Socialism and the Economic Calculation Problem

I was prompted by recent discussions about Socialism, to take a closer look at that particular system, and to contrast it with free-market Capitalism. I want to address, specifically, the means by which resources are distributed within the economy of each system. Though Socialism comes in many forms, they all share the underlying concept that the “collective ownership and administration of the means of production and distribution of goods.” It is from this definition that I base my criticism.

In any economy, there is the problem of routing people into jobs where consumer demand needs to be met. This is accomplished, in a Capitalist system through the price mechanism. If a scarce resource is in high demand its scarcity rises as it is consumed at a higher rate than it is produced. A scarce good or service naturally rises in value — and hence price — as it becomes scarcer. Higher prices attract self-interested entrepreneurs and laborers into that particular market where a profit is being sought. As more competition enters a market, the price is driven down until a relatively stable balance is reached between production and consumption. People are compelled to voluntarily seek, and become skilled in jobs they would not otherwise accept, due to the incentive of larger profits, higher likelihood of finding employment, and job security. If a particular market has been saturated, there is a disincentive for people to seek that as their main source of income, for reasons contrary to those stated above.

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