Home Economic news Covid-19 and the Socialist Calculation Problem | Patrick Barron

Covid-19 and the Socialist Calculation Problem | Patrick Barron


One hundred years ago Ludwig von Mises wrote the definitive exposure of the impossibility of socialism: “Economic Calculation in the Socialist Commonwealth.” In a recent Mises Wire essay—”Socialist Robert Heilbroner’s Confession in 1990: ‘Mises Was Right.’“—Gary North sums up the socialist problem succinctly (his emphasis).

But Heilbroner failed to present the central argument that Mises had offered. Mises was not talking about the technical difficulty of setting prices. He was making a far more fundamental point. He argued that no central planning bureau could know the economic value of any scarce resource. Why not? Because there is no price system under socialism that is based on the private ownership of the means of production. There is therefore no way for central planners to know which goods and services are most important for the state to produce. There is no hierarchical scale of value that is based on supply and demand—a world in which property-owning individuals place their monetary bids to buy and sell. The problem of socialism is not the technical problem of allocation facing a planning board. It is also not that planners lack sufficient technical data. Rather, the central problem is this: assessing economic value through prices. The planners do not know what anything is worth.

Notice North’s point. Socialism is impossible, not just technically difficult. Knowing what to produce requires a price system. A price system requires private ownership of the means of production. Why? Because the price system rests on individually held hierarchical scales of values. And the hierarchical scale of values require private ownership of the means of production. In other words, if you don’t own something, you cannot know its worth. This doesn’t mean that everyone has the same hierarchical scale of values. But all these individual scales of value do meet in the marketplace to determine marginal prices at given points of time. Your Beanie Baby collection may be worth a thousand dollars in today’s market and possibly zilch tomorrow. Now, your beanie baby collection may be priceless to you and you don’t really care about its value to others. But if you decided to make a business of selling Beanie Babies or even to simply sell your collection, you would be forced to confront the reality of the marketplace.

Covid-19 and the Socialist Calculation Problem

You may well ask what this has to do with covid-19. covid-19 isn’t a marketable good. It isn’t owned by anyone. No one wants it. Quite the opposite in fact. True. Nevertheless, government’s response to covid-19 assumes that it knows everyone’s personal risk hierarchy and can tailor an appropriate public response. This is as impossible as knowing values in a socialist commonwealth. In the place of a hierarchy of wants, we have a hierarchy of risk. And just as everyone’s hierarchy of wants is different, everyone’s hierarchy of risk is different. No one can deny this. We see it played out everywhere. Young people in college assess their personal health risk from covid-19 as very low. The aged and those suffering from other illnesses assess their personal health risk as very high. Furthermore, one’s response is determined by what one gives up. The elderly living on pensions may be giving up very little in a lockdown or quarantine other than their social lives. Certainly they are not giving up their life-sustaining income by staying in semi-isolation. But those still of working age have a very different tradeoff. Business owners who are forced to shut down may lose their entire wealth. Salaried and hourly workers may see a slower drain on their wealth, but the longer the lockdowns continue, the more accumulated wealth they will see drain away.

I have used stereotypical broad categories here for illustrative comparisons only. Of course, those of the same age, health profile, wealth accumulation, etc. may have entirely different personal risk assessments. The old adage applies that no two people are alike. These facts of human existence make universally acceptable public policy responses to covid-19 not just difficult but impossible. The only acceptable public response is one of perfect liberty; i.e., each individual decides his own response to covid-19 as long as he does no harm to others.

What about Externalities?

This brings up a common retort that perfect liberty does harm others. A typical government justification for coerced lockdowns and quarantines was that there was a need to conserve hospital beds for the expected onslaught of covid-19 patients. Sounds reasonable at first, but not upon further examination. This so-called line of reasoning rests upon faulty externality theory; i.e., that everything you do affects others in some degree. By this logic government has a right to regulate everything you do. Forgetting for a moment that government’s access to information is no greater than that of thousands of others, there is the ethical problem of government’s right to determine to whom a private entity may offer services. For example, a private hospital may refuse patients who wish to have elective surgery in order to preserve beds for what the hospital considers more important patients, but government may not insert its power of coercion into this decision. Like the socialist allocation problem, government has no “skin in the game” and, therefore, it has nothing upon which to make a universally applicable policy except the temporary prejudice of those currently elected to office and/or those currently working for government. Perhaps an even more damning criticism of the externality rationale is that there is no attempt and probably no definitive calculation of the many adverse consequences to lockdowns and quarantines, from delayed medical treatment that leads to worsening health (both physical and mental) or even death to permanent loss of one’s ability to feed, house, and clothe one’s family adequately.

The Double Standards of Politicians

So, we are left with these conclusions: since all risk is personal, no one knows the risk tolerance of others. Therefore, one’s response to covid-19 is a personal decision based upon one’s personal risk assessment. In other words, perfect liberty must be respected, because it is the only rational option. Impractical? This is the very policy actually followed by many of the authors of the current restrictions. Governor Newsom of California attended a lavish dinner party after issuing new and more onerous restrictions on public and private gatherings. Illinois Governor Pritzker has been unapologetic about visiting his many out-of-state residences after telling his constituents not to do the same. Other politicians have been similarly embarrassed. Are they taking unnecessary risks, both to themselves and others? There is no definitive answer. By the very fact that they violated their own restrictions, we can conclude that they valued their freedom to do so above their personally perceived risk. Why should not that same right be available to all of us?