Economics Questions

Re: Mises Calculation Problem in Large Corporations

meambobbo — Tue, 24 Jun 2008 15:13:49 GMT

Included in regulatory costs but should be specifically mentioned - there's also the regulatory cost of the SEC to simply become incorporated. Supposedly, the initial paperwork filing can cost $1,000,000.00+. This is why venture capital funds start-ups, and if they are successful, they go public to pay out the initial investors.

...Also, just to give some of you a picture of regulatory cost - a friend of mine was hired as a paralegal in DC. He made a $35k/yr salary, and his job was EXCLUSIVELY to fill out the paperwork to comply with Sarbannes-Oxley, passed in wake of Enron.

Re: Mises Calculation Problem in Large Corporations

meambobbo — Tue, 24 Jun 2008 15:00:56 GMT

It's not simply the transaction costs, though.

There is an economy of scale in being able to be multi-national when the differing laws of many nations create a production and consumption process that is cheaper to be multi-national than completely "in-house". For example, the homesteading laws of some nation rich in raw materials, labor laws of India/China, import tariffs... Clearly, this is not free market activity.

Then there is the tax structure on stocks here. The most sensible arrangement would be to pay out dividends, and let investors choose whether to reinvest, diversify, or consume. Instead, most companies choose not to do this because dividends are double taxed as corporate income and as personal income. The least taxed option for corporate profit is reinvestment. From a tax standpoint, so long as a company is profitable (sometimes when it isn't), it sees the most benefit in growth. Sometimes, growth merely means buying out a smaller, more efficient competitor.

Then there's corporate welfare - subsidies, bail-outs, and gov't loans, OH MY!

Then there's the regulatory bodies who can create privilege without even knowing it (or do it corruptly) - I'd go through the agencies, but it's too much alphabet soup. Some historic - ICC, FCC, DoAg. They can either limit the market by production caps, cost barriers, or direct prohibitions, but in most cases, big business sees less competition without facing as harsh costs.

Then there's the monetary policy which redistributes wealth from non-investors to investors, encourages consumption or risky investment over simple saving, and creates countless "bigger fool" investment opportunities during artificial credit booms.

And...limited liability...

Re: Mises Calculation Problem in Large Corporations

Remnant — Tue, 24 Jun 2008 08:44:48 GMT

JonBostwick:
this gives us a starting point to what was really on people's minds, the size of corporations. Does the state increase or reduce transaction costs?

Over the last decade it is clear that the Internet has reduced transaction costs, cutting out the middle man (disintermediation, was the rather ugly term used back then). But, what we have also seen is a huge increase in state interference in everyday life over the last 10 years, outweighing much of this benefit. Hence, the continuing dominance of large companies today.

Re: Mises Calculation Problem in Large Corporations

Brainpolice — Tue, 24 Jun 2008 08:38:12 GMT

It isn't a misapplied calculation problem to apply it to institutions as such. To only selectively apply the analysis to certain institutions and not others would be a misapplication. An organizational and informational theory applies to all organizations and all cases involving information. This isn't a misapplication, it's an expansion or extension upon the calculation problem.

The state's policies quite blatantly enable economies of scale and externalizes such costs. So yes.

The worldview that state intervention is fundamentally anti-buisiness is bollocks and is accepted from different angles by both the political left and right.

Re: Mises Calculation Problem in Large Corporations

JonBostwick — Tue, 24 Jun 2008 08:03:45 GMT

meambobbo:
"A way of stating the Coase's theorem is: “there must be a balance between the costs of the transactions that a company must pay and the opportunity to make everything in house”.

Well, now that we've gotten away from the misapplied calculation problem, this gives us a starting point to what was really on people's minds, the size of corporations. Does the state increase or reduce transaction costs?

