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.
Well you do have a way of knowing c) in market socialism people have money and they're free to spend it on whatever they want.
Yes the Lange argument has been adressed many times, the one about just solving PPF equations. I understand the arguments against it and I agree with them.
By the way the argument that won the debate for the Austrians wasn't that he can't solve these equations. He can, no serious professor would think he can't. it is that the results are ultimately meaningless.
I, myself, have moved away from Lange's equilibrium equations and onto his trial and error method.
I know why equilibrium equations don't work, I agree they don't work. I have no beefs with the points in that video and the related articles.
I have however, trouble grasping why a trial and error method fails if producers are allowed to produce whatever they want.
Please, Caley, if you have some insight towards this I would actually really love to know on what grounds the trial and error method fails, other than the numerous grounds it fails on which I have already discussed and have made the necessary concessions for on behalf of the socialist. I almost have them cornered!
The only answers I have gotten so far is a bad claim on why Lange's equilibrium equations won't be solveable and people telling me I think equilibirum equations work and that's why I'm not getting this whole thing. No they don't work, I never thought they could and, no, the reasons why they don't work aren't the ones you guys seem to think it is, the equations ARE solvable, the answers are just meaningless. The only person who has actually shedded some valuable insights into my queries is Jon Irenicus.
1. If you have real market prices (trial and error in the market), it isn't socialism.
2. If you have socialism, you don't have real market prices(trial and error in the market).
You say that you with agree with both above. So, how do you then get to the conclusion that socialism can be as efficient as markets? Are you talking about having a market to get prices and then saying "Aha! Now that we have prices we'll switch to socialism!"
Avram:I have however, trouble grasping why a trial and error method fails if producers are allowed to produce whatever they want.
'The socialist planner cannot resort to trial and error because, without the market test of profit andloss, there are no telltale signs that his plan has been a success or a failure.'
Avram please read the following link from page 704 of Human Action.
4. Trial and Error
I have a short alternative to that of the already well proposed. Under Socialism the wants of the individuals can never be fully satisfied. All individuals are just that, unique, they have different wants. A socialist planner must limit the consumers choices, in order to not be wasteful. The planner can't think of all of the needs of all of the actors under his control. The quality of life under socialism cannot possibly be as rich as that under capitalism.
Individualism Rocks
Avram: Tobbog: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. Through a set of prices which aim at balancing supply and demand a central planner can obtain the dispersed knowledge in society in the exact same way the market does. The thing is, how much knowledge is embedded in prices is determined by the extent to which property rights exist. The knowledge problem is crucial and important but it is not impossible for a central planning agency to make a price system which reflects dispersed knowledge.
Tobbog: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.
Through a set of prices which aim at balancing supply and demand a central planner can obtain the dispersed knowledge in society in the exact same way the market does. The thing is, how much knowledge is embedded in prices is determined by the extent to which property rights exist. The knowledge problem is crucial and important but it is not impossible for a central planning agency to make a price system which reflects dispersed knowledge.
I guess you somehow misunderstand the knowledge problem: You assume that all knowledge is already perfectly available. But in reality, it has to be discovered through entrepreneurial action. For example, only some amateur chef knows, that in his hometown, there is not one pizzeria that can make as tasty a pizza as he can. Only some investor knows, that the price of stock XY is a bargain. Only some computer nerd knows, that he can create a search engine that can outcompete Google. Only Carl Icahn knows, that company ABCD is poorly managed, etc.
These are all examples of subjective, tacit knowledge. It is only available, when entrepreneurs take action, when they buy capital goods, employ their staff and sell their products on the market. It is not the task of a market economy, to create perfect equilibrium, but to improve consumer satisfaction, thereby creating perfect disequilibrium.
Avram:No, no, no, no, no! This is not true at all!
The Planner can try to impute prices to capital goods based on the price of consumer goods. But he may not be correct, owing to the complexity of factors that go into making consumer goods.
By the way Avram, did you read my post right? I am not able to understand your position well. You believe that the State can impute genuine prices to Capital goods? My position, as already mentioned, is that planners(if they allow consumer goods market, that is, consumers bid for products already produced by the State) can try to impute prices to capital goods based on the price of consumer goods, but it would be an impossible task.
Avram:The quoted form of market socialism is very powerful, and very dangerous.
In the sense that it solves the problem of economic calculation? I don't think so. And I have already mentioned the reason.
You could explain your case in detail here. I will answer them.
