I apologise if I have placed this in the wrong part of the forum.
I am just seeking someone to present the Calculation argument to me as succinctly and as comprehensively as possible in layman's terms so as to aid its explanation. The examples and elucidation in Mises' essay to not lend themselves to casual conversation you see. If you feel you can outline and break it down in this fashion please do so.
krazy kaju:Anarcho-syndicalists who argue against the existence of money fall into the same problem of economic calculation,
The only people more obsessed with "money" than rabid capitalist carpet-baggers are anarcho-syndicalists/anarcho-communists.
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David Z
"The issue is always the same, the government or the market. There is no third solution."
IrishLiberal:present the Calculation argument to me as succinctly and as comprehensively as possible
I suggest that this video makes a nice summery.
Individualism Rocks
krazy kaju: Anarcho-syndicalists who argue against the existence of money fall into the same problem of economic calculation, since without money, there is no way to determine what is a more efficient method of producing goods and services. As for those anarcho-syndicalists who do not have a problem with the existence with money, they cannot be defeated with the economic calculation argument. However, their proposed system of economic organization eliminates the use of entrepreneurs, which leads to a very stagnant and anti-innovation economy.
Anarcho-syndicalists who argue against the existence of money fall into the same problem of economic calculation, since without money, there is no way to determine what is a more efficient method of producing goods and services. As for those anarcho-syndicalists who do not have a problem with the existence with money, they cannot be defeated with the economic calculation argument. However, their proposed system of economic organization eliminates the use of entrepreneurs, which leads to a very stagnant and anti-innovation economy.
The calculation problem exists in both cases. Money only works if there are market prices.
Since you have read Economic Calculation in the Socialist Commonwealth. I would suggest the follow up Mises states in Human Action chapter 26 The Impossibility of Economic Calculation Under Socialism.
Has anyone here read Economic Calculation in the Socialist Society by Trygve J.B. Hoff? If so, do you think his work adds to the body of this debate?
@Krazy Kaju
The example you listed above is actually readily solvable through central planning. Basically production possibility curves are drawn up and then the efficient point is found by solving the relevant simultaneous equations. Furthermore market socialism DOES concede the use of money to determine prices for goods so the ratio to which one consumer good is preferred to another is known. For precisely these reasons it was at first considered that Lange won the calculation debate. If the market really is just one big equation solving device, then it would be quite easy for a super computer to do exactly that.
It was actually the work of Kirzner and his insights into the market process as described by Hayek and Mises that put a temporary end to the debate. He declared that even if the socialist economy can allocate capital goods along these lines, it can't facilitate the discovery process of entrepreneurship.
However, as this article (and do read that article) points out even the market process can be emulated by a central list of non-consumer prices published every second in order to bring markets toward equilibrium by reducing surplus and shortages. This of course allows market socialism to use a single unit of account in a very similar manner to how a capitalist market does.
Now there are two ways of viewing that a) you can see it as "groping in the dark" but then you'd have to concede that entrepreneurs do the same or b) you can see that while the socialist economy can lets say produce a certain set of previously produced goods efficiently it can't decide where a new factory should be opened or what kind of new product should be made or how many resources should go into making it in the same way a market does.
I think unless the socialism debate is to hit a brick wall, it needs to delve deeper into this "decision" aspect. Simply claiming that the socialist planner cannot add up apples and oranges because he cannot use a single unit of account is not true, it is also not true that he can't account for trade-offs. He very much so and very easily can.
Where the debate can be won on the side of capitalism is in looking at decisions and recognizing that part of the information contained within a price is unrestricted decision. The capitalist entrepreneur bids up prices because of his personal anticipation of the future, he decides how these resources are to be employed with no restrictions. This is impossible if he is just an overseer of a given production process.
In the capitalist economy the price reflects the opportunity cost of the last entrepreneur's anticipation of the future, and his appraisal of the good in question. In market socialism the price embodies the opportunity cost of the forgone yield of another already existing production process.
It is this key difference, that might be able to finally win the calculation debate in my mind. However I am not sure how.
The socialist could say that in socialism there might be a group devoted to market research which acts like the entrepreneur in coming up with a new product and then the socialist planners could divert resources in order to produce this new good. Where how and why can be calculated the same way as in a market by comparing expected costs in money price to expected revenues in money terms.