Re: Mises Calculation Problem in Large Corporations

meambobbo — Thu, 19 Jun 2008 19:51:21 GMT

Here is an interesting quote from the wikipedia page on Coase Theorem:

"A way of stating the Coase's theorem is: “there must be a balance between the costs of the transactions that a company must pay and the opportunity to make everything in house”. This is one of the reasons why, in the past, companies used to grow more and more: it was better to make something in house since the cost of the transaction to buy it was high. In the internet era, Coase's theorem became even more up to date, but under a slightly different version. The concept is the same, but the way of reading it is the opposite. We could say: "the size of a company will decrease until the cost of doing something inside the company will be lower than doing it outside". In other words, since in the internet era the cost of the transactions became very small, as a consequence, the size of the companies is decreasing. An example of this phenomenon is the increasing pace of the outsourcing and off-shoring businesses."

Re: Mises Calculation Problem in Large Corporations

meambobbo — Thu, 19 Jun 2008 19:25:52 GMT

JAlanKatz:

Well, how do you do it? Better yet, don't tell me - work with me to bring about a free market, then show me that you can build a large, vertically-integrated firm successfully and make a profit.

But leaving the lands in the hands of those it was given to, and not the hands of the rightful owners, would be more analogous to leaving the slaves as slaves, not to competing in the marketplace. The land really is owned illegitimately in large parcels.

But the small producer is buying the intermediate goods knowing that he will bring a small quantity of the finished good to market alongside tremendous quantities from the big business. Why would he do that?

Well, yes, Hayek said that, but I'm a Misesian.

Consider that the way prices are actually made in a vertically-integrated firm today is cost+markup, and that managers receive bonuses on the dollar amounts of accounting profits in their departments. So a manager can enlarge his bonus by increasing costs, since he is guaranteed sales. Does this sound more like Misesian play prices, or the way things work in a real market?

What we have in a real company is managers who profit from changing artificial prices, who order around workers who understand the process of production better than they can, and who don't own the actual materials and don't internalize actual costs. What does this sound similar to?

I will agree that a free market would be unlikely to have a vertical firm. One reason for this is that transaction costs should become much lower, making them closer to the costs to the company of designing a new stage of production. Another is, as pointed out, more competition, in varying sizes, should exist. However, this doesn't imply that a vertical firm's problem is the calculation problem. Even in a free market, there is nothing preventing some mastermind owner from hiring managers and using accounting practices that would result in a more efficient production process at each stage than all other producers. Likely, no. Possible, yes. I am not such a mastermind, so I can't tell you exactly how; but I imagine such would have to hire managers who were somewhat autonomous but still required his direction (perpetual scarce knowledge), such that these combinations allowed better efficiency than if the managers were left on their own, in their own businesses. Additionally, for each stage of production, the profit a manager would see in his own less efficient business would be less than his salary in the vertical firm. Again, this requires a genius owner (or group of owners), who is (are) unrivaled in the market, and is thus highly unlikely.

I was not saying let injustice lie where it may. I am simply saying some situtations imply that complete justice is impossible -> you can only undo so much injustice. For instance, if I decide to cut down a burning tree and it falls on your 56 room mansion, completely destroying it, you are screwed, because I do not have the economic ability to produce you a new mansion, directly or indirectly. In other cases, it may cost more to enact justice than to simply relieve debt. For example, in the above case, you could take me as your slave, spending time whipping me to rebuild that mansion brick by brick; but you'd be better off using your time to earn money, which would get you a new mansion quicker. Injustice is a sad fact of life. My point is that we should accept some reasonable degree of it. If we simply attempt to reverse, in detail, the past practices of government, we will find and endless road of controversy, preventing us from establishing a system of much less injustice quicker (a free market defended by market "government" services), which would lead to less overall injustice down the road. In the example I use, this would be akin to beating me for a few days, then garnishing a small enough portion of my wages to allow me to survive for the rest of my life. You won't get everything you are owed, but you are still better off than if you tried (in vain) to exact perfect justice.

In the case where the smaller producer chooses to produce, he does so because he calculates profit in doing so. It doesn't matter how much of whatever he produces in relation to some other producer. If he is relatively less profitable in doing so, the more efficient producer will likely be able to expand production faster and reduce greater costs through capital investment, reducing prices, which will make the smaller producer less and less profitable, until he has no reason to continue business.

