Mises laid out that economic calculation requires 2 fundamental things
- A medium of exchange (i.e money)[2]
- Markets[2]
According to Mises, although it is possible to perform economic calculation in a proficient manner without these two requirements present, very few circumstances exist. These circumstances include economic calculation within a household.
To him, cost-benefit analysis is not hard to do on a personal scale. It is not hard to pick between a certain amount of wine and a certain amount of oil. However, because marginal utility is not homogeneous and universal, people will have different preferences. For example, a teetotaler may prefer oil to wine, whereas an alcoholic may prefer wine. Thus the central planner or bureaucrat will have trouble distributing resources as prices cannot be set without markets as prices reflect the supply and demand of goods, labour and resources. Buying and selling consumer goods within a socialist state will simply be internal transfers of goods and not "objects of exchange", which sets the price mechanism out of order.[2]
Mises thought that Economic Calculation is only possible (outside of extremely limited circumstances) by information provided by market prices, which reflects the changes of individual subjective values. Bureaucratic, centrally planned methods of resource allocation are inherently irrational and do not allocate resources in the most efficient method, which means that economic calculation in a socialist commonwealth is impossible. Because of the economist's idea that cost-benefit analysis is imperative and crucial, the socialist economy is also impossible.[2]
Many consider Economic Calculation in the Socialist Commonwealth to be Mises's most influential work, while others view Human Action: A Treatise on Economics to be more important of a book, as it fills the magnum opus role.
Joseph T Salerno, an American Austrian school economist considers it to be among his best works. He writes:
"The significance of Mises's 1920 article extends far beyond its devastating demonstration of the impossibility of socialist economy and society. It provides the rationale for the price system, purely free markets, the security of private property against all encroachments, and sound money. Its thesis will continue to be relevant as long as economists and policy-makers want to understand why even minor government economic interventions consistently fail to achieve socially beneficial results. "Economic Calculation in the Socialist Commonwealth" surely ranks among the most important economic articles written this century."[2]
