Editing Economic calculation problem (section)

=== Coherent planning ===
The fourth condition for successful economic calculation is plan coordination among those who plan production. The problem of planning production is the knowledge problem explained by Hayek (1937, 1945), but first mentioned and illustrated by his mentor Mises in ''Socialism'' (1922), not to be mistaken with ''[[Socialism: An Economic and Sociological Analysis]]'' (1951). The planning could either be done in a decentralised fashion, requiring some mechanism to make the individual plans coherent, or centrally, requiring a lot of information.

Within capitalism, the overall plan for production is composed of individual plans among capitalists in large and small enterprises. Since capitalists purchase labour and capital out of the same common pool of available yet scarce labor and capital, it is essential that their plans fit together in at least a semi-coherent fashion. Hayek (1937) defined an efficient planning process as one where all decision makers form plans that contain relevant data from the plans from others. Entrepreneurs acquire data on the plans from others through the price system. The price system is an indispensable communications network for plan coordination among entrepreneurs. Increases and decreases in prices inform entrepreneurs about the general economic situation, to which they must adjust their own plans.

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 [[local knowledge problem|the local knowledge problem.]] Opponents argued that in principle an economy can be seen as a set of equations. Thus, using information about available resources and the preferences of people, it should be possible to calculate an optimal solution for resource allocation. [[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|date=October 2010}} This is partly because individuals possess useful knowledge but do not realize its importance, may have no incentive to transmit the information, or may have incentive to transmit false information about their preferences.<ref>{{cite book|last=Hayek|first=Friedrich|author-link=Friedrich Hayek|title=[[The Road to Serfdom]]|publisher=[[University of Chicago Press]]|edition=50th anniversary|year=1994|isbn=0-226-32061-8}}</ref> He contended that the only rational solution is to utilize all the [[dispersed knowledge]] in the market place through the use of [[price signal]]s.<ref>{{cite book|last=Steele|first=David Ramsay|author-link=David Ramsay Steele|title=From Marx to Mises: Post-capitalist Society and the Challenge of Economic Calculation|year=1992|publisher=Open Court|location=La Salle, Illinois|isbn=0-8126-9016-8}}</ref> The early debates were made before the much greater calculating powers of modern [[computers]] became available but also before research on [[chaos theory]]. In the 1980s, [[Alexander Nove]] argued that the calculations would take millions of years even with the best computers.<ref>{{cite book|last=Nove|first= Alec|title=The economics of feasible socialism|date=1983|publisher=G. Allen & Unwin|isbn=0-04-335048-8|location=London|oclc=8827566}}</ref> It may be impossible to make long-term predictions for a highly complex system such as an economy.<ref>Bergstra, Jan. [http://www.phil.uu.nl/~janb/phloofin/eclog.html "Economic Logic: A Survey and Variations on the Theme"]. {{webarchive|url=https://web.archive.org/web/20070105024440/http://www.phil.uu.nl/~janb/phloofin/eclog.html|date=5 January 2007}} Utrecht University, Department of Philosophy, section Theoretical Philosophy, group of Applied Logic. Retrieved 4 January 2015.</ref>

Hayek (1935, 1937, 1940, 1945) stressed the knowledge problem of central planning, partly because decentralized socialism seemed indefensible. Part of the reason that Hayek stressed the knowledge problem was also because he was mainly concerned with debating the proposal for [[market socialism]] and the [[Lange model]] by [[Oskar R. Lange]] (1938) and Hayek's student [[Abba Lerner]] (1934, 1937, 1938) which was developed in response to the calculation argument. Lange and Lerner conceded that prices were necessary in socialism. Lange and Lerner thought that socialist officials could simulate some markets (mainly spot markets) and the simulation of spot markets was enough to make socialism reasonably efficient. Lange argued that prices can be seen merely as an accounting practice. In principle, claim market socialists, socialist managers of state enterprises could use a price system, as an accounting system, in order to minimize costs and convey information to other managers.{{citation needed|date=October 2010}} However, while this can deal with existing stocks of goods, providing a basis for values can be ascertained, it does not deal with the investment in new capital stocks.{{citation needed|date=April 2008}} Hayek responded by arguing that the simulation of markets in socialism would fail due to a lack of genuine competition and entrepreneurship. Central planners would still have to plan production without the aid of economically meaningful prices. Lange and Lerner also admitted that socialism would lack any simulation of financial markets, and that this would cause problems in planning capital investment.

However, Hayek's argumentation is not only regarding computational complexity for the central planners. He further argues that much of the information individuals have cannot be collected or used by others. First, individuals may have no or little [[incentive]] to share their information with central or even local planners. Second, the individual may not be aware that he has valuable information; and when he becomes aware, it is only useful for a limited time, too short for it to be communicated to the central or local planners. Third, the information is useless to other individuals if it is not in a form that allows for meaningful comparisons of value (i.e. money prices as a common basis for comparison). Therefore, Hayek argues, individuals must acquire data through prices in real markets.<ref>{{cite web|first=Carlo|last=Zappia|title=The economics of information, market socialism and Hayek's legacy|url=http://www.econ-pol.unisi.it/pubdocenti/HEI99.pdf|access-date=3 April 2007|url-status=dead|archive-url=https://web.archive.org/web/20070614110711/http://www.econ-pol.unisi.it/pubdocenti/HEI99.pdf|archive-date=14 June 2007}}</ref>