I'm a Misean too. I simply mentioned all that to demonstrate how seemingly subtle variations in the core of underlying theories can make for drastic differences down the road.

Such a price structure (cost + markup) sounds like "play prices," incapable of generating true profit calculation. Obviously, allowing such practices to go on for long periods of time in a free enterprise system will result in competitors out-competing this business.

This is the fundamental question - is the calculation problem embedded in vertical producers? I don't think so, although it can occur. Rather, in socialism, it is embedded. It is permanent. No matter what the choice or method to get around it, a socialist system cannot get around it.

If a vertical producer chooses "play prices", independent producers will eventually replace it. Yet, it doesn't have to. If independent producers already exist, market prices do also, which allows vertical producers to use them in place of "play prices". The vertical producer does not have to trade with the rest of the market to use the prices. If the vertical producer uses the market prices to calculate profit and finds it is better off out-sourcing, it still may choose not to. This may be due to transactional costs that don't exist in their vertical arrangement, or simply stubbornness. On the other hand, it may find that it is the most efficient producer of all those intermediate goods. (Unlikely, but possible) Anyway, it avoids the problem in these scenarios.

If there is no market for such goods outside this single producer, then you will have the calculation problem...but only until the problem renders the company inefficient to the point where some (or many) stage(s) of its production must be out-sourced. In a regulated market, with high transactional costs or barriers to entry, it may require a large difference in efficiency between an out-sourced producer and the internal production stage before it is actually more profitable to out-source. But as soon as market prices develop between multiple owners, the problem disappears for that stage of production. Accounting costs can again reflect market prices, and profit at those stages can be calculated, which may reveal a new production structure that can avoid out-sourcing. In these cases, the problem is only temporary.

I think we'll agree on the main points though. Monopoly vertical producers (no other provider/buyer of intermediate goods) can suffer from the calculation problem, or may face unprofitably high costs to avoid it (such as putting its intermediate goods up at auction, then refusing to sell, incurring legal costs). It is highly unlikely such producers would exist in a free market. I think relatively few non-monopoly vertical producers would exist as well. There would likely be an efficiency problem, as barriers to entry and transactional costs are lessened, allowing more efficient organizations to exist and profit, which would happen as greater profit to workers, managers, and owners who specialize and know the most about some production process could not be stopped.

Re: Mises Calculation Problem in Large Corporations

Remnant — Thu, 19 Jun 2008 14:23:00 GMT

meambobbo:

Shouldn't Mises's Calculation Problem, as commonly applied to socialism, also apply to very large, multinational, multi-industry corporations? Are they not essentially a blanket ownership of many orders of capital used vertically to produce goods? Does the Calculation Problem mean that businesses should be as small and specialized as possible?

I think this question may be answered by Coase's Theorum.

http://en.wikipedia.org/wiki/Coase_theorem

Roughly summarized, a firm will grow until the internal transaction costs outweigh the benefits from scale.

(As an aside, I think that Coase also determined that the early Lighthouses in England were not funded by Government, but by local shippers. Lighthouses had previously been frequently used as an example of market failure and a reason for Government intervention. In spite of this, Paul Samuelson continued to have the Lighthouse reason for Governemnt intervention in his textbook, even into the very late editions.)

Re: Mises Calculation Problem in Large Corporations

meambobbo — Wed, 18 Jun 2008 21:30:16 GMT

JAlanKatz:

[That's a liberal myth. Standard Oil could only succeed because government was willing to build roads and subsidize railroads; railroads received subsidies and were given seized land around their tracks. They were not forced to compete in the marketplace, they were given absurd incentives - pay by the mile, encouraging odd track formations? My view of IP is that modern software corporations are not big business without government privileges.

