Currency and the calculation problem

Economics Economics Questions
1

So I haven’t read much about this but from the little I have this is what I think that the idea comes down to. I’m sorry if I’m totally wrong about this but I need this because I think I’m going to end up bashing heads with some socialists or heavy statists soon.

In a socialist society calculation is impossible (besides just Hayek’s “knowledge problem” and the simple calculating all the data issue) because in effect currency is rendered utterly useless because indeed currency is useless. In a socialist society all transactions are based off of either simple distribution or the government using its godly powers to simply command a transaction to take place. In such a society currency is absolutly useless because one cannot spend it on anything and there is no market.

Therefore any socialist entrepeuners (if they can be called so in such a system) would have no way of mesuring exactly what people want through the profit motive (this would be true anyway of course because there is no profit in such a system) but even to make sure if such a system was breaking even.

So am I right here than in a communist/socialist system there really can be no currency which would mean the end of all real economic calculation/progress or am I just being stupid here?

As for normal calculation problem (in that there is a ton of data) isn’t that solved today with the invention of super computers?

2

If its going to be online, I’ll march with you [8o|]

Well… government goods and services can have prices, at which point currency is sort of like a way of government to ration scarce resources. Unfortunately, without knowing how much people are actually willing to pay for goods and services, the true price remains unknown, and government doesn’t know whether to produce more of this good or to shift production to some other good.

Right, because the government will just order X workers to produce Y t-shirts, and doesn’t know if it is actually worth their time to be producing that or something else. The best a statist can do is guess: Say they produce enough t-shirts so everyone has 10/year and then move onto producing pants until those quotas are filled. This just runs into the issue of: is 10 t-shirts too much or too little… when we’re done with t-shirts do we make pants?

Like I said, there can be currency but it takes the form of rations. Individuals can still calculate if they can choose which goods to buy.

Just playing devil’s advocate.

Yeah what equation do you plug in? :stuck_out_tongue: The calculation problem is not to be taken as literally there is some function of concrete variables which can be calculated. For example, the worker’s decision to work for 40 hrs a week vs 50 hrs a week depends on his subjective value judgments, which can never have a number.

3

No, it’s more to do with the absence of pricing of capital goods due to lack of ownership in them than lack of currency; some forms of socialism like market socialism do not abolish money.

Depends on what kind of information we’re talking about. I don’t think supercomputers can account for or capture much of the local information held by individuals regarding their own circumstances and which influence their own decisions (including how they choose to value various goods.) I still think Mises’s rendition of the problem is the tougher one to overcome, but Hayek’s formulation can still be considered viable by not overestimating what computers can and cannot do.

4

Even if we had hypercomputers that could take in any equation and produce the correct answer in less than a second(provided the necessary numbers, of course), there’s still at least two problems: the first is determining the variables that matter and the equation to get from them to the number we’re interested in and the second is actually measuring them. Even one mistake in either would ruin everything.

5

What would the computer calculate? Even a computer needs meaningful data to crunch on.

You misunderstand the information problem. The calculation problem is not a problem of computational power. It is a problem that there is no useful information in the first place that one can work with in order to compute.

6

I would be happy to my dear snowflake, but it looks as though this battle will be far from the relm of teh internetz

This is what I started to write but then I realized, with currency you ran into the above problem, without currency you ran into the problem that you couldn’t tell if you were breaking even.

So really how could there be a currency in a system where there is no profit?

I think it would be easier if someone could just send me to an article that explains the calculation problem and condenses Mises’ work. I still plan to read it but I have ALOT of Austrian reading on my plate and I’m having difficulty finding time to read as it is.

7

Your understanding of the currency question is good.

I have an idea for you, which can help you encounter statists better. Possess the analogy of the market to a voting process, with money serving as votes. Consumers vote(or bid) with their money for different goods. If an economic system wants to call itself to be a rational allocator of resources, it must obey the rules of this voting process. The pricing system is basically about allocating resources to the most important wants(based on the votes each resource gets).

And as you know, without money there is no scope of voting, and so there is no question of ever hearing to teh consumer’s preferences.

But wait, your Statist friends, true to the precedence set by the neo-classical and socialist economists, are gonna make a lot of concessions to their pure socialist model of economy. The first one would be, allowing money to play a part in the economy.

Also, try telling your Statist friends about the role profits and losses play in the economy, that is, why economic calculation is important for the welfare of the economy. If I am gonna take raw materials worth $1000 and make a product that sells for $1500, what I do is, combine resources to form a product that is valued better. This is not to say that value can be objectively measured. But prices can tell us the ordinal valuation of stuffs.

And also tell people that profits and losses are the result of imbalance in the allocation of resources. Whenever you correct the imbalance, you get profits. When you further aggravate the imbalance, you make losses. For example, if I’m gonna take cream and butter worth $100 and make it into ice creams worth $200, I make a better allocation of resources thereby earning profits. If you look at this in crude terms, it’s a kind of arbitraging activity. In short, you reallocate resources in such a way that resources are used towards the best uses. The better allocation here in this case is based on the form. You change cream and butter to ice cream.

Arbitraging is quite the same, you transfer products from areas where it is valued less to places where it is valued more and thereby causing a better allocation of resources and earning profits as a result. The better allocation here in this vase is based on the place. You transfer product in place X(where it is valued lesser) to place Y(where it is valued higher).

8

They way I heard it, the calculation problem doesn’t have to be connected to currency. Even if there is currency, there is a calculation problem because the gov has a monopoly on production. It takes all the raw materials and decides what to do with them. Nobody else owns a factory. Nobody can make any stuff without permission. Nobody can buy raw materials on their own and do what they want with them. This condition is enough to create the calculation problem, even if there is money being used in the country, say for people to trade what the gov divvies out to them.

The problem is because the gov has everything at its disposal, with no one competing for it. To use Walter Block’s example, say they decide to build a bridge. They can build it from steel or from gold. How do they know which to use? What’s wrong with a solid gold bridge? it’s more expensive? No it isn’t, because there are no jewelers buying raw gold. They are not allowed to. Gold and everything else has no price. [Of course gold jewelry has a price, but nobody wants a blob of gold.]

Now in the real world we know people would be happier with a steel bridge and tons and tons of gold jewelry, because gold is more expensive and thus not worth wasting on a bridge. But how do they know that?

BTW, right after the Bolsheviks took over in Russia they eliminated money. Instantly mass starvation happened. They hated it, but they had to bring money back.