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
Jon Irenicus: And I would ask yourself the question of how the central planner could possibly replace the role of competing entrepreneurs. They can't.
And I would ask yourself the question of how the central planner could possibly replace the role of competing entrepreneurs.
They can't.
You'll get no disagreement from me
Jon Irenicus: 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.
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.
Rothbard: 6. The Depletion of Natural Resources One category has been purposely omitted so far from the discussion of land factors. At first, we defined land as the original, nature-given factor. Then we said that land which had been improved by human hands but which is now permanently given must also be considered as land. Land, then, became the catallactically permanent, nonreproducible resource, while capital goods are those that are nonpermanent and therefore must be produced again in order to be replaced. But there is one type of resource that is nonreplaceable but also nonpermanent: the natural resource that is being depleted, such as a copper or a diamond mine. Here the factor is definitely original and nature-given; it cannot be produced by man. On the other hand, it is not permanent, but subject to depletion because any use of it leaves an absolutely smaller amount for use in the future. It is original, but nonpermanent. Shall it be classed as land or as a capital good? The crucial test of our classificatory procedure is to ask: Must labor and land factors work in order to reproduce the good? In the case of permanent factors this is not necessary, since they do not wear out. But in this case, we must answer in the negative also, for these goods, though nonpermanent, cannot be reproduced by man despite their depletion. Therefore, the natural resource comes as a special division under the "land" category.[29] Table 15, adapted from one by Professor Hayek, reveals our classification of various resources as either land or capital goods.[30]
6. The Depletion of Natural Resources
One category has been purposely omitted so far from the discussion of land factors. At first, we defined land as the original, nature-given factor. Then we said that land which had been improved by human hands but which is now permanently given must also be considered as land. Land, then, became the catallactically permanent, nonreproducible resource, while capital goods are those that are nonpermanent and therefore must be produced again in order to be replaced. But there is one type of resource that is nonreplaceable but also nonpermanent: the natural resource that is being depleted, such as a copper or a diamond mine. Here the factor is definitely original and nature-given; it cannot be produced by man. On the other hand, it is not permanent, but subject to depletion because any use of it leaves an absolutely smaller amount for use in the future. It is original, but nonpermanent. Shall it be classed as land or as a capital good?
The crucial test of our classificatory procedure is to ask: Must labor and land factors work in order to reproduce the good? In the case of permanent factors this is not necessary, since they do not wear out. But in this case, we must answer in the negative also, for these goods, though nonpermanent, cannot be reproduced by man despite their depletion. Therefore, the natural resource comes as a special division under the "land" category.[29]
Table 15, adapted from one by Professor Hayek, reveals our classification of various resources as either land or capital goods.[30]
JonBostwick:Your plan requires a set "technological recipe", but determining the best way to make a good is a chief function of the price system.
No, it's an entrepreneurial function. The price system is allows for profit and loss which allows an objective measure of whether or not the entrepreneur was right.
JonBostwick:By your own admission your plan relies on arbitrary production in lieu of economic calculation.
It's not arbitrary. It is in light of consumer preferences and the available alternatives.
JonBostwick:And that's just one of the variables you are trying to set as a constant.
What would you infer from Kaju's example? I think that if he posits a simplified structure of production with missing details but mentions nothing about it changing, it's reasonable to presume that it's an economy that is evenly rotating.
Esuric: 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.
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.
In the real world, economic calculation is possible in a market economy. In a socialist economy it is impossible.
Esuric: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!"
It's like making a utility function with cardinal rankings and saying, "hey look, value can be cardinally ranked!"
Crazy Kaju gave an example of a simplified (and incomplete) economic model as a demonstration of the necessity of economic calculation for rational capital allocation. All I'm trying to point out is that if you fill in the missing holes (and it doesn't matter which way) in his simplified model it in fact does become possible for a central planner to rationally allocate capital goods without economic calculation as a tool.
Where does Rothbard contradict what I said there?
nirgrahamUK: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.
I just don't see the problem the same way that you do. The MPP relates the input to the ouput. Having to allocate several FOP at one time doesn't add to the difficulty. It just becomes a matter of solving a set of equations instead of one.
nirgrahamUK: Stephen:Economic efficiency is the production of goods at minimal cost. but you have no market for factors, so where are these costs? 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?
The cost is the next most highly valued good which must be given up to obtain the shoe making machine.
nirgrahamUK: 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?
This is a poor mischaracterization of my argument combined with a poor example. The consumers are bidding against each other with their future supply of one good for the other good.
Jon Irenicus: Where does Rothbard contradict what I said there?
According to standard Austrian analysis, there are no depleteable FOP in the ERE. And it doesn't follow from the fact that a good is used uneconomically that it will be depleted.
Maybe you are refering to capital consumption, but even if you are, I fail to see how it is relevant to the problem of calculation.
How's production going to go on indefinitely outside of paedagogical constructs exactly? The Rothbard stuff you quoted of course doesn't really say anything on this. It matters because as the resource is depleted it becomes scarcer consequently must enter into new pricing relations.
It’s funny how every harebrained scheme of socialists seeks to mimic the market without actually being a market. Don’t they ever grasp the futility?
Socialist: “Oh, we won’t have a market. But we’ll still have people producing things for consumers depending on what they take. And we’ll make a half-baked attempt at economic calculation, along with some lame mechanism for consumer feedback. Oh, and we’ll make sure hard-working people have more of a say than the slackers…”
Libertarian: “Hmm. Sounds like a market. Except inferior, since it’s not the real thing.”
Socialist: “D’oh!”
Jon Irenicus:How's production going to go on indefinitely outside of paedagogical constructs exactly? The Rothbard stuff you quoted of course doesn't really say anything on this. It matters because as the resource is depleted it becomes scarcer consequently must enter into new pricing relations.
