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
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.
Then what 'prices' do you speak of as a result of backwards imputation other than some arbitrary 'technological' optimum which is disconnected from an economic optimum in the absence of profit? I never said a word about money prices. A thing to add is that the f.o.p themselves will be scarce and gradually depleting, if it is not clear.
Sphairon, I'd suggest you give Kirzner's recount of the history of the calculation debate a read if you're not yet convinced...
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.
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.
I disagree. maybe you can expand and help me understand your points?
Stephen: The technological recipe provides the MPP of the capital goods
secondly, two different factories with different ways of administering production, proportions of secrataries to managers etc, different choices of production processes to transform raw materials into the same consumers product( from the pov of the customers) , who use different machines, one whose models are replaced every 5 years, and the other who replaces every 10 years etc, now the consumers are given play money and they bid for some definite quantity of the product of the two factories (their outputs are aggregated at the 'store'). the consumers bidding on the market of produced goods, clears , and nothing is left on the shelves. now, should either factories production increase? should both? should neither? should either factories production decrease? should both? should neither? what is the mechanism by which this is determined? should both factories, be closed down the material and staff redistributed to other industries, whilst a new factory that supersecedes is built?.
what concept of efficiency are you using? do you think that its feasible to say that some process of creating computers id '99%' efficient? is it that its some percentage more or less effiient than other actual processes? or other 'imagined' processes?
so in sum:
a)does the central planner rationally allocate everything, or just some arbitrary subset of the the factors?
b) assume all markets clear, (there is only a consumer goods market) no stock is left on shelves, because no piece of stock has lower marginal utility than the free money dispensed to the consumers to spend. is the central planner trying to make each unit good clear at the same market price? is tehre an ideal price that each good should leave the shelf at that he will aim for in his production strategy? how precisely does the clearing of the consuemr market help determine how to restructure production for the given period the planner considers
c) efficiency of the structure of production can be 'calculated', can it?
Jon Irenicus:A thing to add is that the f.o.p themselves will be scarce and gradually depleting, if it is not clear.
Actually, that's not clear. Not in the real world. And definitely not in Kaju's example. In the real world, only a certain type of land is depleted. All other factors of production such as nondepleteable land, capital, or labour are render services in perpetuity or are replaced. It makes to most sense to infer an ERE from Caju's example, since he specified a particular structure of production, in which case there are no depleteable FOP.
Jon Irenicus:Then what 'prices' do you speak of as a result of backwards imputation other than some arbitrary 'technological' optimum which is disconnected from an economic optimum in the absence of profit? I never said a word about money prices.
I was just explaining the Misesian calculation argument in answer to your question of whether I was familiar w/ it. That's not my position on Kaju's example. Kaju's example is simple enough that you can directly evaluate the most efficient production structure.
Jon Irenicus:Sphairon, I'd suggest you give Kirzner's recount of the history of the calculation debate a read if you're not yet convinced...
And I would ask yourself the question of how the central planner could possibly replace the role of competing entrepreneurs.
Sphairon: 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.
this pretty much nails down for me why I am not yet convinced of the a priori impossibility of economic calculation without market pricing.
Bogus, he's trying to hold a variable(demand) as a constant. Doesn't work that way.
nirgrahamUK:i.e. we are not deciding how to allocate them, hence the central planner is not doing what he said he would do, allocate all the resources.
This doesn't follow, in the same way that on an open market, it doesn't follow from the fact that the DMVP of a factor of production depends on complementary factors, that entrepreneurs don't decide on how to allocate other factors.
nirgrahamUK:secondly, two different factories with different ways of administering production, proportions of secrataries to managers etc, different choices of production processes to transform raw materials into the same consumers product( from the pov of the customers) , who use different machines, one whose models are replaced every 5 years, and the other who replaces every 10 years etc, now the consumers are given play money and they bid for some definite quantity of the product of the two factories (their outputs are aggregated at the 'store'). the consumers bidding on the market of produced goods, clears , and nothing is left on the shelves. now, should either factories production increase? should both? should neither? should either factories production decrease? should both? should neither? what is the mechanism by which this is determined? should both factories, be closed down the material and staff redistributed to other industries, whilst a new factory that supersecedes is built?.
