I was discussing the calculation problem in the planned economy with someone and now I'm stumped. I'm not sure if I've maneuvered myself into the situation by arguing wrongly or if my opponent is unwilling to admit a defeat, so please help me out.Background: planned economy, planner X has control over all resources, consumer wishes are found out by a sophisticated electronic polling system without prices (we'll assume for the sake of the argument that this actually works).Me: People can tell you what they would like to have, but without a pricing system, how do they coordinate their wishes? I.e., why should they not demand a racing car as urgently as a washing machine?X: People will add preferences, i.e. "Most importantly, I need food, then a washing machine, then a racing car". My polling system will demand this.Me: Granted that it's possible to accurately discriminate between goods of different utility, what is keeping people from demanding the best, most expensive, most lavish in every single utility field? I.e., a Lamborghini instead of a Camry? Caviar instead of potatoes? There's no penalty for demanding the best because there are no prices to distinguish them.X: They will have to add alternatives. If they don't add proper alternatives, they may get nothing at all.Me: So who decides whom to give what kind of quality product? By what standard?X: Me, by my own.Me: So you're just acting arbitrarily and randomly, just like every central planner before you. You don't have a concept for distributing resources at all. You just admitted my point.X: You tried to prove that prices are necessary, not that my distribution system is bad. You failed.Any ideas? Thank you in advance.
I'm pretty sure that the problem in this scenario is not insurmountable for the central planner. If he discovers the ratio of A to B or B to A that the aggregate of consumers prefer (perhaps through a consumer goods market), then he can simply impute it back to producer goods according to the technological recipes used to create the consumer goods and lower order producer goods. But anyway...
Which producer goods to use seeing as they're not priced? All one has done is established which consumers' goods to produce.
Look, assuming an ERE and a fixed set of technological recipes, it is in fact possible to allocate capital goods efficiently
Without their being priced? No.
To darkness I condemn you...
nir:the central planner is not doing what he said he would do, allocate all the resources.
nir:an entrepeneur decides to allocate only some of the factors in the economy, other entrepeneurs do others.the claim is that the central planner will replace all of them
stephen:I'm sorry. I don't understand how the implications of your last point prove your original objection.
the point is, all entrepreneurs as a 'collection' have determined how to allocate all the factors. no one entrepreneur does this, and every entrepreneur leaves the vast quantity of factors relative to him as a given that he will not be allocating. (others allocate). If a central planner takes the same attitude he is not allocating all the factors. if he doesn't (take that attitude) and rises to the challenge of allocating all factors (as the original premise was) then MPP conceptualizing isn't going to be of help to him. that's how it seems to me.
Stephen:Economic efficiency is the production of goods at minimal cost.
what is the cost of a shoe making machine of a certain type and model, made to a certain level of craftmanship? the question is incoherent with us having assumed away the market for factors.... or isn't it?
Stephen:The central planner could distribute ration certificates to the consumers for good A prior to any actual production. Then, an auction could be set up where the consumers can bid (the maximum they are willing to pay) for units of good B with their ration certificates(play money). The central planner can then use those bids to construct minimum selling bids as a ratio of the tradeoff between the two goods on the production possibilities frontier. The sets of bids and offers can be used to construct a price reflects consumer demand given the range of possibilities available to them.
this does not even begin to address the challenge of economic calculation. you have here a recipe for figuring out what consumers say they like lots of. and because there is a market for the produced goods, that market will clear, every good will leave every shelf at whatever price it takes to do that. *assuming none of the items are economic bads, or are economic goods worth less than the transaction cost of bidding for them and using them". , still I fail to see how it could possibly lead you to a rational calculation of how to structure the next round of production. so the 5000 shoes cleared at 5fiat paper units each, and 30000 beef sandwiches cleared at 3 fiat paper units each. how is that going to help rationally structure production without a factor market?
