In his classic 1920 essay Economic Calculation in the Socialist Commonwealth, Ludwig von Mises argues that socialist systems of central planning wi

Economic Calculation in the Nonprofit Commonwealth

submited by

Style Pass

2022-06-22 02:30:05

In his classic 1920 essay Economic Calculation in the Socialist Commonwealth, Ludwig von Mises argues that socialist systems of central planning will not be able to rationally allocate scarce resources, especially various goods used throughout the production process. Without property rights, prices, and profit and loss feedback, central planners would be unable to engage in rational economic calculation.

In a market economy, the Three P’s of property, prices, and profit and loss act as guides that help people discover the most efficient ways to use scarce resources. Property rights create an institutional framework that enables processes of mutually beneficial exchange, whereby resources move from lower valued uses to higher valued uses. Prices are exchange ratios that emerge from these exchanges, and that provide market participants with valuable signals regarding the relative scarcity of different goods. Profit and loss feedback uses the prices of both inputs and outputs to tell producers whether they have created or destroyed value. If their decisions have destroyed value, they are making losses, and have incentives to revise their plans.

This argument has implications beyond just the question of whether to rely on market processes or socialist central planning. It also has implications for decisions regarding philanthropy. While non-profit organizations generally work within arenas that feature stable property rights and prices for the inputs they use, the goods and services that the non-profit organizations offer are typically not sold for a price. Moreover, the non-profit organization does not rely on profit and loss feedback.