Tobbog: But in reality, it has to be discovered through entrepreneurial action. For example, only some amateur chef knows, that in his hometown, there is not one pizzeria that can make as tasty a pizza as he can. Only some investor knows, that the price of stock XY is a bargain. Only some computer nerd knows, that he can create a search engine that can outcompete Google. Only Carl Icahn knows, that company ABCD is poorly managed, etc.
In market socialism only some amateur chef knows that in his hometown there is not one pizzeria that can make as tasty a pizza as he can, only some investor knows that the price of stock X is a bargain and only some computer nerd knows that he can make some search engine that can out-compete google, and all this information is tacit and only available when citizens of the socialist republic decide to take action buying capital goods, employing their staff and selling products on the socialist market.
I'm talking about MARKET socialism here, it is, indeed, very similar to capitalism and this is why it is so hard to deal with.
A) Under free market capitalism the goods will exchange till they find their way through a market price to those who value the goods the most i.e whose reservation prices were the highest
B)Under the trial and error method of market socialism these goods will first go to the state, and then be bought from the state by the people who value the radios the most i.e whose reservation prices were the highest
Under A) the clearing price is found through exchange while under B) it is found by a super computer lowering the price from a very high point till the market clears
The price is still decided in both A) and B) by the knowledge, expectations and valuations of those looking to buy the radios. So knowledge is indeed conveyed through prices under market socialism. However there may be differences, but there is no reason they cannot be conveyed.
What these differences are is precisely what I'm trying to find out.
Let me make it clear the socialist model I am looking at has money, consumers are free to spend their money on whatever they wish and consumer prices are formed by markets, producer prices are given on a list published every millisecond (think of a huge price index) these prices are found by lowering prices from incredibly high points in the case of a surplus or raising prices in the case of shortages, the ultimate money value of these prices is determined by entrepreneurial expectation, anticipation and appraisal. Entrepreneur's can't keep profits.
I do not advocate this model, I wish to destroy it.
Prashanth Perumal:By the way Avram, did you read my post right? I am not able to understand your position well. You believe that the State can impute genuine prices to Capital goods? My position, as already mentioned, is that planners(if they allow consumer goods market, that is, consumers bid for products already produced by the State) can try to impute prices to capital goods based on the price of consumer goods, but it would be an impossible task.
Hello Psarnath
Yes I did, I don't believe the state can impute genuine prices to capital goods. Imputation implies some sort of mechanistical calculation backwards from some starting values. The state can achieve no such thing.
However I do think they can, by trial and error, arrive at prices which superficially seem to reflect all the information and coordinating functions embedded in market prices, because these trial and error prices are formed by the subjective valuations of all market participants. The extent to which these prices differ from capitalist prices is precisely the extent to which control and ownership of the goods is given to their purchasers.
I do not advocate this sort of method, I am simply saying that it is a powerful argument a socialist may still make. Now I have in my mind cornered the socialist to confess that producers must be given full control of their capital goods, that all potential capital goods must have a price including land and that producers must be allowed to produce whatever they wish. If these thigns aren't met under market socialism, the capitalist market is superior.
However I can't find a finishing blow as to why profits should exist if we assume that producers in our hypothetical socialist republic are revenue maximizers and there are no incentive problems (a point I wish to concede so socialists can't tell me well socialism would work if people were perfect)
Well the price in the case of the list IS determined by producer's subjective valuation. That is, producers will buy capital goods till the price exceeds their reservation prices and these reservation prices are formed precisely by their valuations and their expectations. The list is just a means to facilitate this communication throughout market socialism. There is no real difference with how this works and how the market price system works. The difference comes from the fact that the producer's valuations would be different if they had restrictions on what they could or could not do with the control of goods they bought from the state.
That is the problem. That those restrictions do not allow the functioning of the market with regard to economic calculation concerning capital goods. So no, if they cannot be exchanged or disposed of otherwise as though they were owned rational economic calculation will not take place with regard to them and any valuation will be at best arbitrary. It's not the producer's subjective valuation with regard to goods they fully own, but with regard to some entity from above imposing upon them certain goals to meet based on its subjective valuations.
Well in the situation I described it would be very similar. Indeed, it can be best described as a market where profits are abolished yet people act with perfect revenue maximizing incentive.
No, it can be characterised as a market where no calculation takes place with regard to capital goods other than the mock valuations of the managers of a monopolist's desires for disposing of certain goods in X, Y or Z fashion with no external reference and no ability to trade away these goods. Simply looking at how scarce something is and whether some action "maximizes revenues" misses the point. BTW, what exactly are revenues over costs if not profits (of course the issue here is that with no real knowledge of the countless alternative combinations and new forms of capital goods the opportunity costs in question will be heavily distorted if not impossible to form and this is worsened if one has no stake in ownership)?
