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?
Check my blog, if you're a loser
Check the past week's threads (the one called My View on Capitalism and another where I linked to an article by Kevin Carson.)
-Jon
Freedom of markets is positively correlated with the degree of evolution in any society...
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?
Yes.
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?
No.
See the differences between the hayekian and misesian take on the calculation problem by Hülsmann and by Hoppe.
PS: See also Salerno.
Remember that on the market it may the case that the most productive arrangement for a specific good is only one producer. Because of the price of the good and costs in producing that good that market prices make possible, everyone except the existing producer decides it is not worth it to start a second business based on the cost-calculations of their own individualized knowledge.
This applies to a corporation as well. The corporation's employees know from cost accounting what the corporation pays for different production factors. If they find out that they can do it at a lower cost if they leave their employee status at the corporation and form their own business with their previous employer as their client, then the fact that they choose not to do so reveals that vertical integration is the most economically efficient way to organize production. However, for this to be true, these employees must be legally allowed to start their own business (in monopoly theory, they must have the right to compete with themselves) otherwise they won't realize lower costs when they do become aware of them. Because this is forbidden in a socialist economy, there is an economic calculation problem. This problem does not arise in an economy with free enterprise, whatever size an organization takes.
The fallacies of intellectual communism, a compilation
Successful business cannot be unnecessarily big or it will go out of business. Some may be big because of government intervention, but I think in a free market one couldn't say a multinational or multi-industry company was too big (doesn't this include small ebay sellers that sell worldwide and in a variety of goods?). How big is too big? Such questions are themselves calculation. The only thing that says too big in a free market is when they go bankrupt or quit selling anything anyone wants. The difference between that and big government is that the government never ever has to say enough is enough (and more often than not government also wants this same privilege for its revenue-generating "corporations")... and the government's business operation is basically setting the consumers into the mold of their "services" instead of satisfying anything at all.
Stranger: Remember that on the market it may the case that the most productive arrangement for a specific good is only one producer. Because of the price of the good and costs in producing that good that market prices make possible, everyone except the existing producer decides it is not worth it to start a second business based on the cost-calculations of their own individualized knowledge. This applies to a corporation as well. The corporation's employees know from cost accounting what the corporation pays for different production factors. If they find out that they can do it at a lower cost if they leave their employee status at the corporation and form their own business with their previous employer as their client, then the fact that they choose not to do so reveals that vertical integration is the most economically efficient way to organize production. However, for this to be true, these employees must be legally allowed to start their own business (in monopoly theory, they must have the right to compete with themselves) otherwise they won't realize lower costs when they do become aware of them. Because this is forbidden in a socialist economy, there is an economic calculation problem. This problem does not arise in an economy with free enterprise, whatever size an organization takes.
We don't have an economy with free enterprise. Noone does. So why continue this misleading charade of using theories about the ideal conditions of free enterprise to describe current conditions without it? The modern buraucratic large corporation is not a product of free enterprise, this much should be quite clear. The fact that people make certian choices now - in the atmosphere of an unfree economy in which their choices are artificially limited - does not prove that this would be their choice in a free economy, and it most certainly does not legitimize the current structure and conditions of the unfree economy. This is fallacious - it's what "vulgar libertarianism" means. It is only through the effects of all sorts of restrictions on competition that the contemporary corporation can get as powerful as it does today. When one takes into account the fact that big buisiness and the state have a certain synergy between one another, it no longer suffices to use "the free market" as a descriptor and legitimizer of whatever structure and size buisiness happens to take. The buisinesses become more closely modeled after the state due to the synergy.
Brainpolice:So why continue this misleading charade of using theories about the ideal conditions of free enterprise to describe current conditions without it?
Methinks some people need to read the posts in a topic before replying.
scineram: Brainpolice:So why continue this misleading charade of using theories about the ideal conditions of free enterprise to describe current conditions without it? There are tons of refutations of the perfect competition and other relevant theories on this site. Vulgar libertarians should read upon that before they start supporting socialism.
