It is probable that my conception of utility is wrong, and I have been reading, but I still think that if utility is subjective then there is no way to scientifically asses the welfare benefits or costs of socialism versus capitalism. So even if it is known that socialism cannot calculate, we cannot say from this fact that socialism is less preferable to capitalism.
Knowing that this must be wrong I ask if you would know any good articles/books on utility or calculation.
fakename: It is probable that my conception of utility is wrong, and I have been reading, but I still think that if utility is subjective then there is no way to scientifically asses the welfare benefits or costs of socialism versus capitalism. So even if it is known that socialism cannot calculate, we cannot say from this fact that socialism is less preferable to capitalism. Knowing that this must be wrong I ask if you would know any good articles/books on utility or calculation.
I don't subscribe to the Austrian impossibility of socialism argument, but if you use the principle of revealed preference you can, indeed, see that capitalism is preferable to socialism. For instance, why don't South Koreans try to escape to North Korea? Why don't Americans risk their lives to make it to Cuban shores. Why did the U.S.S.R. feel the need to construct the Berlin Wall? It is plain as day that people reject socialism for capitalism, thus implying greater subjective utility.
"I cannot prove, but am prepared to affirm, that if you take care of clarity in reasoning, most good causes will take care of themselves, while some bad ones are taken care of as a matter of course." -Anthony de Jasay
I didn't want to ask this question here as well, but I feel I have to in response to the previous: What is the doctrine of revealed preferences? Every mention of it seems to say that preference scales logically imply that people have revealed their preferences through their actions or that people act to maximize ex ante utility but why doesn't this also imply that , when people judge paying taxes to be a better choice than being sent to jail, these victims of theft are maximizing their utilities too?
(I hope the above wasn't too unintentionally funny to an educated austrian)
fakename: I didn't want to ask this question here as well, but I feel I have to in response to the previous: What is the doctrine of revealed preferences? Every mention of it seems to say that preference scales logically imply that people have revealed their preferences through their actions or that people act to maximize ex ante utility but why doesn't this also imply that , when people judge paying taxes to be a better choice than being sent to jail, these victims of theft are maximizing their utilities too?
You're right on. Our preferences are revealed through our actions. You're also right about taxation. Every time you pay taxes, you are demonstrating that you prefer to simply comply with your robbers rather than put up a fight. That doesn't make taxation any less wrong, however. If I give a mugger my wallet without a fight, it is only because I'd rather do that than risk him killing me. It doesn't mean that I'm okay with the mugger robbing me and would rather he didn't. I just had to choose between two bad choices, so I chose the option that would leave me the least worse off, if that makes sense.
I think you need to ask "calculate what"? The problem of social calculation is that of how to determine the best use of scarce resources to meet human needs. If you take a system that can calculate the best possible use of those resources and compare it to another that can't, you have one system that is capable of meeting human needs and another which is not. So the only possible way that you could prefer central planning to a market based pricing system is if you had a personal preference for poverty and want... which the odd sicko might but generally speaking this runs in direct contradiction to human nature (it is in our nature to satisfy our needs - indeed this is probably the most fundamental aspect of the nature of all creatures, not just humans).
It is a fact that, because of economic calculation, many more economic choices are available under capitalism than under socialism, as socialism outlaws most economic exchanges. The fact of the existence of more choices implies that capitalism is superior to socialism.
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To bring up a few new points...
Still, the utility of someone's choices is experienced only by that particular individual. Assuming a very closed-off enviroment like the soviet union, one cannot help but conclude that the given choices in the enviroment (pay taxes, do what the gov. tells you) and the act of choosing them increases the ex ante utility. It could be that the greater diversity of choices, for instance, is good for someone else in the world or might even be good for the particular soviet individual here stipulated; but with theses choices prohibited by gov. in one scenario and residing in an entirely different person in the other, it seems true to assert that whatever the soviet does in his country with his given options fulfills his utility. Furthermore, because all acts increase utility ex ante, all economic arrangements are utility maximizing.