I will get to the rest but wanted to give a quick response here. This is always what i tell liberals who bad mouth Standard Oil - public subsidies and land seizures created a monopolistic railroad system that restricted supply, thus when demand expanded via Standard's exclusive contracts, new railroads couldn't find the same privileges, couldn't compete, and couldn't supply alternate transportation to fight Standard. But I believe you are wrong about The Great Northern Railway - James J. Hill did it with private money and privately bought land. He purposefully set out to make the straightest, longest-lasting, most efficient railway. He arguably did, only after which government ran him out of business by trying to fix his rates. And government only came into the ICC rate fixing business because of the non-competition they created through the subsidies and land seizures. I am not sure Google exists as such due to government, and they even supply their own power (not sure about 100%). The only way I can see Google using government policies (besides human resources BS) is benefitting from the inflationary money system and receiving more capital than they otherwise would have.

Re: Mises Calculation Problem in Large Corporations

meambobbo — Wed, 18 Jun 2008 21:07:55 GMT

If market prices reflect government-imposed costs, we seem to have a different problem -> profit at each stage of production can be calculated, however, it is calculated incorrectly according to actual productivity. Isn't this nearly ALL of Mises's arguments against government intervention? The calculation problem seems to be highlighted not by miscalculation, but by missing the tools to calculate. No matter how inefficient some global socialist scheme is, so long as there is no black market in capital goods, there is no method for the planners to discover and correct inefficiency. Rather, if a vertical producer becomes inefficient enough, alternate ownership, production, and markets will develop in that producer's intermediate goods.

This seems to mean the problem exists in corporatist or socialist systems, or those that mix those two, where ownership and production (and thus private profit) are strictly limited. I think barriers to entry do not qualify, unless they are so extreme as to exclude all other owners/producers.

Re: Mises Calculation Problem in Large Corporations

JAlanKatz — Wed, 18 Jun 2008 21:04:59 GMT

meambobbo:
My first point was simply this: can lack of smaller competition create the calculation problem? It seems that while the calculation problem becomes more notable with greater size and greater orders of production, it's existence is based upon the inability to calculate profit, due to the inability to calculate market prices for capital goods, at each production stage. Does lack of smaller competitors producing intermediate goods create the problem? It seems to me that there are still ways to determine market prices and profitability, without drifting into the "play prices" that socialist planners use.

Well, how do you do it? Better yet, don't tell me - work with me to bring about a free market, then show me that you can build a large, vertically-integrated firm successfully and make a profit.

meambobbo:

Obviously, there is injustice that must be corrected before we can simply say, "ok, free market activity only, starting...now!" but we're also going to have to arbitrarily limit such. I said recently in a different post - how do we recover the trillions and trillions taxed away from producers? It is unfortunate but justice from the past is simply impossible. We should be more focused on establishing a free market than correcting prior injustice. I think this is similar to the black community's plight with slavery. Are they better off spending tons of money and time attempting to use the legal system to give them a financial leg up from the heirs of slaveowners, or could they more quickly earn it in what is now a much more open market for them?

But leaving the lands in the hands of those it was given to, and not the hands of the rightful owners, would be more analogous to leaving the slaves as slaves, not to competing in the marketplace. The land really is owned illegitimately in large parcels.

meambobbo:
As far as big business, I don't think Standard Oil rested on government; in fact, that worked the other way around. Same with James J. Hill's Great Northern Railway. The latter was a case where vertical integration was used when there was no prior established market for such goods in certain territories. If there were no nearby steel plants, new ones were built next to the rail line, by the rail company. And depending upon your view of intellectual property rights, many modern software corporations are big business without government privileges. I would agree that in the majority of cases, however, big business is the byproduct of government policies.