Noone here is supporting socialism.
Brainpolice:We don't have an economy with free enterprise. Noone does. So why continue this misleading charade of using theories about the ideal conditions of free enterprise to describe current conditions without it?
The question was whether vertical integration implied problems of economic calculation. The answer is that it doesn't; even on the pure theoretical free market, large corporations can be economically efficient. If government interference makes it too costly to compete against vertically-integrated corporations, then the large corporation is an outcome of economic calculation: people form corporations to protect themselves from the government.
Are you suggesting that WWJD...er, constructing an imaginary Evenly Rotating Economy to understand the basic principles of an economic system is unproductive?
I could point out some examples of former employees setting out in business under the theory described under the post you were responding to that would invalidate your counter point if I were so inclined. Or even an example of vertical integration being the most efficient means of production as in Standard Oil back before the Trust Busters got through with them.
But, you know, marginal utility of my leisure time and all that...
Stranger: The question was whether vertical integration implied problems of economic calculation. The answer is that it doesn't;
February 17 - 1600 - Giordano Bruno is burnt alive by the catholic church. Aquinas : "much more reason is there for heretics, as soon as they are convicted of heresy, to be not only excommunicated but even put to death."
Juan: Stranger: The question was whether vertical integration implied problems of economic calculation. The answer is that it doesn't; The answer is, I think, 'vertical integration' can lead to calculation problems but in a real free-market those problems would be self-correcting.
No, it is the inverse. A problem of economic calculation can lead to vertical integration. For example, if it is really expensive or complicated to start a business, then it will be advantageous to organize the economy in vertically-integrated corporations.
Stranger: Juan: Stranger: The question was whether vertical integration implied problems of economic calculation. The answer is that it doesn't; The answer is, I think, 'vertical integration' can lead to calculation problems but in a real free-market those problems would be self-correcting. No, it is the inverse. A problem of economic calculation can lead to vertical integration. For example, if it is really expensive or complicated to start a business, then it will be advantageous to organize the economy in vertically-integrated corporations.
But most of the cost and complications in starting a business are imposed by the state. Thus, I think that there would be a tendency of fewer large vertically-integrated companies in a truly free market.
Market anarchist, Linux geek, aspiring Perl hacker, and student of the neo-Aristotelians, the classical individualist anarchists, and the Austrian school.
wombatron:But most of the cost and complications in starting a business are imposed by the state. Thus, I think that there would be a tendency of fewer large vertically-integrated companies in a truly free market.
No doubt, but bigness also makes you prey to antitrust regulators, thus it is possible that government interference in the economy favors small business.
Yes. The market should limit the size of businesses by balancing economy of scale against the calculation problem, and other managerial problems associated with big business. It has failed to do so because of the state. Would we expect anything different? The biggest can pay off the government to get bigger.
You might be interested in Kevin Carson's article in the Freeman this month. You might also check his blog for comments on this issue. I also started a thread called "Kevin Carson" to discuss this issue.
Stranger:No doubt, but bigness also makes you prey to antitrust regulators, thus it is possible that government interference in the economy favors small business.
That's only very big businesses that don't "share" their profits with the politiceans. ;) Anyway, if you ignore special interests (tax and ecological benefits for a factory to move to a region, and all kinds of not so visible regulation that is buderson to a smaller scale business) and just focus on the size of the government, you'll see that it promotes at least mid-sized businesses because of their contracts; government as a big consumer needs big producers.
What people tend to ignore is that big corporations like a lot of the food chains and a lot of recreational stuff are franchises. They just offer some services in exchanges of part of the revenues of its franchises. A lot of times, they don't even own the building.
Equality before the law and material equality are not only different but are in conflict with each other; and we can achieve either one or the other, but not both at the same time. -- F. A. Hayek in The Constitution of Liberty
Stranger: The corporation's employees know from cost accounting what the corporation pays for different production factors. If they find out that they can do it at a lower cost if they leave their employee status at the corporation and form their own business with their previous employer as their client, then the fact that they choose not to do so reveals that vertical integration is the most economically efficient way to organize production.