As for the calculation argument proper, I understand that mises stipulates a central planner with perfect knowledge of even consumer preferences. But in my opinion, owing to the fact that all people act according to their preferences coupled with the fact of the perfect extent of the planner's knowledge, the planner has everything he needs to work an economy. For in this position he is indistinguishable from the regular individual whose wants are evident to himself through introspection and can easily arrange means to desired ends. If followed consistently, the planner would allow all the things people desire and "socialism" would simply become free markets. For instance, he could easily solve the problem of prices because he knows 1) how much people want things 2) where resources are and how to get them and 3) the disutility involved in extracting the resources. And if the people desire a currency to facilitate exchanges he can also give this to them. So under this socialism both money,property, and prices are given real meaning.
Furthermore, because all acts increase utility ex ante, all economic arrangements are utility maximizing.
Wrong. If the economic system requires intervention to reach an outcome, it is not utility-maximizing, as the individual must be coerced into participating/abstaining from a transaction, in spite of what they would have done.
As for the calculation argument proper, I understand that mises stipulates a central planner with perfect knowledge of even consumer preferences.
Yeah, to show how it's irrelevant, i.e. to show that Hayek's rendition of the problem is not all there is to it.
For instance, he could easily solve the problem of prices because he knows 1) how much people want things 2) where resources are and how to get them and 3) the disutility involved in extracting the resources. And if the people desire a currency to facilitate exchanges he can also give this to them. So under this socialism both money,property, and prices are given real meaning.
Wrong. Ownership in the factors of production is required for prices to even arise in this area. Otherwise, there can be no such thing as prices. Anything else is merely play. You're trying to define the problem away: if the "planner" simply gives people free markets, then it's obvious there is no calculation problem. But the whole point of socialism is to bring the f.o.p. under state control, i.e. to abolish private property in this area. And without private property there can be no prices, hence no economic calculation. That is Mises's argument. BTW positing an omniscient planner is troublesome in and of itself, and relies heavily on static, false models of general equilibrium, discarding the dynamism inherent in economic activity.
-Jon
To darkness I condemn you...
fakename:As for the calculation argument proper, I understand that mises stipulates a central planner with perfect knowledge of even consumer preferences.
But then goes on to say that the transition from a non-socialist economy to a pure planned one would break the equalibrium and it would all come crashing down.
Any change would throw it into disarray.
fakename:But in my opinion, owing to the fact that all people act according to their preferences coupled with the fact of the perfect extent of the planner's knowledge, the planner has everything he needs to work an economy.
Even if a planner did have perfect knowledge of people's needs, how could he rank them in terms of priority such that he could assign the scarce resources that he had available to those most pressing needs first. Which is more important: my haircut or your new shoes? If one has to choose between these (because there are insufficient resources to meet both needs) it's impossible to come up with any objective criteria to do so... it's comparing apples to oranges.
I can decide whether a set of new shoes is more valuable to me than a haircut is to me... but it's impossible to compare the various different needs of different people and list these in order of "Priority" since the concept of priority in this context is necessarily subjective. Who's priorities? The central planner must necessarily assume one set of priorities which might suit him and might even suit me, but which would not suite a whole bunch of other people. He is thus forcing his set of priorities onto a whole bunch of hapless victims (even if he has perfect knowledge of their needs).
Only in some kind of "hive mind" society like a bunch of bees or ants could such a situation be avoided.
