same thing could be said about socialism in general…
Tried already (Cybersyn). Predictably failed. Next.
Clayton -
“More than that, profits result from adjusting to unanticipated consumer demand (key word: unanticipated),”
adjusting to unanticipated consumer demand comes from entrepreneurs who are able to better predict what consumers will want in the future than there counterparts, how does this depend on economic calculation ?
“In the real world of changing/varying consumer preferences, how do you propose to iron out this lack of predictability”
the computers wouldn’t have to perform this task they would only calculate prices, if someone innovates a new product it too can be entered into the database then set upon store shelves and based on how many people are buying this product and the supply of it an accurate price can be calculated
“as past consumption patterns will not match future ones with any degree of exactitude?
Prices are for this reason adjusted continuously in a capitalist society and can continuously be adjusted with computers in a socialist society as well
“Moreover, with profits out of the picture, where will the incentive to innovate and the funds for business expansion/reinvestment come from?”
yeah that is a problem so profits would have to be reintroduced back into the picture, the computers wouldn’t necessarily produce a better market or society than can be produced under capitalism but the point still remains that now due to modern computers the task of calculation under socialism can be accomplished
“So, how are your computers going to predict future variations in consumer preferences? “
the computers wouldn’t need to entrepreneurs would do it, just as they do now under capitalism
“sure you can hope that in the future a super advanced robot solves the Calculation Problem”
those “super advanced robots” are already here in the form of not super computers but regular computers your average joe has in his apartment
“Then we already have a reason to prefer capitalism over this computerized socialism. Are we to extend the division of labor no further than the municipal line?”
ok so you are arguing this would produce nationalism since goods crossing from one state or city to another would mess up the computers calculations ? Well this is perhaps true we would have to solve this problem by having several computers calculate prices for the whole nation which would create the problems I presented myself earlier that those prices would be less effective because people who live in texas would unlikely have the same consuming habits as those who live in Rhode Island, this would also create nationalism in America to solve this we would need a group of computers calculating prices for the whole world and this creates an even bigger problem of prices matching the taste of individuals in different regions
if this is your argument then I concede to this argument
“Do you think this is the only relevant information in an economy? Who will determine what products to make and by what chain of processes to make them?”
already addressed this the individual entrepreneurs as they already do now, since I conceded earlier profits would have to be reintroduced into the system to encourage entrepreneurs to innovate
“With trial and error you might be able to calculate the clearing price for apples, but from this you would never know that they actually prefer oranges. “
if the computers database determines more oranges than apples were sold, I would know weather they actually prefer oranges
“how is it going to work for the entire world (and I say the entire world because your isolated socialized towns are clearly inferior to the division of labor available when we all participate in the same system)?”
ok this is true and I concede this point, even though it is still inferior it still remains however that economic calculation under socialism using computers is still possible im still waiting for you guys to convince me economic calculations under socialism is just as impossible today with computers as it was before the invention of modern computing and you all haven’t done it yet
“I’m so excited, the Zeitgeist movement has been debunked to shreds and they keep on coming.”
Maybe we need to dumb it down? Simplify?
Can anyone think of a nice little cartoon / skit / pic that could be made to illustrate the calculation problem? Anyone know of any good sources?
How do you understand the economic calculation problem? Why do you think a computer is going to be able to calculate the needs of billions of individuals?By calculate, how an earth are you going to know what Individual A’s needs are , you don’t… I imagine you are going to use SCIENCE and decide how much each person should eat according to SCIENCE…
We already do that…
Big corporations use computers to decide what sells and what doesn’t.
Basically, you are describing “central planning”, as if there would be one giant computer and someone is going to decide what to do with all that information. Kinda like one big giant corporation that controls the world.
There’s no difference between socialism with computers and without, it’s still the same damn thing!!! It’s kinda like saying “if Lenin and everyone from his circle had a computer they would have done a better job”.
How is Socialism with computers going to do things better then Capitalism?