But the state presents barriers to entry, which make starting a business more capital intensive - not to mention connections intensive. Besides, what if a company tends to attract non-entrepreurial workers?
JohnSchreimann:Some may be big because of government intervention, but I think in a free market one couldn't say a multinational or multi-industry company was too big (doesn't this include small ebay sellers that sell worldwide and in a variety of goods?)
I agree. What we can say is that there are sound economic reasons to conclude that present companies are bigger than the market would allow due to government interference. We can say this because:
1. There are governmental policies which would tend to promote the growth of big business.
2. There are big businesses which are massively inefficient.
However, it goes even further. Kevin Carson has a blog post recently discussing the creation of demand by large industries.
scineram:There are tons of refutations of the perfect competition and other relevant theories on this site. Vulgar libertarians should read upon that before they start supporting socialism.
Sure, except that no one is supporting socialism and no one is making use of perfect competition or other "relevant theories." What we're supporting is a free market, as opposed to a corporatist market where the state grants certain priviledges to business at the expense of other people's freedoms. Do you really want to call that socialism?
JAlanKatz: But the state presents barriers to entry, which make starting a business more capital intensive - not to mention connections intensive. Besides, what if a company tends to attract non-entrepreurial workers?
If there are non-entrepreneurial people in the economy, then clearly we are better off with big corporations to tell them what to do and exploit their productive potential, which they cannot do on their own. This has nothing to do with government.
Stranger:If there are non-entrepreneurial people in the economy, then clearly we are better off with big corporations to tell them what to do and exploit their productive potential, which they cannot do on their own. This has nothing to do with government.
Any society has entrepreneurial and non-entrepreneurial people. The existence of non-entrepreneurial people doesn't mean that we need big corporations, they could just as easily work for a larger number of small firms. In any case, my claim is that it might be that the non-entrepeurial people end up working for Walmart, invalidating your claim that if the big corporation was inefficient, the workers would immediately start their own firm. The entrepreneurial people in society might lack information, and those with information might not be entrepreneurial.
JAlanKatz:The entrepreneurial people in society might lack information, and those with information might not be entrepreneurial.
Knowing that one is not entrepreneurial is information. It serves nothing to start your own business if you know that you are going to bungle it up and go bankrupt your first year, wasting the economy's capital. You are much better off supplying labor to a corporation without having to understand how to run a business yourself.
Stranger:Knowing that one is not entrepreneurial is information. It serves nothing to start your own business if you know that you are going to bungle it up and go bankrupt your first year, wasting the economy's capital. You are much better off supplying labor to a corporation without having to understand how to run a business yourself.
Agreed 100%. But that goes against your original claim that a big business must be efficient because an employee who sees a department being inefficient can start his own firm and sell the output of that department to the company. There are good reasons to think that even in an inefficient firm, that won't happen.
Also, the fact that someone is better off supplying labor to another doesn't imply that we need big, vertically integrated businesses. That would depend, at the very least, on the proportions of entrepreneurial vs. non-entrepreneurial people in society.
JAlanKatz:Agreed 100%. But that goes against your original claim that a big business must be efficient because an employee who sees a department being inefficient can start his own firm and sell the output of that department to the company. There are good reasons to think that even in an inefficient firm, that won't happen.
The fact that the employee knows that he could not run his own business well enough to make profits in excess of what he gets paid by the corporation is precisely what makes the corporate relationship efficient. If people choose to work for corporations, then that corporation must be efficient.
Stranger:The fact that the employee knows that he could not run his own business well enough to make profits in excess of what he gets paid by the corporation is precisely what makes the corporate relationship efficient. If people choose to work for corporations, then that corporation must be efficient.
No, we just dealt with this. You're ignoring personality types - some people are not entrepreneurial personality types. These people are likely to be the people who end up working for corporations. Just because HE can't make profits in excess of what he gets paid doesn't mean that someone else, with the information about how the company operates, can't run an outsourcing firm more profitably, and employ that very same person at a higher wage. This means that the corporation could be inefficient and still not have someone outsource its departments.