I personally find it mind boggling thinking about this hypothetical world, which is to me the last bastion of socialism's defense.
Imaginary, hypothetical worlds are all socialism has. If that. The only way you've managed to make a case so far is by conceding further points in favour of free markets but none of them still evade the problem of a lack of external reference with regard to the pricing decisions of the commune or state or whatever. It's not like market socialism is an unknown quantity to the Austrians - Kirzner's and Rothbard's recounts of the calculation debate mention it and Kirzner goes as far as to mention why it fails to meet the challenge. This isn't new stuff.
But simply saying the subjective appraisal of entrepreneurs does not determine prices in market socialism does not bring my understanding any closer to the truth, because this statement is false.
Look, if you insist on believing some fairy tale world can work, do so. I don't care. Nothing has really been done to address Mises's criticism of the system other than to say supercomputers can do it!
To darkness I condemn you...
The above combinations are, mathematically speaking, infinite in number. Pragmatically speaking, they would represent some measurable number, but still be incredibly large. Worse still, is that even if there were only a few combinations, a central planner would have no way of knowing which is more efficient. Worst of all is that there are many more inputs involved in the production of a single product and that there are literally thousands of inputs when you follow the line of production. A producer good that a producer uses to produce another producer good (mouthful, I know) could literally have hundreds of different combinations for production, and the good that producer good produces good also have many combination possibilities. No computer or human mind is able to even begin to comprehend the complexity of the problem.
Yep, this aggravates the problem manifold IMO. Not only is calculation in capital goods impossible but there's not merely one layer of these goods but multiple layers, none of which can be owned privately. Revenue can be maximised in terms of higher output but valuation of costs will be skewered and in some cases impossible. Price formation is stinted because of this and also because the goods cannot be exchanged, and thus prices qua ratios of exchange cannot form. All the planner can do is try guess at a price based on their very limited subjective valuations (or guessing about the subjective valuations of the owner, if it differs.) The fact that the goods cannot be freely exchanged is of paramount importance, not secondary.
Jon Irenicus:irzner's and Rothbard's recounts of the calculation debate mention it and Kirzner goes as far as to mention why it fails to meet the challenge. This isn't new stuff.
I'm somewhat familiar with Kirzner's recount having studied some of his papers on the subject and having listened to a few audio files I found on the FEE. I have not however had the privilege of asking him any questions in person as of yet.
However, Kirzner spent most of his time criticizing equilibrium calculated prices for producer goods and not the trial and error method. He was essentially right in doing so because Lange just briefly mentioned the trial and error method before going onto espouse a system for obtaining the necessary information in order to solve Production Possiblity Curve equations and finding the efficient point given a ratio of consumer goods.
All the criticisms of market socialism Mises and Hayek made as elucidated by Kirzner here stand. However, these are not valid criticisms of market socialism with prices formed under the trial and error method.
Jon Irenicus:it can be characterised as a market where no calculation takes place with regard to capital goods other than the mock valuations of the managers of a monopolist's desires for disposing of certain goods in X, Y or Z fashion with no external reference and no ability to trade away these goods. Simply looking at how scarce something is and whether some action "maximizes revenues" misses the point
Jon, the managers can trade away these goods and dispose of them just like in the market. Being given full control over them they can sell them back to the state at the listed price and they will if it the going price is above their reservation price (which is the same as them selling it to a buyer on the market). Basically, exchange does take place between managers in a manner very similar to the capitalist market, the difference is there is an intermediary.
Jon Irenicus:of course the issue here is that with no real knowledge of the countless alternative combinations and new forms of capital goods the opportunity costs in question will be heavily distorted if not impossible to form and this is worsened if one has no stake in ownership
Could you explain this in more detail? This seems to me to be "on the right track" so to speak
Jon Irenicus:Look, if you insist on believing some fairy tale world can work, do so. I don't care. Nothing has really been done to address Mises's criticism of the system other than to say supercomputers can do it!
As I understand it Mises' criticism as espoused by Kirzner can be drastically simplified to "because the owners of producers goods cannot engage in trades with one another and there is no one unit of account, there is no way for prices to reflect opportunity costs as determined by the relevant market actors anticipations, expectations and knowledge of the world around them."
This however is not a criticism of the kind of market socialism I am attempting to form a critique of. Indeed, this is a criticism to Lange's claim that all the socialist needs to do is get a super computer to find the efficient point given the consumer ratio. And it is a great criticism.
