The Socialist Calculation Problem

There are those who think that it would be much much better if we were to do away with these chaotic and wasteful market things and simply allocate resources to where they are needed, those wise people at the centre making the decisions about what should be allocated where for us. To a greater or lesser extent this is true of anyone suggesting socialist measures: from those who want the full out planned economy to those who merely bleat that some things are too important to be left to the market.

A little lesson as to why they\’re wrong:

GP surgeries across the country are experiencing problems after deliveries of vaccine changed from weekly to fortnightly.

Deliveries were supposed to stay at the same level but many practices have found they have received just a fraction of their normal vaccine allocation.

It means that despite there being no shortage nationally many surgeries do not have enough jabs as parents bring their babies in for routine immunisations.

There\’s been no change in the number of vaccines ordered, no change in hte number delivered centrally, so what\’s the problem?

The Department of Health calculated how much vaccine each surgery would need and distribution company Movianto, which makes the deliveries in temperature controlled vehicles, then wrote to surgeries informing them of their allocations, which were supposed to be based on the ordering history of each surgery.

Errors were made in the calculations but discovered before the new deliveries started and the Department of Health assured practices that they would receive the correct number of vaccines.

However, yet more errors were made in the second set of calculations and so some surgeries were given too few vaccines.

Aaaa….those socialist calculators screwed up, not once but twice. Now note that they were not trying to predict demand, they weren\’t trying to work out the price they would have to pay to get the vaccines manufactured, nor the price they would need to pay doctors to do the vaccinations. No, they were simply trying to change the distribution system from a weekly one to a fortnightly one. And they cocked up twice.

So, think how much more disastrous it would be if the same planners were trying to plan the incentives in the economy, rather than this much more simple distribution of something already to hand. Think if said planners were trying to plan, say, 150,000 relative prices…..you\’ll now understand why the Soviet System left people so staggeringly poor, as such errors cascaded through the system.

You\’ll also get an idea of why the NHS and the education systems are as they are….worse than they need to be given the resources spent on them. For they are indeed planned in such a manner.

Large scale detailed planning (yes, in either public or private sectors) doesn\’t work: it\’s called the socialist calculation problem and no, it hasn\’t gone away with the advent of computers and spreadsheets.

14 thoughts on “The Socialist Calculation Problem”

  1. A old friend of mine says the “socialist calculation problem” does not exist now because we have computers to do the calculations. Obviously the DoH is waiting for delivery of a Lyons LEO.

  2. Kit, tell your friend to read Mises’ Socialism, in which the great man explains why the socialist calculation problem cannot by its very nature be resolved.

    Or get him to read I, Pencil or watch Friedman’s account of same on YouTube for a more accessible, easily comprehensible treatment of the idea.

    Knowledge is dispersed, and no amount of hopeful socialist planning can mimic the magic of the price system in communicating such vast amounts of knowledge.

  3. The beer delivery for my restaurant was short this week, and some cheeses were out of stock.

    After a brisk chat with the supplier yesterday morning, at ten pm last night the shortfall arrived, before we had run out, delivered by the sales rep in his own car.

    Some things are too important to be left to central planning.

  4. KMcC:

    Your explanation is scandalously inadequate.

    Not only does the price system of the free market enable the reflection of all that widely-dispersed knowledge of both quantitative and qualitative aspects of the physical complexities involved in the provision of all goods and services, it also:

    1. conveys to each participant the most reliable
    “reading” possible of the actual state of
    everyone else’s opinion and valuation of
    all things vendible;

    2. conveys that same sort of psychic/material
    “mind-reading” for the period where it really
    counts: tomorrow and years down the road.

    Enough of this demeaning of Mises, enough!

  5. Peter Risdon:

    The problem you encountered may certainly occur from time to time in either a free or centrally-planned economy. Nothing is perfect.

    But the “fix” you describe was, especially in the free market, a real stroke of luck: nine times out of ten, the rep wouldn’t do such a thing on his own time (might not even answer the telephone
    on his off-hours).

    In this regard, the socialist commonwealth is vastly superior. It would have contingency plans covering all hours of the day and assigned personnel for each, drawing salaries and obligated to “snap to” as occasion demanded.
    Trucks would be a problem, though–they’re scheduled in for year after next, I believe.

