<p>How does the planner know that his central plan is the ideal one? The conventional story is that he's got an objective function that maximizes the sum of all the society's members' utility. He maximizes that sum by :</p>

<ol>
<li>Setting the members' marginal utilities equal. </li>
<li>Allocating inputs efficiently so the output lies on the production possibility frontier (Production Efficiency)</li>
<li>Choosing the mix out outputs to put to their most valuable purpose (Product-Mix Efficiency)</li>
<li>Allocating outputs efficiently such that no resources can be redeployed to make someone better off without making anyone worse off. </li>
</ol>

<p>How does he do this? He does this with prices. These may be shadow prices, relative prices without currency (barter), or they might be conventional prices quoted in the numeraire good. Explaining this is probably beyond the scope of a stackexchange article. <a href="http://ingrimayne.com/econ/Efficiency/Overview11mi.html" rel="nofollow">This review may be of some use</a> but the content in a microeconomics textbook would be similar. </p>

<p>So the price of goods are not only not "definitely meaningless" but essential to the planner's activities. However, you do not need currency in an ideal centrally-planned economy. It is possible to write down models with prices but without currency (credit models) or even money (barter models) which nevertheless have central planners that can easily maximize welfare.  </p>

CC BY-SA 3.0
2015-12-09T17:48:44.963Z
2015-12-09T17:48:44.963Z
BKay
<p>This reminds me of a debate about economic calculation: <a href="https://en.wikipedia.org/wiki/Socialist_calculation_debate" rel="nofollow">the Socialist calculation debate</a> on how a socialist economy would perform economic calculation given the <strong>absence of the law of value, money, prices</strong>, and private ownership of the means of production.</p>

<p>It was essentially a debate in the 1920-30s between Ludwig von Mises and Oskar Lange:</p>

<blockquote>
  <p>"Lange took up the challenge of Mises' claim of the impossibility of
  constructing a socialist economy. He readily acceded to the need for
  efficiency calculations to be made in value terms rather than using
  purely natural or engineering criteria, but claimed that these values
  could emerge along lines consistent with neoclassical value theory,
  without the need for a market in capital goods and without private
  ownership over the means of production. Lange drew heavily upon the
  dominant neoclassical tradition to defend socialism" (Auerbach and Sotiropoulos, 2012, pp. 1-2)</p>
</blockquote>

<ul>
<li>Auerbach, Paul and Sotiropoulos, Dimitris (2012). Revisiting the Socialist Calculation Debate: The role of markets and finance in Hayek's response to Lange's challenge, Kingston University London, Economics Discussion Paper 2012-6.</li>
</ul>

<p><a href="https://en.wikipedia.org/wiki/Socialist_calculation_debate#Lange_model" rel="nofollow">Lange model</a></p>

<blockquote>
  <p>Oskar Lange responded to Mises' assertion that socialism and social
  ownership of the means of production implied that rational calculation
  was impossible by outlining a model of socialism based on neoclassical
  economics. Lange conceded that calculations would have to be done in
  value terms rather than using purely natural or engineering criteria,
  but asserted that these values could be attained without capital
  markets and private ownership of the means of production. In Lange's
  view, this model qualified as socialist because the means of
  production would be publicly owned with returns to the public
  enterprises accruing to society as a whole in a social dividend, while
  worker's self-management could be introduced in the public
  enterprises.</p>
</blockquote>

<p>The <a href="https://en.wikipedia.org/wiki/Lange_model" rel="nofollow">Lange economic model</a> assumes a <strong>Trial-and-error price adjustments</strong></p>

<blockquote>
  <p>Because prices are set by the central planning board "artificially"
  aiming to achieve planned growth objectives, it is unlikely that
  supply and demand will be in equilibrium at first. To produce the
  correct amount of goods and services, the Lange model suggests a
  trial-and-error method. If there is a surplus of a particular good,
  the central planning board lowers the price of that good. Conversely,
  if there is a shortage of a good, the board raises the price. This
  process of price adjustments takes place until equilibrium between
  supply and demand is achieved.</p>
</blockquote>

CC BY-SA 3.0
2015-12-12T07:28:48.413Z
2015-12-12T07:28:48.413Z
emeryville
<p>BKay's answer is very thorough, but I want to address one particular assumption of having an "ideal" centrally-planned economy that may impact the need for money. While externalities can be internalized if the social planner is equally omnipotent on that front, and we assume no incomplete markets or market power, there is still the threat of uncertainty.</p>

<p>A social planner can set relative prices so that they get a Pareto result on average, but cannot guarantee ex-post efficiency. The easiest way I would imagine the social planner would deal with this is creating an insurance market or by guaranteeing some set of balanced-budget wealth taxes to end up at the average result regardless of what state the economy is in.</p>

<p>Suppose that there are transaction costs to the tax/insurance though. Then a consumer might prefer to have (costless) liquidity and clear the market themselves, and iy may be optimal to have a currency in that situation.</p>

CC BY-SA 3.0
2015-12-12T06:49:09.887Z
2015-12-12T06:49:09.887Z
Kitsune Cavalry
<p>Under this condition, the price of goods are definitely meaningless.</p>

CC BY-SA 3.0
2015-12-09T11:23:40.833Z
The price ratios however are not meaningless. It conveys important information about the technological capabilities of the economy. https://www.youtube.com/watch?v=52nZc6Qt330
Giskard
<currency>
Is it necessary to have currency in an ideal centrally-planned economy?
Novite
# Is it necessary to have currency in an ideal centrally-planned economy?