It just means repeating the bidding process and restructuring production each new period.
To both you and UK,
I've jumped through your hoops and answered your questions and as far as I can tell this isn't coming to a conclusion. How about you guys tell me what you would accept as a complete solution or produce a logical proof of the impossibility of correct FOP allocation in the absence of economic calculation for Kaju's example stating any additional assumptions.
I just started reading Economic Calculation in the Socialist Society by Hoff, still in the introduction, and there is this great bit from Maurice Dobb, a socialist who was uniquely not a market socialist in the 30s.
While Dobb's attitude was both paternalistic and authoritarian, he did notice something the market socialists overlooked in their enthusiasm for the model of perfect competition. A Dobb put it sometime later, "Either planning means overriding the autonomy of private decisions or it means nothing at all""
When I read about libertarian paternalism, it is really just the same paternalism of the 30s socialists. Which is the same paternalism of today's non-governmental libertarian socialists.
If you find something evil that wobbles, push it. - Gary North
Stephen:I've jumped through your hoops and answered your questions and as far as I can tell this isn't coming to a conclusion. How about you guys tell me what you would accept as a complete solution or produce a logical proof of the impossibility of correct FOP allocation in the absence of economic calculation for Kaju's example stating any additional assumptions.
first off, I consider your activity in this to be a threadjack.
This post was about Sphairon's difficulty of keeping faith with the Austrian calculation argument in the face of socialists, dictators and technocrats who blind him with science. For you to, interpret KKaju's post in a narrow way, as permission for you to deliver your proof that central planning is feasible and rational in the ERE literally adds, nothing to the conversation. what do you expect Sphairon to have taken away from it aside from more confusion?
Secondly, using the construct of the ERE to think about the calculation argument is precisely the wrong way to go about it. whatever room you find for a central planner is utterly redundant. producers and consumers are going about their days with perfect certainty, all prices are set. no money is needed.the entrepreneur has no place, as all factors are already allocated. so introducing a central planner to dictate what is already being done is empty,
Now to end on a nice quote bomb
The mathematical economists are almost exclusively intent upon the study of what they call economic equilibrium and the static state. Recourse to the imaginary construction of an evenly rotating economy is, as has been pointed out,1 an indispensable mental tool of economic reasoning. But it is a grave mistake to consider this auxiliary tool as anything else than an imaginary construction, and to overlook the fact that it has not only no counterpart in reality, but cannot even be thought through consistently to its ultimate logical consequences. The mathematical economist, blinded by the prepossession that economics must be constructed according to the pattern of Newtonian mechanics and is open to treatment by mathematical methods, misconstrues entirely the subject matter of his investigations. He no longer deals with human action but with a soulless mechanism mysteriously actuated by forces not open to further analysis. In the imaginary construction of the evenly rotating economy there is, of course, no room for the entrepreneurial function. Thus the mathematical economist eliminates the entrepreneur from his thought. He has no need for this mover and shaker whose never ceasing intervention prevents the imaginary system from reaching the state of perfect equilibrium and static conditions. He hates the entrepreneur as a disturbing element. The prices of the factors of production, as the mathematical economist sees it, are determined by the intersection of two curves, not by human action.
Ludwig v.M
please use the ERE as ridiculous is it is as a pedagogical tool to understand the difference between entrepeneurial profit and interest; don't keep going back to it on holiday, youwouldn't want to go native....
Repeating the bidding process of what? Consumer goods? You cannot factor in capital goods as costs if they're not priced (and as I have said backwards imputation will not suffice unless you're dealing with completely specific capital goods which was not what KK specified.)
nirgrahamUK: Stephen:I've jumped through your hoops and answered your questions and as far as I can tell this isn't coming to a conclusion. How about you guys tell me what you would accept as a complete solution or produce a logical proof of the impossibility of correct FOP allocation in the absence of economic calculation for Kaju's example stating any additional assumptions. first off, I consider your activity in this to be a threadjack.
So what? It's the internet.
nirgrahamUK:This post was about Sphairon's difficulty of keeping faith with the Austrian calculation argument in the face of socialists, dictators and technocrats who blind him with science. For you to, interpret KKaju's post in a narrow way, as permission for you to deliver your proof that central planning is feasible and rational in the ERE literally adds, nothing to the conversation. what do you expect Sphairon to have taken away from it aside from more confusion?
I thought my interpretation of KK was reasonable. If you specify one type of structure and say nothing about any time variance, it's reasonable to assume its static (or evenly rotating). Generally if someone gives specifications but there are a few missing, one ought to be as conservative as possible but fill in those holes. Also, I don't see how Sphairon is supposed to learn anything from a poor illustration in which the opposite of what KK is attempting to demonstrate is what is demonstrated.Sphairon's difficulty stems from a lack of sound understanding of the matter, which can only be achieved by heavy reading and thinking on the subject, not by a handful of posts from similarly confused proponents who have not done heavy reading.
nirgrahamUK:Secondly, using the construct of the ERE to think about the calculation argument is precisely the wrong way to go about it.
Or using a crappy example were everything's already specified.
nirgrahamUK:whatever room you find for a central planner is utterly redundant. producers and consumers are going about their days with perfect certainty, all prices are set. no money is needed.the entrepreneur has no place, as all factors are already allocated. so introducing a central planner to dictate what is already being done is empty,
True enough, but that is not what the calculation problem is about.
nirgrahamUK:please use the ERE as ridiculous is it is as a pedagogical tool to understand the difference between entrepeneurial profit and interest; don't keep going back to it on holiday, youwouldn't want to go native....
It's useful for more than just that. It's necessary for almost any thought experiment in economics.
ok, im done with this thread
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