regard
to the problem of transforming by successive steps, in the most appropriate and expedient
way, the given economic system into the system aimed at.
Even if, for the sake of argument, we assume that a miraculous inspiration has enabled
the director, without economic calculation, to solve all problems concerning the most
and the advantageous arrangement of all production activities, and that the precise image of
the final goal he must aim at is present to his mind.
There remain essential problems which cannot be dealt with without economic calculation.
For the director's task is not to begin from the very bottom of civilization and to start
economic history from scratch.
The elements with the aid of which he must operate are not only natural resources untouched
by previous utilization.
There are also the capital goods produced in the past and not convertible or not perfectly
convertible for new projects.
It is in precisely these artifacts produced under a constellation in which valuations,
Technological knowledge and many other things were different from what they are today, that
our wealth is embodied.
Their structure, quality, quantity and location is of primary importance in the choice of
all further economic operations.
Some of them may be absolutely useless for any further employment.
They must remain unused capacity.
But the greater part of them must be utilized if we do not want to start anew from the extreme
poverty and destitution of primitive man, and want to survive the period which separates
us from the day on which the reconstruction of the apparatus of production, according
to the new plans, will be accomplished.
The director cannot merely erect a new construction without bothering about his ward's fate in
the waiting period.
We must try to take advantage of every piece of the already available capital goods in
the best possible way.
Not only the technocrats, but socialists of all shades of opinion repeat again and again
that what makes the achievement of their ambitious plans realizable is the enormous wealth hitherto
accumulated.
But in the same breath, they disregard the fact that this wealth consists to a great
extent in capital goods produced in the past, and more or less antiquated from the point
of view of our present valuations and technological knowledge.
As they see it, the only aim of production is to transform the industrial apparatus in
such a way as to make life more abundant for later generations.
In their eyes, contemporaries are simply a lost generation, people whose only purpose
it must be to toil and trouble for the benefit of the unborn.
However, real men are different.
They want not only to create a better world for their grandsons to live in, they themselves
also want to enjoy life.
They want to utilize in the most efficient way those capital goods which are now available.
They aim at a better future, but they want to attain this goal in the most economical
way.
For the realization of this desire, too, they cannot do without economic calculation.
It was a serious mistake to believe that the state of equilibrium could be computed by
by means of mathematical operations on the basis of the knowledge of conditions in a
non-equilibrium state.
It was no less erroneous to believe that such a knowledge of the conditions under a hypothetical
state of equilibrium could be of any use for acting man in his search for the best possible
solution of the problems with which he is faced in his daily choices and activities.
There is, therefore, no need to stress the point that the fabulous number of equations
which one would have to solve each day anew for a practical utilization of the method
would make the whole idea absurd even if it were really a reasonable substitute for the
The Market's Economic Calculation