All you are illustrating here is that in an economy there are no omniscient actors. Different entrepreneurs have greater or lesser knowledge than others about how to allocate resources in the production of consumer goods. Over time, the less efficient will be weeded out through the system of profit and loss.
nirgrahamUK:what concept of efficiency are you using? do you think that its feasible to say that some process of creating computers id '99%' efficient? is it that its some percentage more or less effiient than other actual processes? or other 'imagined' processes?
Economic efficiency. Not mechanical efficiency.
nirgrahamUK:a)does the central planner rationally allocate everything, or just some arbitrary subset of the the factors?
All the non-specific factors.
nirgrahamUK:b) assume all markets clear, (there is only a consumer goods market) no stock is left on shelves, because no piece of stock has lower marginal utility than the free money dispensed to the consumers to spend. is the central planner trying to make each unit good clear at the same market price? is tehre an ideal price that each good should leave the shelf at that he will aim for in his production strategy? how precisely does the clearing of the consuemr market help determine how to restructure production for the given period the planner considers
This part's a bit complicated, but I have a solution I will post later.
nirgrahamUK:c) efficiency of the structure of production can be 'calculated', can it?
It can in an ordinal sense.
JonBostwick: Sphairon: 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. Bogus, he's trying to hold a variable(demand) as a constant. Doesn't work that way.
Preferences are constant in an ERE.
Stephen:This doesn't follow, in the same way that on an open market, it doesn't follow from the fact that the DMVP of a factor of production depends on complementary factors, that entrepreneurs don't decide on how to allocate other factors.
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:All you are illustrating here is that in an economy there are no omniscient actors. Different entrepreneurs have greater or lesser knowledge than others about how to allocate resources in the production of consumer goods. Over time, the less efficient will be weeded out through the system of profit and loss.
well, you have not address the consequences to one who would central plan. everything in that paragraph that had a question mark demanded a response.
Stephen:Economic efficiency. Not mechanical efficiency.
Stephen:All the non-specific factors.
Stephen:This part's a bit complicated, but I have a solution I will post later.
Stephen:It can in an ordinal sense.
Stephen:Preferences are constant in an ERE.
what value does mentioning an ERE have?. the central planner that challenged sphairon made no claims about ERE's . so how is referring to a pedagogical abstraction going to help his case?
Maybe we can solve the discussion this way:
In a theoretical stone age-like tribal economy, where all factors of production, all possible production processes and the consumer preferences can be more or less known ex ante, it might be possible to allocate ressources by using some fancy mathematic formulas.
However, in an economy as complex and ever-changing as ours, with millions or even billions of people trading goods, any attempt to allocate ressources centrally must utterly fail. Why? Because the tacit, subjective knowledge contained in millions of brains can never be transferred into a central planning agency. What computer could substitute people like Ray Kroc, Ingvar Kamprad, Jeff Bezos or Larry Ellison? In contrary, without a market process - as DD5 thankworthy corrected a prior post of mine - all that knowledge could not have been produced in the first place. Through the market price system, the market participants can exchange this otherwise uncommunicable knowledge with each other.
Feel free to correct me if I didn't get the gist of the matter right.
Actually, that's not clear.
Actually, it is.
Not in the real world.
Oh?
And definitely not in Kaju's example. In the real world, only a certain type of land is depleted. All other factors of production such as nondepleteable land, capital, or labour are render services in perpetuity or are replaced. It makes to most sense to infer an ERE from Caju's example, since he specified a particular structure of production, in which case there are no depleteable FOP.
Only to the extent that the good - which is ultimately scarce - is economically allocated and produced. If it is not eventually it will begin suffering depletion. Which goods could be produced in perpetuity anyway? Economic use may halt their depletion but unless new technologies come into play cannot indefinitely forestall it.
They can't.
Sphairon:this pretty much nails down for me why I am not yet convinced of the a priori impossibility of economic calculation without market pricing.
You're not convinced of the a priori impossibility of economic calculation in a theoretical evenly rotating static economy; where the best production methods are given, and can be induced from static demand functions. But by now you should understand that economic calculation, in a dynamic world, in the real world, is entirely impossible.
