Economic Calculation Problem in Perspective

I'm ready to admit that I was wrong about the economic calculation problem (see also this post). My claim was that the economic calculation problem is primarily suited to explaining the success of price-based market systems, and that is it therefore largely moot today.

I still think the economic calculation problem is a bit... I don't know what the word is, but it's the kind of observation that changes the way you think. It doesn't actually give definitive answers to interesting questions, but it's still useful as an organizing principle.

However, I no longer think that its time has passed. Yesterday I had an exam question about how to distribute water within a large city. I used the economic calculation problem as a starting point in my discussion. My basic point was that in terms of designing a system of pipes, the informational burdens are not that high. We know that everyone wants clean water, we know roughly how much each house will use (close enough to install correctly sized pipes), and we can figure out an efficient design for the grid. It's true that we need prices so that people use the right amount of water (assuming water is scarce), and use it in the right ways, but the government is probably competent to plan the water grid itself.

In contrast, almost any other good has a much higher informational burden associated with its distribution. Water isn't really homogeneous, but tap water has to be because we're not going to build a separate grid for each grade of water. Even something like peanut butter would be very difficult for the government to get right: there are different brands, different types, and some people don't want it at all.

So the economic calculation problem does a decent job of guiding our intuitions about how water is different from peanut butter (another key difference is the natural monopoly aspect of water provision). Ironically, then, I think one of its biggest uses today is to point out areas in which the government might do as well as or better than the market. Still, it's a more valuable tool than I initially thought.