I personally do not yet know how to respond to this. To me the socialist debate is far from over. It is obvious that practically it is almost nigh impossible for socialism to ever work. However I can see how a socialist system can solve some of the problems attributed to it. Maybe I am not yet proficient enough in my readings of Hayek or Mises. I would appreciate any thoughts on some of the issues I have raised
Jon Irenicus:Joan Robinson is proposing market socialism. It still does not allow for the pricing of capital/land goods to take place to divert them to their most efficient uses and see which inputs should be used in fabricating desired outputs. They seem to think it's as simple as seeing as which goods are desired then using capital goods to make them - yet there's millions of capital goods out there which can be put to a multiplicity of uses; how are they going to rationally allocate them?
Basically in market socialism the managers get their revenues from customers and they are given some kind of "incentive" (While incentives are extremely important, it is even more important that they be conceded - the goal is to prove that even with perfect humans we cannot have socialism be plausible) to maximize this revenue. Because of this they strive to allocate land, labor and capital to whatever combination yields the highest revenue (indeed, this is incredibly similar to capitalism) within the bounds of the ownership rights given to them by their superiors. Thus after they get revenue from their customers they then spend it on goods given a centrally published list of prices. The list of prices then changes as shortages are reported or surpluses arise.
This is, indeed, very similar to how a market works.
Avram,
I suggest you read this:
http://mises.org/journals/qjae/pdf/qjae10_4_1.pdf
He sets up his theory on purely essentialist grounds from Rothabardian monopoly theory. All systems are planned the question is of what type is the planning: competitive or non-competitive.
This paper is truly excellent.
The atoms tell the atoms so, for I never was or will but atoms forevermore be.
Yours sincerely,
Physiocrat
Physiocrat, thanks for the recommendation buuuuuut... If you click on the link I provided in one of my posts above you'll see I based my ideas on the exact same paper! ;)
It is good and it identified that crucial difference which I tried to lay out in simpler terms, however it does not provide for a case of why this is better than the socialist alternative.
Moreover he is inconsistent with his approach to the consumer market, first saying it is done by allowing consumers to spend on whatever they will and later as with his theatre example it becomes a product of the central list, which is, in fact, not the case under the theory of market socialism as expounded by its supporters
As an aside there might also be something important in the thought of profits as a signaling mechanism on what should be produced. I have not yet thought about it in great detail but I have a sneaking suspicion that market socialism might be more inefficient in this regard, although the basic mechanics might appear superficially similar.
Avram: Physiocrat, thanks for the recommendation buuuuuut... If you click on the link I provided in one of my posts above you'll see I based my ideas on the exact same paper! ;)
Sorry about that. As I've been in a lengthy calculation debate recently I couldn't be bothered to read everyone's contributions but thought I'd post a link to the best article I've read on it.
Avram: It is good and it identified that crucial difference which I tried to lay out in simpler terms, however it does not provide for a case of why this is better than the socialist alternative.
Well that parts easy-
1. All monopolies are inefficient compared to the free market (Rothbardian monopoly theory)
2. The State is a monopoly.
3. Therefore the state is ineffecient.
Avram: Moreover he is inconsistent with his approach to the consumer market, first saying it is done by allowing consumers to spend on whatever they will and later as with his theatre example it becomes a product of the central list, which is, in fact, not the case under the theory of market socialism as expounded by its supporters
I can't comment on that as I haven't read the paper for a while.
Avram: As an aside there might also be something important in the thought of profits as a signaling mechanism on what should be produced. I have not yet thought about it in great detail but I have a sneaking suspicion that market socialism might be more inefficient in this regard, although the basic mechanics might appear superficially similar.
They do but aren't fundamental.
IrishLiberal:I am just seeking someone to present the Calculation argument to me as succinctly and as comprehensively as possible in layman's terms so as to aid its explanation.
Well, basically the market allocates resources towards the most urgent uses.
How does the market do the job?
Through prices. Imagine money as votes, and prices reflecting the number of votes each resource(either capital or consumer goods) gets. The market place is where people bid for resources with money votes. So, basically the market is about, as already mentioned, allocating scarce resources towards the most urgent uses.
