The Price Mechanism Solves the Allocation Problem WITHOUT Information about Individuals’ Preferences

The start of the debate about the feasibility of socialism was Mises’s early work (1920, 1922). Until then, a socialist commonwealth was described as an idealistic society where the question of how to allocate resources was neither asked nor answered. Socialism, at the time, was defined as a regime where there is no private property of the means of production (even if there was private property of final consumption goods). In a small society, where there is intimate knowledge among individuals (such as a family), there is no need to allocate resources with a price mechanism. Parents usually do not use a price mechanism to allocate the resources of the household. However, the situation of a large society is different, where there are numerous anonymous interactions, some of which may be repeated and many others of which may not. This anonymity means that individuals do not have knowledge of the preference sets of other individuals and also face limited opportunities to learn such preferences. The price mechanism solves the allocation problem without information about individuals’ preferences.

—Peter Lewin and Nicolás Cachanosky, Capital and Finance: Theory and History, Routledge International Studies in Money and Banking (London: Routledge Taylor and Francis, 2020), 112-113.