Rationing and Recalculation
By Arnold Kling
I offer a new insight into the Recalculation Story. It is inspired by this quote from p.66 of Leuchtenberg’s The FDR Years, the essay on the way that many policy makers and pundits were calling on the government to mobilize as effectively to fight hard times as it had to win the first World War.
The task of determining priorities in a war economy, [economist John M.] Clark observed, could not be equated with that of reinvigorating sick industries. He concluded, “All the machinery for allocating limited supplies of essential resources among conflicting uses, which played so large a part in the wartime controls, had no application to the depression…the problem is essentially opposite to that of war.”
The price system and the central planner play similar roles. They set priorities and ration scarce resources. In war, the task is to shift a lot of resources toward manning and provisioning an army. The price system can do that (as the volunteer army shows), but central planning also can do that.
The Recalculation problem is different. The challenge is to find new patterns of comparative advantage in a complex economy. Both the price system and central planning have a more difficult time doing this than they have with setting priorities and allocating resources in a fully-employed economy. The rationing problem works with known arrangements of production. The recalculation problem involves discovering what are now unknown arrangements of production.
Please do not say, “Excess demand for money, you fool!” I understand what you are saying, but I do not buy it, and pounding the table and yelling it louder is not going to convince me. Give me a while. Maybe I will change my mind. But I think that instead I can come up with a simple, reasonable illustration of the recalculation story.