So, what's the calculation problem?
Without a pricing system, there is no scope of any rational allocation of resources, that is, towards the most urgent uses(based on the number of votes each resource gets).
This is the most basic explanation of the calculation problem you need to know.
Next, there were some of these neo-classicals who started conceding that without any pricing system rational allocation of resources would be impossible. So, they said that the pricing mechanism would still be intact without private property. But, they did not concede the disadvantages the lack of private property rights would bring to their system. The neo-classicals proposed a system in which pricing mechanism does exist, but it would be entirely controlled by the State.
What was this neo-classical pricing system like?
I basically consider two important neo-classical economists to be worthy of rebuttal. One was Oscar Lange, and the other was Enrico Barone.
Oscar Lange basically accepted that people should vote in the market place with their money votes, and prices of consumer goods should be ascertained. But Lange was not able to solve the problem of pricing of capital goods. Why? In a market economy, multiple individuals or companies own capital resources(like land, mines, etc.). These individuals bid in the capital goods market to ascertain the prices of these capital goods. But, in the socialist economy where there is just a single owner of capital resources. So there is no question of competitive bidding happening. The best that the planner could do would be to impute values to capital goods based on the price of the consumer goods that are made out of it. This imputation process is quite impossible. There are so many components that go into making a consumer good, and ascertaining the price of each component is not just impossible. The Capitalist economy on the other hand has decentralized ownership, which makes it possible for the economy to price individual components in the market place.
Enrico Barone on the other hand did not want any type of genuine pricing. His model for ascertaining prices basically assumes that the State has all knowledge that it wants to price commodities. The State needs to have the consumer preferences, the current technological capabilities of the economy, the amount of capital goods in the economy's stock, etc, etc.. And when the State has all this required information, prices can be ascertained. Sure, it can be. If God helped us!
The other solutions
There have been other solutions to the problem. And mostof these solutions are just ways to sneak through a rational pricing system but with the same prejudice against private property rights. Some guys proposed that there would be competing branches of the government which would bid for capital resources, and thereby ascertain their prices. The disadvantage of such a system is obvious. There is no surety that the monopolies will be efficient, for they are appointed by their political masters. The State still owns the capital resources, the monopolies just bid. So the State can still make arbitrary allocations. There is no guarantee that the monopolies have all the knowledge of techniques that could be used to make products. In a Capitalist economy an entrepreneur who thinks he can do better than others does not have to petition the State to get to apply his ideas. Things would be quite pathetic in a Socialist State. And I can go on!
Bank Run:Has anyone here read Economic Calculation in the Socialist Society by Trygve J.B. Hoff? If so, do you think his work adds to the body of this debate?
I have read the work. It is a better bet for beginners than Mises(it's impossible for any beginner to comprehend Mises' essay on the calculation problem), and it deals with other aspects of the Socialist economy, like interest rates for example. It is worth the read, definitely!
Which has what to do with private ownership of capital goods? Mises characterised the above as a form of mock ownership, at best guessing a resource's worth with its owner's wishes in mind, the owner being some monopoly such as the commune or the state with no threat of competition - any appraisal of opportunity costs &c. will be at a divergence from those which would obtain by an entrepreneur in a competitive free market with private ownership, and there is no external reference point any more to test one's valuations against. Hence Mises's characterisation of this process as arbitrary. The managers are made to play entrepreneurs, unlike a genuine market in which there are multiple competing owners of capital goods.
To darkness I condemn you...
As far as I understand the calculation problem, it goes somehow like this:
Society's knowledge is dispersed among millions of market participants. Since most of that knowledge is tacit knowledge, it is impossible to transfer it to one single entity, like a super computer or a central planning agency. In a free market economy, everyone is free to use his knowledge, in order to improve his situation and that of society. By means of market prices, the market participants can communicate which resources are scarce and which are abundant, so they can coordinate their actions. In a centrally planned economy, there is only one planning entity, which is allowed to allocate ressources. Hence, there is no communication and no market prices.
It is absolutely impossible for a central planning agency to get all the dispersed knowledge of society. Therefore, a centrally planned economy will always be poorer than a comparable free market economy.
