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
Tobbog: 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.
Esuric: 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).
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).
In the real world there is continuous change. There is no constancy. Value scales, technological knowledge, capital structure, every factor which effects the overall structure of production changes. In the real world we need profit and loss to economically calculate. We're on the same page right?
Kaju's example is not the real world. It is a highly simplified model. By making specifications he is implying certain assumptions. If you add a few more, such as an evenly rotating economy, it in fact does become possible to calculate the optimal production structure.
So does my thinking really 'fall apart', or are you mistaken in what I'm actually criticizing?
Stephen:In the real world there is continuous change. There is no constancy. Value scales, technological knowledge, capital structure, every factor which effects the overall structure of production changes. In the real world we need profit and loss to economically calculate. We're on the same page right?
Yeah, exactly.
Stephen:So does my thinking really 'fall apart', or are you mistaken in what I'm actually criticizing?
Yeah, I misunderstood your position. Central planning may be possible in a theoretical world of an evenly rotating static economy. I blame my lack of sleep for the confusion.
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.
No, you won't. What if a good is susceptible to being produced by multiple factors any of which can act as a substitute for another? Which of these unpriced goods of unknown valuations (because unpriced, because unowned or at any rate 'collectively' owned) do you use? The ones which 'best fit the technological formulas'? Why should this have any bearing on economic efficiency per se?
Now you may just be picking on KK's formulation of the calculation problem but even so, how does one place unpriced goods into any sort of economic calculation?
It's really simple. You just construct a production possibilities frontier (PPF).
The amount of consumers goods, A and B, that the central planner can produce is a function of the amount of capital goods, X, Y, and Z, that the central planner allocates to the production of the two consumers goods. Also, first order factors of production, X, Y, and Z, are each a function of the second order factors of production, T, U, and V.
To construct the PPF, you state the amount that of one consumer good that can be produced in terms of the other consumer good. You state A as a function of B. At one end of the interval along the PPF, where only A is produced but not any B, we know from the law of returns that there is some optimal combination of X, Y, and Z which produces an optimum amount of A. Also there exists some optimal combination of of T, U, and V which produces a maximum amount of X , Y, or Z. By imputing backward it is possible to arithmetically solve for the optimal combination of T, U, and V to produce consumer good A. Starting from the end of the interval from which only A is produced you construct the PPF by incrementing by 1 the number of units of B produced until you reach the other end of the interval where only B is produced. Now because the complement of the optimal combination of T, U, and V for the production of A is not necessarily the optimal combination for the production of B, the process must be repeated again except in terms of the optimal combination of complementary factors of production for B. Then the maximum of both functions represents the final PPF.
Now, if you know the ratio of A:B which maximizes consumer satisfaction, than you can identify the point on your PPF which corresponds to consumer demand and you have the most optimal production structure to satisfy consumers.
Stephen:Now, if you know the ratio of A:B which maximizes consumer satisfaction, than you can identify the point on your PPF which corresponds to consumer demand and you have the most optimal production structure to satisfy consumers.
Who knows? The shadow knows!
If only the shadow would come centrally manage our economy.
Statism is a religion.
You could have a market in consumer's goods to figure that out. Even marxists accept private ownership of consumer's goods. The calculation argument is that you need a market in factors of production.
Some time ago I've read a paper by a socialist "economist" who argued that if there was a market for consumer goods and all the ressources available were known to the central planning agency, a central planner could perform rational factor allocation with some fancy mathematic operations as long as there is not too much change in the economy (which I deem the most unrealistic of his assumptions).
Do you think, given his presumptions, that he's right?
look, if i am the central planner and i decide to adapt the structure of production so that i get 500 mansions and the poor get carrot stew to eat, with a particular technological configuration that would achieve that (at some unknowable cost)my decision is rational, only inth sense that i am rational and i made it, and also that i used some deduction and empricisim to arrive at my plan and my guess that it would work and be worth doing for me
but its not a 'rational factor allocation', there would be no economy, there would be no dynamic process whereby the varying ambitions and plans of agents are coordinated in such a way that there is a constant incentive to optimize their plans and satisfy their wants, and although disappointment would be a natural recurrent phenomenon in a free market, still the individuals are politically at liberty and have the rest of their peers working at rational allocation ; cooperating with them to increase their discounted marginal value product, their 'real wage' over time . Under central planning, there would be production, but there would not be an economy. there would be no grounds for asserting that the chosen regime of production was rational in the economizing sense, and given that we are talking about coercion and interfering politically with the free will of individuals to go about and rationally coordinate production, that is grounds for assuming that from an ex-ante view the coerced individuals would rather not have planned production, but rather the economy. furthermore history and thymology allow us to say damn confidently that a central planned economy would be (always is) a hell on earth.
Who cares what 'optimal' combination produces what 'maximum' amount of consumer goods? The consumer goods are owned, valued and priced, the capital goods are not. So they cannot even enter into calculations of economic efficiency. 'Optimal' in terms of economic efficiency (i.e. in terms of agents' valuations) won't be the same as 'optimal' in terms of producing the most output because the capital goods themselves need to be priced to establish whether a profit is being turned or not.
Jon Irenicus: Who cares what 'optimal' combination produces what 'maximum' amount of consumer goods? The consumer goods are owned, valued and priced, the capital goods are not. So they cannot even enter into calculations of economic efficiency. 'Optimal' in terms of economic efficiency (i.e. in terms of agents' valuations) won't be the same as 'optimal' in terms of producing the most output because the capital goods themselves need to be priced to establish whether a profit is being turned or not.
Jon,
Just because the capital goods are not priced in terms of money, it does not mean that they are not priced at all. The technological recipe provides the MPP of the capital goods, and thus the ratio of exchange, i.e. price, of the capital good in terms of at least one of the consumer goods. Once we know what the aggregate consumer demand for one of the consumer goods is in terms of the other, we can evaluate every good in terms of either of the consumer goods and calculate the efficiency of the structure of production.
Just curious, are you actually familiar with Mises's own argument?
Tobbog: Some time ago I've read a paper by a socialist "economist" who argued that if there was a market for consumer goods and all the ressources available were known to the central planning agency, a central planner could perform rational factor allocation with some fancy mathematic operations as long as there is not too much change in the economy (which I deem the most unrealistic of his assumptions). Do you think, given his presumptions, that he's right?
I think the main problem with this is that entrepreneurial risk bearing is an essential factor of all production. A central planner can never be a risk bearer because he is not a natural owner and all factors of production under his control are expropriated. This may just be another way of stating the problem.
I.E. Without private ownership of factors of production, there can be no market in factors of production. Without a market in factors of production, there can be no market prices for factors of production. Without market prices, there is no way to engage in arithmetical accounting and compare inputs with outputs. Without such accounting it is impossible to evaluate the (opportunity) cost of any past use of a factor of production.
Thanks again for all of your efforts and insights! However,
Stephen: Just because the capital goods are not priced in terms of money, it does not mean that they are not priced at all. The technological recipe provides the MPP of the capital goods, and thus the ratio of exchange, i.e. price, of the capital good in terms of at least one of the consumer goods. Once we know what the aggregate consumer demand for one of the consumer goods is in terms of the other, we can evaluate every good in terms of either of the consumer goods and calculate the efficiency of the structure of production.
this pretty much nails down for me why I am not yet convinced of the a priori impossibility of economic calculation without market pricing.
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