The market already does that and it uses computers. I can’t stress enough on this. The price mechanism is influenced by billions of individuals. How is this computer going to calculate by itself without someone’s help? Someone has to manage it…Do tell who…?
Why should they, what makes you think we need central planners to begin with? When you say calculate, are you aware that individual wants are infinite and that the Zeitgeist movement is largely based on their idea of “overconsumption”? If so, please explain “overcunsomption”.
I doubt anyone would attack the Zeitgeist movement with that argument.
So far you’ve been describing all the things capitalism can do and already does.
This is only the beggining.
I always thought, that the story of trying to figure out if a glass is half-empty or half-full was a good analog to the socialist calculation problem -that is, you don’t know if the glass is half-full or half-empty w/o reference to your preferences and needs so 1) a socialist society w/o private property doesn’t really have a way to define “need” in relation to these properties 2) how is a central planner supposed to make economic decisions unless he knows how much you need the water (which is difficult).
“Why do you think a computer is going to be able to calculate the needs of billions of individuals?By calculate, how an earth are you going to know what Individual A’s needs are , you don’t… I imagine you are going to use SCIENCE and decide how much each person should eat according to SCIENCE…””
Google’s web servers can handle god knows how many request in any given time from people all over the world, why can’t a, or several computers calculate information from people all over the world ?
How am I going to know what individual A’s needs are, how does a producer in a capitalist society know exactly what individual A’s needs are ? The fact is the exact needs of every individual are never meant they are merely meant as accurately as what is possible by the coordination of production and consumption through the price system. I’ve already handled this argument numerous times, the computers would not determine what is produced they would merely determine prices, then a group of central planners would determine what needs to be produced using the signals from the price system the same what a producer in a capitalist society determines what he will produce via the price system
“There’s no difference between socialism with computers and without, it’s still the same damn thing”
nonsense production under socialism without computers determining prices operates on the blind hunches of the central planners command, production under socialism using computers to determine prices enables the central planners to calculate production using a price system
“How is Socialism with computers going to do things better then Capitalism?”
it won’t, but since computers can know what has been produced and sold they can calculate prices and solve the problem of an inability to calculate prices under socialism and therefore enables socialist countries to come a lot closer to the efficiently of capitalism
“what makes you think we need central planners to begin with”
we don’t necessarily need central planners, but computers still make it possible for them to calculate how much of what needs to be produced, and solves the calculation problem of socialism
there is no overconsumption
“how is a central planner supposed to make economic decisions unless he knows how much you need the water (which is difficult).”
he doesn’t need to know weather someone or a group NEEDS more water all he needs to know is weather people are buying lots of bottled water for example in which case more bottled water needs to be produced, the computers can tell him if lots of people are buying bottled water or a particular type of water
I suppose you are right, I’m curious what others think about this.
As far as I can see what you’ve done is that you have employed an old idea, the idea of market socialism, and simply added computers into it. The computers are irrelevant, an old time Austrian, I believe it was Joseph Schumpeter suggested exactly what you did. And indeed you do solve the problem of central planning, but you defeat the purpose of making it central planning. If you have introduced a pricing system and allowed everything to make its market price then the only thing that you’ve done is imposed a market in which the factors of production are controlled by a single employer, a monopoly, and inefficiency is bound to ensue. At best you could hope for less innovation and a less flexible system than if you had employed a decentralized market system.
In order to accomplish this amazing feat the computer would have to read all ordinal preferences of all men at every second of every moment. It would have to know the moment a preference changed. Your talking about a computer that has the ability to read minds. A type of omniscient machine.
The solution to economic calculation is omniscience. If your computer can claim that attribute then great, we can enter utopia.
See drawing below for those who forgot how prices are actually formed.
How to solve the economic calculation issue.
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Know all ordinal preferences of all men at any given moment.
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See future wants, preferences, and somehow sort out imaginary bad idea’s with imaginary good idea’s. For example, how would the machine know whether some people would want Ipods in the future? How would the machine know how many people would want ipods and zune’s? Lets say it’s 1990. How does the machine get the knowledge of future desires? How does the machine know if it’s economic worth building one device as another? How does the machine know whether it’s best to use resources to build an IPOD today rather then tomorrow?