  6. Jeeze, tricky calculation, eh? Weekly to fortnightly: shall I multiply by Pi? Or reciprocal 2Pi? Quick, call in a Consultant.

  7. I reckon the accuracy of calculations, in any organisation, tends to improve when the pen-pushers are faced with potential layoffs if they keep getting their sums wrong, and the managers are faced with the same if they don’t improve the performance of their teams.

  8. Monty:

    I’ve considered–at what I believe to be reasonable length–the outside chance, pegged at “slim to none”–that you are (in the tradition of Brit extreme understatement) speaking in satirical mode.

    But I suspect you’re dead serious, more’s the pity. It’s precisely this most widespread misunderstanding of the problems confronting public-sector managers’ attempts to rationalize resource allocation and production.

    If better might be brought about by more severe penalties for underperformance, the former USSR would still be a going concern.

    The essential problem was identified by the Austrian, Bohm, a hundred years ago (Karl Marx and the Close of His System) and then fully explicated by his successor, Von Mises, in the early 1920s (including that the USSR would, one day, collapse “like a house of cards”). The name given by Mises to the problem sums succinctly what would need an entire book to explain: the impossibility of economic calculation in a socialist commonwealth.

    The practical manifestation is that the ablest, wisest, best-intentioned men cannot (with state or publicly-owned entities) accomplish what every private businessman (even a sidewalk pretzel-vendor ) does routinely. Not only must he who directs the operation be an owner of its assets but, equally importantly, there must be a more or less “ready market” for those very assets.

    Nor can the problem be solved by putting “hard-headed businessmen” in charge of public affairs, whether by appointment to ministries or election to public office; all such makeshifts accomplish is to substitute capable for incompetent managers. But “management” is not what is lacking–it’s the resource-allocation at the heart of entrepreneurial action, the utterly simple dicta “make profit/avoid loss,” for which there is no substitute.

    Improvement can only be had through privatization–ideally of every function but those which cannot–for non-economic reasons–be trusted in private hands (essentially the police power).

  9. “Not only must he who directs the operation be an owner of its assets”

    ….a business model that accounts for what, absolute maximum of 20% of GDP in industrial capitalist economies?

  10. john b:

    “20%…in capitalist economies?”

    Actually, I’d guess substantially higher in the US but haven’t any real idea nor faith in whatever data might be “out there,” simply because its the very sort of thing frequently jimmied to support whatever someone’s trying to push or prove.

    Even in businesses not managed in any way by the government, serious inroads on independence and entrepreneurial management are effected through regulation of 1. employment and hiring practices; 2. regulatory control of certain aspects of competition; 3. environmental regulations; aspects of the tax code modifying tax treatment of firms differentially as they provide (or do not) certain health-care plans or benefits; 4. ditto with respect to employee retirement plans; and, 5. a bunch more I’m to lazy too think of.

    Think of it this way. Compared to the quadaplegic (and partially-blind) USSR, we’re OK except for a missing left arm, a limp, and hardness of hearing. If thing don’t get too much worse, maybe make it another couple 100 or so. It’s a big “if,” though.

  11. Movianto –

    As part of the Celesio AG, a €22 billion revenue healthcare distribution group and market leader in Europe with wholesale branches and pharmacy chains in 16 European countries, Movianto offers an unparalleled platform right across the continent.

    That is a private company, no? So as a private company would they not be able to make the shortfall up by delivering what was needed?

    And, more so, why wasn’t the doctors practices asked how much they needed over the next two weeks?

    Would that be a better system – actually asking the customer what they wanted?

  12. “Would that be a better system – actually asking the customer what they wanted?”

    No. The best system is one in which the customer can order what they like from whoever they like, and anyone can offer to supply them.

  13. When internal incentive systems are badly designed, big companies start to look like state bodies. I have lost count of the number of senior managers I have worked with who think everything can be planned and forecasted.

    I should add that I work in a developing market with a hell of a lot more uncertainty than a country like the UK.

    Many people are uncomfortable with uncertainty and try to delude themselves that it can be elliminated through excessive planning.

  14. Pingback: Socialism Tackles Complexity - Charles Crawford

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