The employee doesn't care who he works for - he cares about what he does and what he gets paid. Just because the initial conditions are such that they favor big, vertically-integrated firms doesn't mean that the employee is choosing to work for a big, vertically-integrated firms, just that the employee chooses to work for a boss rather than start his own company. And, again, there are state-built roadblocks to starting your own company as well that can skew this choice. Finally, as Carson pointed out, people who take a job are in many cases expressing a preference for working for someone else over starving, not over other options, because there might not be other options - as is the case when we have land being expropriated by governments early on.
JAlanKatz:No, we just dealt with this. You're ignoring personality types - some people are not entrepreneurial personality types. These people are likely to be the people who end up working for corporations. Just because HE can't make profits in excess of what he gets paid doesn't mean that someone else, with the information about how the company operates, can't run an outsourcing firm more profitably, and employ that very same person at a higher wage.
That other information does not exist, hence the corporation is efficient until it does exist.
Stranger:That other information does not exist, hence the corporation is efficient until it does exist.
I'm done. Any honest reader will know you are talking in circles.
Scineram: Sooo large size is a market failure. Maybe it should be banned.
Juan: Scineram: Sooo large size is a market failure. Maybe it should be banned. So, we live in a free-society where all industry is laissez faire. I didn't notice before, but thanks for the info.
Maybe we could regulate the market into freedom. Just determine what the free market would look like then force it into the mold.
Peace
JAlanKatz:Yes. The market should limit the size of businesses by balancing economy of scale against the calculation problem, and other managerial problems associated with big business.
The calculation problem has nothing to do with size. It is a problem that arrises without a price system.
A small government will suffer the same problems as a large government. There is no value in discussing size, only method.
Jon: Maybe we could regulate the market into freedom.
JonBostwick: Juan: Scineram: Sooo large size is a market failure. Maybe it should be banned. So, we live in a free-society where all industry is laissez faire. I didn't notice before, but thanks for the info. Maybe we could regulate the market into freedom. Just determine what the free market would look like then force it into the mold.
Quit it with the straw men please. Nobody said large size is a market failure. Who said they want to regulate the economy into freedom?
Government most definitely grants favors to large businesses and passes regulations to stifle competition. Thus with a truly free market we would see more competition and many of the large firms would have trouble with this new competition. Thus we would see a trend towards less vertical integration than we presently have under a free market.
That's the point you should be disputing (if you disagree with it).
Lets look at a scenario for a vertically integrated company.
Ford is the sole producer of widgets which it installs in its cars. If Ford were to sell widgets by themselves it possible that they would be put to a more productive use, thus sell for a higher price. This is not the calculation problem. This is a lack information. Should someone offer to buy Widgets from Ford, they would instantly know if the deal was profitable or not.
majevska:Government most definitely grants favors to large businesses and passes regulations to stifle competition.
Thats not integral to government, its coincidental. A state that designed to create excess competition would just as much a state.
I don't presume to know what a free market should look like. The most significant change towards increased competition would the abolition of IP, but I don't see that changing vertical integration.
JonBostwick: Thats not integral to government, its coincidental. A state that designed to create excess competition would just as much a state.
But the fact remains that the state favors big business (maybe not ALL big business, but the gang on top will certainly look after its own). The lack of a state will fundamentally change the nature of society. The cost and complication of starting a business will be much lower, and without a central bank providing artificially large amounts of credit, credit will be harder to come by, also limiting the size of many businesses.
i read the first two. it was a good explanation, and thorough, of their differences, which seem to stem from their underlying foundations of economic theory.
so to support your answer, i'd have to say
no because
1) consumers own private property, as does the corporation - exchange ratios here will be the calculated according the knowledge acheived through private property. in that each consumer can choose alternate private property, or save for future alternatives, or invest for possibly greater future alternatives, firms must deliver desirable products at cheap costs. These products, as the corporations' property, have a calculated cost of its sum factors of production.