That's a liberal myth. Standard Oil could only succeed because government was willing to build roads and subsidize railroads; railroads received subsidies and were given seized land around their tracks. They were not forced to compete in the marketplace, they were given absurd incentives - pay by the mile, encouraging odd track formations? My view of IP is that modern software corporations are not big business without government privileges.

meambobbo:

For my second point, I was saying this: if there are barriers to entry for smaller competitors, does this mean that market prices for intermediate goods cannot be calculated, or simply that such market prices will be elevated, due to costs imposed by government. In other words, because barriers of entry are essentially cost barriers, at some point a smaller competitor can still make a profit producing intermediate goods. If these cost barriers can be calculated, can't the proposed market prices reflect this? If some small entrepreneur offers to buy an intermediate good from the large corporation at $50, the corporation knows that such a price undervalues its productive worth to the corporation, since the smaller producer must buy input lower and sell output higher than the corporation does to make the same profit, due to his higher cost per unit output stemming from larger government imposed costs. So if the corporation calculates the cost barrier as $10 per unit, it can use a market price of $60, rather than the offered price of $50, for that intermediate good. In other words, small producers can and will exist; they simply need a larger profit margin when excluding government-imposed costs in relation to larger producers. If smaller producers don't exist, it means that the larger businesses are more efficient, after weighing government costs.

But the small producer is buying the intermediate goods knowing that he will bring a small quantity of the finished good to market alongside tremendous quantities from the big business. Why would he do that?

meambobbo:
Now, the corporation's perceived "market prices" may not be accurate, but market prices are what they are - they aren't perfect valuations of something. Market distortions will certainly lead to prices that are not accurate to a free market or to some other scale of value. What I am curious is to whether this would be more similar to Hayek's interpretation of the calculation problem, which he said didn't even exist. He simply believed the system relied too much on either trial and error or on computing endless amounts of differential equations, and thus inefficiency. Perhaps large vertical producer suffer similar problems, especially when there is a lack of a market in the intermediate goods they use.

Well, yes, Hayek said that, but I'm a Misesian.

meambobbo:
Mises believed it was simply impossible - he believed there was no means to know whether one arrangement of production was more efficient than another. There were no equations to be solved - doing such would be meaningless. Part of the reason that socialism could exist at all (as I believe Mises and Rothbard argued), was that socialism wasn't universal - market prices from capitalist systems were used in calculation of profit for socialist system. Where socialism tried to create their own prices, they were called "play prices" - rather than being based upon personal profit, they were based upon pure guesswork and prior knowledge. They didn't use Mises's view of market prices, which aren't simply based upon prior prices, but are based upon expectations of private profit, based upon expectations of supply and demand.

Consider that the way prices are actually made in a vertically-integrated firm today is cost+markup, and that managers receive bonuses on the dollar amounts of accounting profits in their departments. So a manager can enlarge his bonus by increasing costs, since he is guaranteed sales. Does this sound more like Misesian play prices, or the way things work in a real market?

What we have in a real company is managers who profit from changing artificial prices, who order around workers who understand the process of production better than they can, and who don't own the actual materials and don't internalize actual costs. What does this sound similar to?

Re: Mises Calculation Problem in Large Corporations

meambobbo — Wed, 18 Jun 2008 20:50:36 GMT

Sure, JAlanKatz.

My first point was simply this: can lack of smaller competition create the calculation problem? It seems that while the calculation problem becomes more notable with greater size and greater orders of production, it's existence is based upon the inability to calculate profit, due to the inability to calculate market prices for capital goods, at each production stage. Does lack of smaller competitors producing intermediate goods create the problem? It seems to me that there are still ways to determine market prices and profitability, without drifting into the "play prices" that socialist planners use.

As far as big business, I don't think Standard Oil rested on government; in fact, that worked the other way around. Same with James J. Hill's Great Northern Railway. The latter was a case where vertical integration was used when there was no prior established market for such goods in certain territories. If there were no nearby steel plants, new ones were built next to the rail line, by the rail company. And depending upon your view of intellectual property rights, many modern software corporations are big business without government privileges. I would agree that in the majority of cases, however, big business is the byproduct of government policies.

Obviously, there is injustice that must be corrected before we can simply say, "ok, free market activity only, starting...now!" but we're also going to have to arbitrarily limit such. I said recently in a different post - how do we recover the trillions and trillions taxed away from producers? It is unfortunate but justice from the past is simply impossible. We should be more focused on establishing a free market than correcting prior injustice. I think this is similar to the black community's plight with slavery. Are they better off spending tons of money and time attempting to use the legal system to give them a financial leg up from the heirs of slaveowners, or could they more quickly earn it in what is now a much more open market for them?