Jon Irenicus:Mises characterised the above as a form of mock ownership, at best guessing a resource's worth with its owner's wishes in mind, the owner being some monopoly such as the commune or the state with no threat of competition - any appraisal of opportunity costs &c. will be at a divergence from those which would obtain by an entrepreneur in a competitive free market with private ownership, and there is no external reference point any more to test one's valuations against. Hence Mises's characterisation of this process as arbitrary. The managers are made to play entrepreneurs, unlike a genuine market in which there are multiple competing owners of capital goods.
Hello Jon,
Thank you for your well thought out response.
I understand that this process is only a "mock" of what would occur under private ownership and that there would be a divergence. Even though this is true it doesn't answer why the market would be the better alternative or why the system must break down. The answer to why this might happen to socialism proper is pretty clear, however the answer to why the system of market socialism would break down, at least to me, is not so clear.
You stated that at best it is "guesses at" the worth of a resource. Well, maybe. The way I see it is like this: we have two producers of the same product and they both need the same resource, now at the current price the super computer in charge of the whole price list sees the stock of this particular resource dwindling and raises the price, the price is raised to the point where the resource is allocated to the producer whose future expectations of its particular yield are higher.
There's no difference between the price given in this situation and the price given under a true market situation.
As I tried to reflect on earlier the difference arises because of how much freedom the producer is given with what his capital goods do. This can lead us to the conclusion that market socialism is at best an inferior "mock" of the market. For, If he must only produce one thing then this lack of private property indeed creates a Hayekian knowledge problem. Here the knowledge of a certain combination of capital goods is prevented from being conveyed through market prices because a potential competitor in one market cannot enter due to this action being forbidden by the state. Furthermore, If the manager must produce only one thing given a certain allocated amount of land then this creates a large spacial co-ordination problem that we can readily say the market solves better.
So to answer my own hypothetical allegation that the socialist planner might be able to open new industries or put more producers in a certain market in a superior way to the market, I can say that this is indeed impossible. Due to a lack of private property the knowledge and anticipation function of prices cannot exist, and that a presence of both is indeed the only optimal way of allocating goods at any one given point in time.
However here is another challenge the market socialist might pose: Suppose he says all land is rented, and producers are allowed to produce with their capital goods whatever they wish, the ultimate owner still being the state, exchange among current holders of goods still being forbidden, and the list of prices published by the super computer.
Now what can be seen in market socialism is a set of prices that DO take into account all possible combination of capital goods to produce all manner of consumer goods as well as the future expectations of producers (who are, as is conceded revenue maximizers) just like in a market with private ownership. The only difference here in terms of prices (not ownership rights, just the numbers produced by market socialism vs market prices), and what I think is a key difference and the difference that goes right down to the core of socialism is that there are no profits. There are no price differentials, there cannot be lets say a production expenditure of $40,000 and a revenue of $60,000 because in market socialism all that a producer earns he must spend. There must be a significant difference in terms of price formation between revenue maximizers and profit diminishers but its very hard for me to think about because I have difficulty understanding and imagining a world where all revenue must go into factors of production thus yeilding no spread between expenditure and revenue, I find it very difficult.
Now, don't get me wrong, I *know* in my mind that socialism must fail but I cannot accurately describe how.
Prashanth Perumal:The best that the planner could do would be to impute values to capital goods based on the price of the consumer goods that are made out of it
No, no, no, no, no! This is not true at all!
To establish the prices which serve the persons "solving equations" as a parameters no mathematics is needed either. Neither is there needed any knowledge of the demand and supply functions. The right prices are simply found out by watching the quantities demanded and the quantities supplied and by raising the price of a commodity or service whenever there is an excess of demand over supply and lowering it whenever the reverse is the case, until, by trial and error, the price is found at which demand and supply are in balance. ...[T]here is not the slightest reason why a trial and error procedure, similar to that in a competitive market, could not work in a socialist economy to determine the accounting prices of capital goods and of the productive resources in public ownership. (Lange and Taylor 1956, p. 89)
The quoted form of market socialism is very powerful, and very dangerous. I have explored its implications as has the author of the article physiocrat and I posted and the author certainly wasn't able to provide any decisive blow instead calling for the debate to be continued and neither can I
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