However it does not address the fact that market socialism CAN form prices which have embedded in them all this information about expectations anticipations valuations and knowledge. It can do this by the price list.
Jon Irenicus:the problem of a lack of external reference with regard to the pricing decisions of the commune or state or whatever
The point of external reference is the need to clear the market, to make sure there are no shortages or surpluses. This means the external reference point is a price which accurately reflects opportunity cost of other managers in the socialist market. Please correct me if I misunderstood "point of external reference"
The b) can't also be known ex ante, since the marginal productivity of capital is not an objective measure, but itself dependent from consumer prices and capital goods prices, which are both inherently subjective.
The failure ob both Neoclassicism and all branches of Socialism is that they both assume that all relevant information is somehow given. But in reality, information has to be incessantly discovered by millions of consumers and entrepreneurs.
Tobbog:The b) can't also be known ex ante, since the marginal productivity of capital is not an objective measure, but itself dependent from consumer prices and capital goods prices, which are both inherently subjective.
This is 100% true and is the argument Kirzner used to demolish the Lange view of the market as just some equation solving device that finds efficient points on production possibility curves.
I will repeat for the hundredth time that I know, 100% believe and understand that just solving for PPFs doesn't give any meaningful information and that using technical information to find the marginal productivity of capital is just "groping in the dark"
However unlike KrazyKaju I am not krazy (hehe) enough to say that these equations can't be solved, just that they're meaningless. It is quite easy to obtain technical information for marginal productivity its just that technical information isn't what is needed, and the Hayekian knowledge problem arising from a lack of private property arises. It means that the allocation of resources did not take into account true oppurtunity costs just percieved.
Strike one for the Austrians and almost a deathblow for socialism!
I mean, this form of market socialism has seen utterly defeated by the Austrians and I am very pleased with that, we all know that.
The form of market socialism that hasn't been defeated and that hasn't received too much serious treatment aside from that one paper by Machej is the trial and error method.
Tobbog:But in reality, information has to be incessantly discovered by millions of consumers and entrepreneurs
And this discovery process is precisely what the trial and error method facilitates.
I've yet to see any reason they're not.
You said they can't be traded:
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.
But whatever. If they can't retain use of the capitalised value of the good why on earth should they be expected to act economically? Again, unless they have full control and ownership of the good - and not just the ability to "sell" it back to its owner, there's little to no resemblance with an actual market where the owner can account for the good's used based on how much value they expect it to generate. They'll just be trying to fulfill the owner's wishes as best they can without regard to whether other owners (which do not exist) have better uses to put the goods to and whether the present owner's evaluation of opportunity costs is the most efficient route possible (markets allow for this via competing owners.)
It's basically the point that KrazyKaju was making, that to make any good one can be made using a huge array of combinations of capital goods. The problem is worsened by the fact that lower order capital goods are also made with higher order capital goods. No ownership exists in any of these. How are prices to form then? How are they to be put to their most efficient use if they're utilised at all? Again, the managers are trying to dispose of the goods as best as they can according to the owner's wishes. How are they to determine whether the owner's wishes are the most profitable way to use the good, that their subjective appraisal of costs is not letting more efficient solutions go by &c.?
Only at the consumer level. Never at the producer level.
By external references I mean the decisions of other owners/prospective owners on the market.
Interesting discussion.
Avram, what is left of the state is this scenario?
As far as I can tell it's just 1) a supercomputer displaying prices based on supply and demand, 2) the nominal owner of all property, 3) the medium for all exchanges, 4) the 'scraper' of all profits and 5) an institution that (somehow) gives incentives that perfectly replicate market incentives.
1) Such computers would be (and are) produced by the free market. This is not a state function.
2) If there's no restrictions whatsoever on what the "managers" can do with their "rented" property, then there is no difference between these "managers" and normal market entrepreneurs. Are there any restrictions? The only one you've mentioned (I think) is that they can't keep profits.
3) Requiring the state to be a "medium of exchange" for all transactions is irrelevant if you assume there are no transaction costs to using this medium (which, I presume, you would).
4) and 5) basically contradict one another. If the incentives in this system perfectly replicate free market profits, what is the state actually doing here?
It seems to me you've made so many assumptions, you've assumed away the state. You won't find a calculation problem in this scenario, because this is capitalism, not socialism.
Truth and Liberty
"No army can stop an idea whose time has come." - Victor Hugo
Truth and Liberty: It seems to me you've made so many assumptions, you've assumed away the state. You won't find a calculation problem in this scenario, because this is capitalism, not socialism.
We've been trying to tell him this for 2 pages now.
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