The assumption of perfect knowledge of preferences would allow a central planner to provide goods and this is how:
The scenario is that he must find a trade off between his own haircut and another's new shoes. All the preferences (and the buying and selling which represent them) of a market are interconnected -the same funds which pay for the haircut might be used to pay the rent for the same strip mall that houses the shoe store. The central planner in the meantime, not only has information of the two preferences but he desires and prefers the new shoes as the separate person who prefers it does (because of the perfect information assumption -the perfection of his knowledge is so complete that it goes all the way into the physiological/psychological). So whatever he chooses to do he must do it such that he gets his haircut and delivers the shoes to the person on time. There is one possible avenue he could do this in. The planner markets his abilities to forecast consumer preferences to a firm or is self-employed thereby raising lots of revenue for himself while increasing the efficiency of the marketing business. The new information is produced less onerously; real wealth increases while real wages decrease allowing for a savings that could be passed on to the shoe buyers and shoe industry which can market more shoes at lower cost, allowing the person to buy his new shoes (this all because of market interconnectedness). In other words the superior information of the planner increases the rate at which information about preferences are processed by firms allowing for them to squeeze in the sale of the new shoes which would've been compromised had the planner been anything less than perfect. Finally, the planner must buy his haircut but the high rate of returns he makes off his new job increases the opportunity cost of getting a haircut and he leaves it alone to get one later. Of course the actions of the planner generate effects throughout the market like a ripple in a lake -effects on preferences. But the planner is totally linked to consumer preferences and places himself in the best position to fulfill them always. That is, he just continuously does whatever he does in the first section of the scenario.
It is exactly like "jimmy" wrote -the planner knows the minds of the individuals of the population.
Also it is true that the point of socialism is to nationalize the factors of production but I would hypothesize that if the central planner really knew the preferences of the people perfectly, then he would never advocate a course of action different from a free market. That is, the thoughts of the planner as concerns the people=what the people want themselves at any given moment. What other thing to do but let their choices have free reign?
And again, utility seems to be maximized with every action, at least at first. But if at the end, an action turns out to be bad, then economic science doesn't have anything to say about it since this is really a sunk cost. Although an action that is coerced carries less utility than one that isn't -how does economic science know this? My Scenario: A bride is forced to marry a groom at gun point. By just her actions she prefers being married to being shot. But how would the economist know what she would prefer in an alternate scenario that was never expressed in action? That is, how could he say that without coercion, she would've taken a more utility-maximizing action? Without action, there is no apodictic way to know anything about utility.
So shouldn't this perfect information concession weaken the calc. arg.? Why not?
I would like to point out that a great acheivement of Mises was drawing an objective science out of what seems like a purely subjective realm. He did not compare certain ends to each other or to other people's - he used the ordinal time preferences of human choices and actions. In other words, the order in which people act to most efficiently acheive their desired ends, and how this results in a market process. While risk and error may play their parts in influencing actions and outcomes, there are objective principles about fulfilling subjective desires.
Jon is right about property and prices. Money is just a medium of exchange to coordinate all exchange rates. There are still imputed market values to anything, depending upon the actions people will take to acquire such things.
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Also it is true that the point of socialism is to nationalize the factors of production but I would hypothesize that if the central planner really knew the preferences of the people perfectly, then he would never advocate a course of action different from a free market.
Assuming the problem away.
And again, utility seems to be maximized with every action, at least at first. But if at the end, an action turns out to be bad, then economic science doesn't have anything to say about it since this is really a sunk cost. Although an action that is coerced carries less utility than one that isn't -how does economic science know this?
Why is coercion necessary to stop someone from undertaking a transaction or to force them into it, if they believed it'd satisfy their preferences?
My Scenario: A bride is forced to marry a groom at gun point. By just her actions she prefers being married to being shot. But how would the economist know what she would prefer in an alternate scenario that was never expressed in action? That is, how could he say that without coercion, she would've taken a more utility-maximizing action? Without action, there is no apodictic way to know anything about utility.
Indeed, and the fact that she didn't get married to a consenting partner means she did not prefer the action, as opposed to some other action. Had she preferred it, she'd have done so. End of story. All you've shown is she prefers marriage to being shot - a transaction she refused to undertake without being coerced.
No. Because it does not actually address Mises's challenge; it merely addresses Hayek's formulation of it. Allocation of resources requires the price mechanism. In its absence, how scarce and how intensely something is desired is impossible to know. All one has are meaningless figures, nothing that'll help direct the resource where it is best suited to. All one is confronted with is conflicting, varying preferences. Nothing else. Socialists try tackle this problem by asserting a market in consumer's goods, and they then suppose they can work backwards. Problem is, all a market in consumer's goods is of no help in determining which of multiple possible factors of production to use &c; it just helps determine which consumers goods are desired. With no property in them and thus no price for them, there is no rational calculation, just arbitrary whim-worship.