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
Let me frame you the economic calculation debate in this way:
There are two (final output) consumer goods, A and B. There are three input goods that can go into producing A and B, which we shall call X, Y, and Z. Any combination of X, Y, and Z which equals 100 can produce 10 A and 10 B. The catch is that there is only 100 of X, 100 of Y, and 100 of Z, so that you can only produce a total of 30 A or 30 B or a mix. Lastly, you use up X, Y, and Z, so that you need to reproduce these resources. X, Y, and Z all are used up at a constant rate (say 10% is always used up in production of final output). You have 100 T, 100 U, and 100 V that can reproduce X, Y, and Z. 100 of T, U, or V can be used to produce 10 of X, Y, or Z in any combination.
So the central planner first has to find out how much of A or B to produce. Then, the central planner has to figure out which is a more efficient way of producing A or B: X, Y, or Z. Next, the planner has to find out how to replace X, Y, and Z by using T, U, and V. How can the central planner possibly know a rational and efficient use of these resources? He cannot. This is also a laughably simple economy. In the real world, there are thousands more variables.
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Sphairon:planner X has control over all resources, consumer wishes are found out by a sophisticated electronic polling system without prices (we'll assume for the sake of the argument that this actually works)
This is just IMPOSSIBLE without the pricing system. Enrico Barone suggested this kind of a solution. Obviously it was trash!
Get into the practical difficulties. When you just assume the planner knows everything, you give away your case in the very first instance of the debate.
So first we survey everyone, then initiate a 5 year plan, then 5 years later everyone gets what they used to want. I don't see any problem with that.
Another quick point:
A free pricing system organically shifts to provide more "resource usage voting power" to those who create value for the most people. In the hypothetical super polling system, everyone (ostensibly) has the same voting power, thus the certifiably insane person controls as many resources as does the noblest entrepreneur. Such a system would quickly lead to chaos, and would provide no incentive for people to create value.
JonBostwick:So first we survey everyone, then initiate a 5 year plan, then 5 years later everyone gets what they used to want. I don't see any problem with that.
You are assuming that people have a constant preference scale all through the five years.
As for innovation, you know, he has his software technology that is able to predict the results of changes in the process of production, and so if someone comes up with a new idea or invention, he just types in the new variables, watches the result and plans accordingly. It may be far-fetched, but not impossible.
In much the same way that tarot cards or astrology might occasionally give 'accurate' predictions, perhaps with somewhat less certainty in this case though. And there is an a priori presumption against the possibility of rational calculation in a socialist society. You did not fail considering that he never countered your point that his system is arbitrary (ergo bad), so tbh concede nothing. Prices are necessary for his system not to suck.
Prashanth Perumal: JonBostwick:So first we survey everyone, then initiate a 5 year plan, then 5 years later everyone gets what they used to want. I don't see any problem with that. You are assuming that people have a constant preference scale all through the five years.
Nah. I was just being facetious.
Your socialist friend isn't even addressing Mises.
Without a market for capital goods no economic calculation can happen. That means, even with a market for consumer goods, economic calculation can not happen if there is a monopolist producer.
Surveys!? Not even a genuine market in consumers goods can make up for a lack of pricing for capital goods.
krazy kaju: Let me frame you the economic calculation debate in this way: There are two (final output) consumer goods, A and B. There are three input goods that can go into producing A and B, which we shall call X, Y, and Z. Any combination of X, Y, and Z which equals 100 can produce 10 A and 10 B. The catch is that there is only 100 of X, 100 of Y, and 100 of Z, so that you can only produce a total of 30 A or 30 B or a mix. Lastly, you use up X, Y, and Z, so that you need to reproduce these resources. X, Y, and Z all are used up at a constant rate (say 10% is always used up in production of final output). You have 100 T, 100 U, and 100 V that can reproduce X, Y, and Z. 100 of T, U, or V can be used to produce 10 of X, Y, or Z in any combination. So the central planner first has to find out how much of A or B to produce. Then, the central planner has to figure out which is a more efficient way of producing A or B: X, Y, or Z. Next, the planner has to find out how to replace X, Y, and Z by using T, U, and V. How can the central planner possibly know a rational and efficient use of these resources? He cannot. This is also a laughably simple economy. In the real world, there are thousands more variables.
Liberals don't mean to destroy people. They just do.