We enter into all sorts of paradox when we imagine a machine that can see into the future and read the minds of man.
At present no computer can solve economic calculation. The key to the calculation problem exists safely tucked away in the minds of every individual man, women, and child on earth. The key to the lock is omniscience. Figure out how to be omniscient and you can solve economic calculation for all of us. Untill then stop making rediculous claims.
Socialism has always been about replacing the omnscience of God with the omniscience of planners.
I seem to recall Jeffrey Tucker talking about miracles in the bible, and I don’t remember exactly but I think his point was related to the notion of a world without scarcity can only be achieved by miracle (the divine) and that was understood in the bible, and yet we don’t understand it today.
@flic
I think his conclusion was more aimed towards the idea that socialism can work better with computers.
If that is his argument then I guess my response is that I still don’t understand how a machine will be any more effecient at being omniscient. We hear about omniscient beings from theists all the time, but the concept of an omniscient machine is a new one for me.
The computer affixes a price to the individual products based on some sort of program that can determine a starting price (the starting price could be based on any number of factors such as what similar products have sold for in the past, polls which give an idea of how many people are likely to buy the product ect).
Prices are the outcome of the forward looking valuations of individuals influenced by the world around them. Were you to substitute a socialist production structure for the a pre-existing capitalist production structure you change the environment in which the decisions are made and thus past prices would not be representative whatsoever of current valuations.
Furthermore, if we draw this theory out to its logical conclusion we find that prices would really function as a way for a central planner to moderate the consumption of a finite resource. In a market economy, as supply of a valued commodity dwindles its price rises (falling supply, steady demand) eventually leading to a reduction in the overall consumption of that resource. The market determines what’s cost-effective/sustainable. But under your construct the computer functions as a goalseeking machine that is programmed to adjust prices in order to meet an arbitrarily determined rate of extraction of the given resource. But since neither the computer nor the central planner setting this “desired rate of extraction” will be able to accurately predict future states of demand you will be left with chronically suboptimal outcomes when compared with a free market economy. This isn’t even half the problem the way I see it.
To elaborate: To moderate demand of a finite commodity your computer will have to adjust the prices of not just one good, but ALL goods that use the given resource as a material input.* Since the interrelationships between the factors of production in an economy are contingent on one-another you will require a quantitative (statistical) model that your computer program can reference so as to determine the necessary price levels for goods and services who’s “market” demand affects the demand for the finite resource in question. This is problematic for one big reason: Quantitative modelling uses coefficients, or fixed ratios between variables, in order to generate information that closely approximates the observed outcomes in the real economy. However, humans, as the plastic and ever-changing beings that we are, are not bound by the rigid, mathematical confines of statistical formulae and as our subjective valuations change over time, along with and because of our environment, so then must models be periodically “calibrated” to the real world. The unfortunate part of all of this is that you won’t actually be able to tell that your calibration is “out” until AFTER the fact. A certain period of time will have to pass for you to gather more data before you can confidently say your model needs to be recalibrated to the real world. In the mean time your computer will be setting prices based on innaccurate information further distorting the real economy. But even still, once you’ve determined your model is no longer approximating observable outcomes what do you calibrate it to? The economy your computer has spent that past little while distorting?
*And I would wager it’s even more than that since the value of some goods is entirely dependant on the value or demand for other goods/services.
The Imago Dei. Man does not bear it. The State does.
Clayton -
Even supposing prices and economic indicators were fundementally based on events in the past, information conveying prices in the Hayekian sense, even if you had all the information it would not follow even in the Hayekian argument that socialism would fail since that data needs interpretation. If you legally restrict who can interpret the data with real responsibility, the market, then it succombs to the universal problems of monopoly.
If according to the OP the idea requires minimal computer knowledge then perhaps the best way to see how it works would be for him and likeminded individuals to form their own community based upon whatever program they come up with to distribute goods without a market.