For my second point, I was saying this: if there are barriers to entry for smaller competitors, does this mean that market prices for intermediate goods cannot be calculated, or simply that such market prices will be elevated, due to costs imposed by government. In other words, because barriers of entry are essentially cost barriers, at some point a smaller competitor can still make a profit producing intermediate goods. If these cost barriers can be calculated, can't the proposed market prices reflect this? If some small entrepreneur offers to buy an intermediate good from the large corporation at $50, the corporation knows that such a price undervalues its productive worth to the corporation, since the smaller producer must buy input lower and sell output higher than the corporation does to make the same profit, due to his higher cost per unit output stemming from larger government imposed costs. So if the corporation calculates the cost barrier as $10 per unit, it can use a market price of $60, rather than the offered price of $50, for that intermediate good. In other words, small producers can and will exist; they simply need a larger profit margin when excluding government-imposed costs in relation to larger producers. If smaller producers don't exist, it means that the larger businesses are more efficient, after weighing government costs.

Now, the corporation's perceived "market prices" may not be accurate, but market prices are what they are - they aren't perfect valuations of something. Market distortions will certainly lead to prices that are not accurate to a free market or to some other scale of value. What I am curious is to whether this would be more similar to Hayek's interpretation of the calculation problem, which he said didn't even exist. He simply believed the system relied too much on either trial and error or on computing endless amounts of differential equations, and thus inefficiency. Perhaps large vertical producer suffer similar problems, especially when there is a lack of a market in the intermediate goods they use.

Mises believed it was simply impossible - he believed there was no means to know whether one arrangement of production was more efficient than another. There were no equations to be solved - doing such would be meaningless. Part of the reason that socialism could exist at all (as I believe Mises and Rothbard argued), was that socialism wasn't universal - market prices from capitalist systems were used in calculation of profit for socialist system. Where socialism tried to create their own prices, they were called "play prices" - rather than being based upon personal profit, they were based upon pure guesswork and prior knowledge. They didn't use Mises's view of market prices, which aren't simply based upon prior prices, but are based upon expectations of private profit, based upon expectations of supply and demand.

I think there are two different takes on the calc problem that are confusing us (it is definitely confusing me).

One is that without actual exchange and/or existence of competition (and thus market prices) in intermediate goods, a calculation problem will occur inside a vertical producer.

The other is that the calc problem is caused by the inability of market prices to occur, due to the inability of private ownership. Even without actual exchange or competitive production, a producer can still assign a market value to an intermediate good because the owner can still generate supply and demand curves. In this case, the calculation itself can be wrong, and depending how wrong it is will be reflected in how many competitors eventually come into existence and become successful. But corporate failure to trade doesn't mean market prices don't exist, only that they calculate more profit in their vertical structure than trading and buying their intermediate goods.

Cartelization probably wouldn't avoid the cost barriers, unless such was done illegally. For example, sales revenue could be shifted to the business whose state laws imposed the least taxes, with sales in other territories among the cartel's members being highly discounted. Actually, I'm not sure if that's illegal.

Many small businesses merging into a single corporation to avoid the cost barriers would legally work. The question is whether they would now suffer the calculation problem or not. ...and now my head is starting to hurt...

Re: Mises Calculation Problem in Large Corporations

JAlanKatz — Wed, 18 Jun 2008 17:10:17 GMT

meambobbo:

And we shouldn't be concerned with whether or not we have a free market. If we are talking about in-practice, real-world cases, we must identify what restrictions of the free market would create the calculation problem. Obviously, public ownership of capital goods would. Regulatory barriers to entry may create it in some situations, at some times, but this doesn't seem so convincing. Couldn't a large corporation also supply capital goods to the market, rather than use them in vertical integration? Thus, you may have one corporation vertically integrated and another who simply sells the capital goods that the first corporation uses.