I don't know if Stephen is purposely being vague about his position, but he's talking about extremely simplified and abstract mathematical models, where all information is given. He's talking about the possibility of economic calculation in a world he creates, with equations he creates, and with constraints he chooses.
It's like making a utility function with cardinal rankings and saying, "hey look, value can be cardinally ranked!"
Stephen: JonBostwick: Sphairon: 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. Bogus, he's trying to hold a variable(demand) as a constant. Doesn't work that way. Preferences are constant in an ERE.
And that's just one of the variables you are trying to set as a constant.
Your plan requires a set "technological recipe", but determining the best way to make a good is a chief function of the price system. By your own admission your plan relies on arbitrary production in lieu of economic calculation.
Me:The technological recipe provides the MPP of the capital goods.
You:This has some meaning in the context of a narrowly defined product line. i.e. the marginal physical product of adding an extra egg, into the mix at a given bakery, might be a determined fact, given the existing conditions at the bakery. however this is far from a helping a central planner to rationally allocate all capital factors, because as we have just noticed to derive the facts of the MPP of the egg we have to assume a certain configuration and assess it in that context. so necessarily, we are taking the other factors, (all the other things in the baker) as fixed, i.e. we are not deciding how to allocate them, hence the central planner is not doing what he said he would do, allocate all the resources.
Me:This doesn't follow, in the same way that on an open market, it doesn't follow from the fact that the DMVP of a factor of production depends on complementary factors, that entrepreneurs don't decide on how to allocate other factors.
You: 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.
I'm sorry. I don't understand how the implications of your last point prove your original objection.
You:secondly, two different factories with different ways of administering production, proportions of secrataries to managers etc, different choices of production processes to transform raw materials into the same consumers product( from the pov of the customers) , who use different machines, one whose models are replaced every 5 years, and the other who replaces every 10 years etc, now the consumers are given play money and they bid for some definite quantity of the product of the two factories (their outputs are aggregated at the 'store'). the consumers bidding on the market of produced goods, clears , and nothing is left on the shelves. now, should either factories production increase? should both? should neither? should either factories production decrease? should both? should neither? what is the mechanism by which this is determined? should both factories, be closed down the material and staff redistributed to other industries, whilst a new factory that supersecedes is built?.
Me:All you are illustrating here is that in an economy there are no omniscient actors. Different entrepreneurs have greater or lesser knowledge than others about how to allocate resources in the production of consumer goods. Over time, the less efficient will be weeded out through the system of profit and loss.
You:well, you have not address the consequences to one who would central plan. everything in that paragraph that had a question mark demanded a response.
In Kaju's example, a process of entrepreneurial discovery is unnecessary, since the technological recipes are a given.
nirgrahamUK: Stephen:Economic efficiency. Not mechanical efficiency. oh geeze that helps. i have no idea what you mean.
nirgrahamUK: Stephen:It can in an ordinal sense. again, no idea what you are saying. i understand what that might mean if we were talking in the sense of an actual economy, in that case you might refer to the ex-ante valuations of free individuals coordinating their plans through the market process. deviations from this would impair 'efficiency' from their standpoint. but you have eliminated the market , there is only one actor, the central planner. so i have no idea what you mean or where you are going with this
Economic efficiency is the production of goods at minimal cost. It is always in terms of consumer valuations. It is impossible to measure in cardinal terms, unlike in mechanical or electrical systems where it is simply the ratio of output to input. There are only more or less value productive uses for scarce economic goods, in the form of ordinal ranking. The whole point of the economic calculation argument is to show that under socialism it is impossible to economize factors of production and there will always be misallocation and waste, namely economic inefficiency.
nirgrahamUK: Stephen:All the non-specific factors. why not specific factors too? they would seem ot be the easiest to allocate....
The problem of allocating specific factors between alternative lines of production is complete nonsense. They only have one use and no problem of economizing exists.
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. 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.
nirgrahamUK:what value does mentioning an ERE have?. the central planner that challenged sphairon made no claims about ERE's . so how is referring to a pedagogical abstraction going to help his case?
Do you even know what I am challenging?
@ Tobbog
Sounds like you're coming at it from a Hayekian perspective.
So you're saying if 'a' is given, we can derive a demand function. Not very useful
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