(Asked by: username_0 on 2015-12-09)

Under this condition, the price of goods are definitely meaningless.

**Tags:** currency

> **Comments:**
> **username_1**: The price ratios however are not meaningless. It conveys important information about the technological capabilities of the economy. https://www.youtube.com/watch?v=52nZc6Qt330  

---

## 3 answers

### Answer by username_2 on 2015-12-09. Score: 3

How does the planner know that his central plan is the ideal one? The conventional story is that he's got an objective function that maximizes the sum of all the society's members' utility. He maximizes that sum by :

1. Setting the members' marginal utilities equal.
2. Allocating inputs efficiently so the output lies on the production possibility frontier (Production Efficiency)
3. Choosing the mix out outputs to put to their most valuable purpose (Product-Mix Efficiency)
4. Allocating outputs efficiently such that no resources can be redeployed to make someone better off without making anyone worse off.

How does he do this? He does this with prices. These may be shadow prices, relative prices without currency (barter), or they might be conventional prices quoted in the numeraire good. Explaining this is probably beyond the scope of a stackexchange article. [This review may be of some use](http://ingrimayne.com/econ/Efficiency/Overview11mi.html) but the content in a microeconomics textbook would be similar.

So the price of goods are not only not "definitely meaningless" but essential to the planner's activities. However, you do not need currency in an ideal centrally-planned economy. It is possible to write down models with prices but without currency (credit models) or even money (barter models) which nevertheless have central planners that can easily maximize welfare.


---

### Answer by username_3 on 2015-12-12. Score: 1

This reminds me of a debate about economic calculation: [the Socialist calculation debate](https://en.wikipedia.org/wiki/Socialist_calculation_debate) on how a socialist economy would perform economic calculation given the **absence of the law of value, money, prices**, and private ownership of the means of production.

It was essentially a debate in the 1920-30s between Ludwig von Mises and Oskar Lange:

> "Lange took up the challenge of Mises' claim of the impossibility of
> constructing a socialist economy. He readily acceded to the need for
> efficiency calculations to be made in value terms rather than using
> purely natural or engineering criteria, but claimed that these values
> could emerge along lines consistent with neoclassical value theory,
> without the need for a market in capital goods and without private
> ownership over the means of production. Lange drew heavily upon the
> dominant neoclassical tradition to defend socialism" (Auerbach and Sotiropoulos, 2012, pp. 1-2)

* Auerbach, Paul and Sotiropoulos, Dimitris (2012). Revisiting the Socialist Calculation Debate: The role of markets and finance in Hayek's response to Lange's challenge, Kingston University London, Economics Discussion Paper 2012-6.

[Lange model](https://en.wikipedia.org/wiki/Socialist_calculation_debate#Lange_model)

> Oskar Lange responded to Mises' assertion that socialism and social
> ownership of the means of production implied that rational calculation
> was impossible by outlining a model of socialism based on neoclassical
> economics. Lange conceded that calculations would have to be done in
> value terms rather than using purely natural or engineering criteria,
> but asserted that these values could be attained without capital
> markets and private ownership of the means of production. In Lange's
> view, this model qualified as socialist because the means of
> production would be publicly owned with returns to the public
> enterprises accruing to society as a whole in a social dividend, while
> worker's self-management could be introduced in the public
> enterprises.

The [Lange economic model](https://en.wikipedia.org/wiki/Lange_model) assumes a **Trial-and-error price adjustments**

> Because prices are set by the central planning board "artificially"
> aiming to achieve planned growth objectives, it is unlikely that
> supply and demand will be in equilibrium at first. To produce the
> correct amount of goods and services, the Lange model suggests a
> trial-and-error method. If there is a surplus of a particular good,
> the central planning board lowers the price of that good. Conversely,
> if there is a shortage of a good, the board raises the price. This
> process of price adjustments takes place until equilibrium between
> supply and demand is achieved.


---

### Answer by username_4 on 2015-12-12. Score: 0

username_2's answer is very thorough, but I want to address one particular assumption of having an "ideal" centrally-planned economy that may impact the need for money. While externalities can be internalized if the social planner is equally omnipotent on that front, and we assume no incomplete markets or market power, there is still the threat of uncertainty.

A social planner can set relative prices so that they get a Pareto result on average, but cannot guarantee ex-post efficiency. The easiest way I would imagine the social planner would deal with this is creating an insurance market or by guaranteeing some set of balanced-budget wealth taxes to end up at the average result regardless of what state the economy is in.

Suppose that there are transaction costs to the tax/insurance though. Then a consumer might prefer to have (costless) liquidity and clear the market themselves, and iy may be optimal to have a currency in that situation.


---