Jon Irenicus:Indeed, and the fact that she didn't get married to a consenting partner means she did not prefer the action
True but another thing, after reading around on utility some more I'm still unable to fathom how we know in the above case that the woman's utility actually declined due to gov. force. I know that it wasn't maximizing for her to do it before, but now in the case of the shotgun wedding she clearly demonstrates her preference for the marriage?
Jon Irenicus:All one is confronted with is conflicting, varying preferences. Nothing else. Socialists try tackle this problem by asserting a market in consumer's goods, and they then suppose they can work backwards. Problem is, all a market in consumer's goods is of no help in determining which of multiple possible factors of production to use &c; it just helps determine which consumers goods are desired. With no property in them and thus no price for them, there is no rational calculation, just arbitrary whim-worship.
Yeah, but my scenario is =to someone inventing a mind-reading machine on the market. I know it is impossible for socialism to calculate w/humans but with a mind reading machine everything is possible and the constant changes in the market and the preferences people have are known so figuring out the ratios shouldn't be that hard. Bascially in a state of nature a bunch of people get together and one of them can read minds. They hire him to market everything and he does and so industry is aided even more. This is what happens if you assume that there is a person with total knowledge of all things and why I think the article is weaker with it.
One more question: Who is this aguilar who wrote axiomatic economics? i read an exchange between him and others and I was just wondering how wrong he was (having never read his paper) on a scale of 1-10?
fakename: True but another thing, after reading around on utility some more I'm still unable to fathom how we know in the above case that the woman's utility actually declined due to gov. force. I know that it wasn't maximizing for her to do it before, but now in the case of the shotgun wedding she clearly demonstrates her preference for the marriage?
What don't you understand? In one case she's choosing between getting married and getting shot, and in the other she's choosing between getting married and not getting married. Her "preference scale" looks like this:
1) don't get married
2) get married
3) get shot
Clearly, in constraining her to only choosing between (2) and (3), her choice of (2) is not maximizing her utility, since (1) is of higher utility, but you're not letting that be a consideration.
fakename: Yeah, but my scenario is =to someone inventing a mind-reading machine on the market. I know it is impossible for socialism to calculate w/humans but with a mind reading machine everything is possible and the constant changes in the market and the preferences people have are known so figuring out the ratios shouldn't be that hard.
Yeah, but my scenario is =to someone inventing a mind-reading machine on the market. I know it is impossible for socialism to calculate w/humans but with a mind reading machine everything is possible and the constant changes in the market and the preferences people have are known so figuring out the ratios shouldn't be that hard.
A "mind reading machine" wouldn't help. There are no "ratios" to figure out - you can only rank preferences in order (sort of; you can't even really do that very far - it's enough to just rank your highest preference above everything else), you can't put values on them ("I rank X at 35 preference units, Y at 32 preference units, ..."), which would be necessary to compare preferences between two people (and even if you could, you'd have to build Deep Thought and run the universe at fractional speed to solve the humongous preference matrix in "real time"; and then the planner would be operating on past data: he knows your preferences now, but production takes time and he can't know your future preferences until the future is the present, so he'll still misallocate resources!)
fakename: One more question: Who is this aguilar who wrote axiomatic economics? i read an exchange between him and others and I was just wondering how wrong he was (having never read his paper) on a scale of 1-10?
18.7
Paul: What don't you understand? In one case she's choosing between getting married and getting shot, and in the other she's choosing between getting married and not getting married. Her "preference scale" looks like this: 1) don't get married 2) get married 3) get shot
So I suppose that one can know the utility of something for a person but not in between people? And also doesn't economics deal with human action at the present without regard to human action in the past (utility from an exchange ex ante rather than ex post)? If this is true wouldn't basing a preference scale on past action (like her decision not to be married) be illicit?