Stephen:I'm pretty sure that the problem in this scenario is not insurmountable for the central planner. If he discovers the ratio of A to B or B to A that the aggregate of consumers prefer (perhaps through a consumer goods market), then he can simply impute it back to producer goods according to the technological recipes used to create the consumer goods and lower order producer goods. But anyway...
Yeah, he could theoretically reserve engineer a production method which could yield necessary producer goods, and he could theoretically use a Walrasian general equilibrium model to allocate such goods amongst the economy.
There are severe and damning problems with this: first, Walrasian auctions assign prices before the fact, and then allocate both consumer and producer goods; but these prices are entirely arbitrary, they lack real-time information (which makes prices useful). It's true that the economy has various producers setting prices and then bringing there goods onto the market, and it's true that people act on these prices, but the subjective actions of individuals change the prices over time. The formation of real prices is a dynamic one of trial and error (Hayek's disseminated information argument). The second problem, as Mises points out, is that it's not the case that a centrally planned economy can't produce a car just as well as a 'capitalist' economy (can figure out a production recipe), but it cannot figure out the most efficient production recipe. There are as many production recipe's as there are goods in an economy, and the point of the economic system is, again by trial and error, to figure out the most efficient way to produce goods (various capital combination's). Capitalist economies need entrepreneurial failures; the failures send out vital information signals to other actors. Centrally planned economies don't have failures since they're not bound to the profit (anti-loss) motive. Lenin and the Soviet Union knew how to produce steel, but they didn't know how to produce it as efficiently as American steel producers, and they didn't know how much steel to produce (which is why their GDP numbers were through the roof, while millions were starving in the streets). Essentially, real prices (with actual information) emerge from a dynamic process of trial and error amongst many different actors.
The point you missed from Kaju's response is that they cannot find the most efficient way to produce consumer/producer goods (they can't figure out how to combine their producer goods in the most efficient way as possible, since they cannot measure opportunity costs).
Maybe you should argue a little more Hayekian: Consider the Calculation Debate as a knowledge problem. You're having millions or even billions of people, all of whom posess different knowledge of their specific environment. Most of that knowledge is tacit and/or subjective, which makes it impossible to enter it into a super computer. Furthermore, the transfer of knowledge to the planning agency would be time consuming. The knowledge of a central planner, even if it is the best and fastest computer ever built, must therefore be a lot less than the combined knowledge of all market participants.
In a free market economy, there is no central planning agency necessary, since every market participant can use his knowledge as he sees fit. Through subjective market prices, they can communicate which goods are scarce and which are abundant and economic calculation mirrors the real preferences of all market participants.
Esuric:The point you missed from Kaju's response is that they cannot find the most efficient way to produce consumer/producer goods (they can't figure out how to combine their producer goods in the most efficient way as possible, since they cannot measure opportunity costs).
I think there were a number of implicit assumptions made in Kaju's model that in fact do make it possible to allocate higher order goods efficiently.
I'm not familiar w/ Walrasian auctions or the details of Hayek's information argument. I am familiar w/ Mises' arguments.
Look, assuming an ERE and a fixed set of technological recipes, it is in fact possible to allocate capital goods efficiently, so long as one knows what ratio of consumer's goods to produce to maximize consumer satisfaction.
Jon Irenicus:Without their being priced? No.
Give me the ratio of exchange for the consumer good A in terms of B and the quantitative technological formulas for the production of all lower order goods in terms of the higher order goods and I'll show you why you're wrong.
Stephen:Look, assuming an ERE and a fixed set of technological recipes, it is in fact possible to allocate capital goods efficiently, so long as one knows what ratio of consumer's goods to produce to maximize consumer satisfaction.
Emphasis is mine, but here's where your position falls apart. The production methods must be elastic, since the desires of consumers and individual actors are elastic. The structure of production must continuously shift (both horizontally and vertically) in order to prevent misallocations, and to provide consumers with the goods/services they demand. This is why there cannot be fixed production recipe's, because production methods must continuously change. Trial and error, disseminated information, and freely floating market signals is how the structure of production changes, evolves, and ultimately prevents disequilibrium. I'm not even raising the whole technological progression argument, which stems from dynamic or x-efficiency (requires supernormal profit).
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