2) factors of production are market consumers - laborers, which would be the primary factor of production would then get to evaluate the firm's product upon the market. if they were simply to get paid in firm credit, then their would still be a calculation of the firm's products compared to other allocations of resources. because labor is so capital intensive, large firms must satisfy their labor as consumers.
3) stock-holders are entrepreneurial owners of property - firms have underlying assets, contracts, and consumer goods. Owners wishing to profit from capital investment will be forced to seek firms that have the better management of the firm's property, as those will grow in productive capabilities, in capital value, and in market size (by lowering prices). If some market participant knows of a better arrangement of some firm's capital, he (they) can purchase it and redirect the assets' management.
Because consumers can calculate, much production cost leaving the firm's control, and competitive ownership calculation, it is likely that very large firms will still face competition, on various scales. Laborers could both invest in and buy competitors' products. As such, large firms will always have calculations - not simply with management and accounting based upon knowledge of past actions, but on the part of their owners on whether to sell or buy more of the firm, predicting whether or not they will be profitable in the future, and under what ownership-management conditions. These things are speculative.
In other words, mismanagement would essentially be under fire from calculated competition in ownership, which ultimately faces consumer calculation. This basically forces managers to act as private owners. They face the loss of employment to not understand the property they control and effectively use it. Thus, calculation enters in the value of their employment (and career improvements for production increases).
Thus, I assume there is a calculated effort to solve the "what do i do next?" question posed to the firm's property managers. Where there isn't, the stock price will fall with profits until there is an exchange of owners, with one entrepreneurially acting to redirect capital management in a more productive arrangement.
Maybe the time the market owners, managers, and laborers can respond to adjusting their production process is lesser than would be many independent owners of capital goods, but then would this be more like the efficiency argument, rather than the calculation problem? perhaps this is why the calculation problem is applied to socialism, which allows for no alternative arrangment, and thus direction, of ownership. While socialism's managers may change, its owners cannot. The exchange of capital goods is impossible. Even with large firms in a market, firms essentially calculate profit. Unprofitable firms lose stock price relative to assets as valued by other firms, so at some point, ownership serves to sell existing assets for a more productive function. Ownership, and its ability to calculate profit, also promotes calculation upon direct managers of property. Also, in the ability for laborers to be owners, profitable calculation occurs.
I like many of the points on both sides of this. I think it's fairly obvious that we don't see too many of such huge corporations, who only purchase raw materials and labor and sell only consumer goods, even while government may show bias towards larger business.
Ultimately, i think, the calculation problem seems to apply exclusively to socialism, as its foundation lied in that all capital goods were public property. No one could benefit from the ownership or the exchange of such property. No one could determine exchange ratios and scarcity among goods. In large firms, rather, the demand for stock ownership would reflect the judgement of management of the capital. If capital were mismanaged, it would appear that there were some missing information link between those knowledgeable about the good, who would best serve as its owners. This creates investment opportunities for them inside the company, as well as outside. However, the lattice work is not missing. Owners may own many multiples of firms, exchanging their shares in proportion to capital management's ability to turn a profit. A huge network of private owners of capital goods, consumers, and managers all function according to calculation.
JonBostwick: The calculation problem has nothing to do with size. It is a problem that arrises without a price system. A small government will suffer the same problems as a large government. There is no value in discussing size, only method.
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.
When it comes to government, it always operates without a price structure, so yes, it always is afflicted by the calculation problem, and to the same degree (100%) while the business is afflicted by it to a greater or lesser degree. On the other hand, as the business grows, it gains economy of scale, which tends to counteract the problems it suffers from the calculation problem, which is why the market wouldn't shrink it down to an individual, as well as the presence of non-entrepreurial individuals, as Stranger spoke about.
Ludwig von Mises Institute | 518 West Magnolia Avenue | Auburn, Alabama 36832-4528
Phone: 334.321.2100 · Fax: 334.321.2119
contact@Mises.org | webmaster | AOL-IM MainMises
Mises.org sitemap