The point that the market is not free is important in responding to a claim that "well, big business must work, since we have them." If instead we have an unfree market that favors big business, this no longer looks like a good point. I'm not claiming persay that regulatory barriers to entry create the calculation problem. Instead, I'd claim that the barriers cause big vertically integrated business, and that these suffer from calculation problems. I'm not sure I see what your last question is asking. Are you asking if we can have a large, non-vertically integrated corporation? I'd say yes, but I'm still not convinced that the market would develop them. Historically, I cannot think of a big business which did not rest on government privileges. Can you think of one?

The best way to answer questions about predicting what a free market would do is to have one and see. However, I don't think that works if we keep all sorts of arrangements inherited from the unfree market. Suppose society consisted of 100 people, and each of these lived on homesteaded land. The economy developed, etc. etc., but in the meantime, the state took all the property and gave it to 2 people, making the rest into renters. Then the libertarians come to power and dissassemble the state, but the property arrangement is left as it was. Can we really call the result a free world?

meambobbo:
It seems such an argument rests on some capital goods having small markets, best provided by small businesses, subject to barriers of entry. (Even in this case, couldn't we argue this simply raises the market price, rather than eliminates it? At some point, profit margins would overcome barriers to entry, if means of production become horribly inefficient in the vertical producer.) Again, this seems to be an efficiency problem, not an inability to calculate.

I don't know what you're saying here. Can you rephrase?

meambobbo:

And why can't many efficient producers cartelize or merge to avoid barriers to entry?

How does cartelization avoid barriers to entry?

Re: Mises Calculation Problem in Large Corporations

meambobbo — Wed, 18 Jun 2008 16:24:36 GMT

I think you two are probably arguing two different things. Do you each know exactly what you are arguing? Do you know what the other is arguing? I think this whole question posed a lot of hypotheticals.

And we shouldn't be concerned with whether or not we have a free market. If we are talking about in-practice, real-world cases, we must identify what restrictions of the free market would create the calculation problem. Obviously, public ownership of capital goods would. Regulatory barriers to entry may create it in some situations, at some times, but this doesn't seem so convincing. Couldn't a large corporation also supply capital goods to the market, rather than use them in vertical integration? Thus, you may have one corporation vertically integrated and another who simply sells the capital goods that the first corporation uses.

It seems such an argument rests on some capital goods having small markets, best provided by small businesses, subject to barriers of entry. (Even in this case, couldn't we argue this simply raises the market price, rather than eliminates it? At some point, profit margins would overcome barriers to entry, if means of production become horribly inefficient in the vertical producer.) Again, this seems to be an efficiency problem, not an inability to calculate.

And why can't many efficient producers cartelize or merge to avoid barriers to entry?

Re: Mises Calculation Problem in Large Corporations

Brainpolice — Wed, 18 Jun 2008 01:38:39 GMT

Stranger:

JAlanKatz:

Agreed, for governments. Here, the relevent meaning of "big business" also has nothing to do with size persay, but with vertical integration. As Carson argues in the Freeman, vertically integrated businesses operate without a market price for intermediate goods. The higher the business goes vertically, the more this is a serious problem for the business. In a free market, this would tend to limit the growth of vertically-integrated firms.

That is simply wrong. The fact that there is only one supplier of the intermediate good does not imply that there is no market price. It implies that this single supplier is in fact the most efficient supplier of the intermediate good, and that vertical integration is efficient, because no one else chooses to supply the good at a price lower than the cost incurred by the corporation to supply itself.

Stay away from Carson man.

For the millionth time: we don't have a free market. Let's repeat that: we don't have a free market. So stop assuming that current conditions are somehow "proof" that the buisinesses and groups in question are efficent. This is a misuse of free market theory. Stop being an apologist for what we have now.

because no one else chooses to supply the good at a price lower than the cost incurred by the corporation to supply itself.[

There's a reason for this you know: we don't have a free market. There are massive barriers for people to do so. Stop ignoring them.