Paul:A "mind reading machine" wouldn't help. There are no "ratios" to figure out - you can only rank preferences in order (sort of; you can't even really do that very far - it's enough to just rank your highest preference above everything else), you can't put values on them ("I rank X at 35 preference units, Y at 32 preference units, ..."), which would be necessary to compare preferences between two people (and even if you could, you'd have to build Deep Thought and run the universe at fractional speed to solve the humongous preference matrix in "real time"; and then the planner would be operating on past data: he knows your preferences now, but production takes time and he can't know your future preferences until the future is the present, so he'll still misallocate resources!)
Notwithstanding the seeming innanity of my questions, I still think that in a market the ratios (prices) are directly indexed to preferences and preferences, though ordinal, can be compared by a person in terms of ordinal rank. In my scenario, I don't see how a central planner with knowledge of everyone's preferences is in any different position than a person who ranks his very own preferences. Indeed, it is true that these preferences would be a comparison of apples to oranges for the planner but a person with preferences for apples and/or oranges is still able to "plan" how to get them and uses his ordinal rankings and the market to do so -I don't see how a central planner with perfect knowledge of everyone's preferences and their rankings would be in any different position for he has all the same data that the people going to market have.
And finally, on aguilar I heard that there are good rebutals of him on this site. Where could I find them? I read that he uses obscurantist language -do the critics even know what he is talking about?
fakename - it's not the unknown preferences of consumers that makes socialism fail. It is the unknown market value of capital goods, as they cannot be privately owned or exchanged. central planners will indeed use the preferences and opinions of consumers to attempt to compute values to certain capital goods. This may give some indication as to how valuable one capital good is to another capital good inside an existing structure of production; however, it does not suggest alternative structures of production.
In any case, none of the proposed methods of determining the values of capital goods have been attempted by a socialist regime. They all use the command economy. This might be because the equations needed to be solved could take years to solve even with the most modern computers. Or it could be because it is more accurate to simply use the market values of comparable capital goods in capitalist markets. Or because the central planners know their consumer preference information isn't complete or accurate.
Or because those setting the accounting prices would be rational to fudge the numbers and keep their jobs rather than reveal rampant losses - or inefficient use of property allocation.
For a more complete argument, look here.
I read your article and mises' article too. Rereading the last one was actually like reading a whole new book! Did mises even mention the perfect manager in his article? For the life of me I couldn't find one reference! Well in that case I guess his calculation argument is pretty much perfect. Nevertheless can you point out an instance where he actually addressed the perfect planner?
Thanks
Also, the utility thing is still hard to grasp.
To be honest, I have not read any of Mises's works. I do know that his two main works on socialism were Socialism from i think 1920, and the revision of Human Action from the 60's. I'm not 100% on that. If I find it I'll link.
Utility is odd. Often the socialist will argue that egalitarian distribution of wealth is moral or promotional of social values or something of that nature. Yet socialist regimes are marked by not simply the wealthy or well off attempting to flee to freer markets, but also the poor. And capitalism is not marked by individuals attempting to hoard wealth. They are free to use, exchange, or donate their property as they please. If they value the well-being of others, then it increases their utility to donate to charity. The capitalist's argument is that capitalism will best provide such charitable people with means to fight poverty and human suffering.
Economics is not supposed to be firmly connected to morality or maximizing some conception of utility. It is supposed to be a study of how to most efficiently coordinate the production and exchange of property so that people can acheive their desired ends. These ends may be self-centered or generous.
Capitalism is often seen as cold because it appears to define utility through the calculation of profit. This is a little off. We may define economic efficiency in terms of profit, but not utility. Utility is defined by the individual and can occur or be absent in both profitable and unprofitable ventures.
Fakename, I think you're on the right track here. The more subjective and individualistic you get in poli. econ, the better.
I think the basic point for "socialist" calculation isn't so much that it is preferrable as it is that "socialism" cannot efficiently allocate resources and possesses no means to assess the proper use functions.
This, as you have pointed out, does not mean that "capitalism" is superior to "socialism" on every level, merely that "capitalism" can do something that "socialism" cannot.
P.S. I use quotes because I don't subscribe to the view that capitalism = free market (what Mises seems to have been referencing), nor do I believe that socialism = teh evil collective-centralized boogeyman.
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