Even if you were able to design a program that could look into the future and immediately take into account quickly changing preferences there’s still the whole " Socialism involves taking money from others by force" thing.
It would be interesting to see a sociological experiment with perhaps a Mises Community and a community based upon the ideas of the OP placed side by side.
adjusting to unanticipated consumer demand comes from entrepreneurs who are able to better predict what consumers will want in the future than there counterparts, how does this depend on economic calculation ?
Because they base their decision on the possibility of reaping a profit and exploiting a spread between inputs and potential revenues.
the computers wouldn’t have to perform this task they would only calculate prices, if someone innovates a new product it too can be entered into the database then set upon store shelves and based on how many people are buying this product and the supply of it an accurate price can be calculated
The problem is they themselves do not innovate. With profits extirpated, what is the incentive to do so? I don’t even mean things like new gadgets but rather matters as simple as new production techniques. Innovation is driven by the potential marketability (hence profitability) of the novel idea.
Prices are for this reason adjusted continuously in a capitalist society and can continuously be adjusted with computers in a socialist society as well
How?
yeah that is a problem so profits would have to be reintroduced back into the picture, the computers wouldn’t necessarily produce a better market or society than can be produced under capitalism but the point still remains that now due to modern computers the task of calculation under socialism can be accomplished
Um, no.
the computers wouldn’t need to entrepreneurs would do it, just as they do now under capitalism
So basically capitalism with computers?
I think the problem here is that you’re trying to “solve” a rather weak version of the Hayekian calculation problem. Mises’s argument digs deeper. Here’s the relevant bits from wikipedia:
If money is also spent on capital goods and labor, then it is possible to make comparisons between capital goods and consumer goods. The exchange of consumer and capital/labor goods does not imply that capital goods are valued accurately, only that it is possible for the valuations of capital goods to be made.
These first elements of the Calculation Critique of Socialism are the most basic element: economic calculation requires the use of money across all goods. This is a necessary but not a sufficient condition for successful economic calculation.
Without a price mechanism, socialism lacks the means to relate consumer satisfaction to economic activity, it is argued. The incentive function of prices allows diffuse interests, like the interests of every household in cheap, high quality, shoes, to compete with the concentrated interests of the cobblers in expensive, poor quality shoes. Without it, a panel of experts set up to ‘rationalise production’, likely closely linked to the cobblers for expertise, would tend to support the cobblers interests in a ‘conspiracy against the public’. If this happens to all industries however, everyone would be worse off than if they had been subject to the rigours of competition (economics)
Why can’t prices form? You need to understand what prices are. They are ratios that form in the exchange of individuals’ property. The problem von Mises identifies is that under socialism, individual ownership of the means of production is ruled out. With a one-world government (which is the form of socialism Mises discusses specifically), its calculations are arbitrary guesses (as opposed to the bidding process that pits entrepreneur-capitalists’ competing valuations of opportunity costs under capitalism.) Moving on…
Entrepreneurs lack the profit motive to take risks under socialism, and so are far less likely to attempt to supply consumers demands. Without the price system to match consumer utility to incentives for production, or even indicate those utilities “without providing incentives”, state planners are much less likely to invest in new ideas to satisfy consumer’s desires.
Why do they lack it? Because even if the state/commune employs managers to “innovate” or manage production, they do not own the means of production. They do not invest their own money in ventures undertaken nor are they entitled to full remuneration (or alternatively, losses) that attend a system of private property.
Relatedly:
Prices in futures markets play a special role in economic calculation. Futures markets develop prices for commodities in future time periods. It is in futures markets that entrepreneurs sort out plans for production based on their expectations. Futures markets are a link between entrepreneurial investment decisions and household consumer decisions. Since most goods are not explicitly traded in futures markets, substitute markets are needed. The stock market serves as a ‘continuous futures market’ that evaluates entrepreneurial plans for production (Lachmann 1978). Generally speaking the problem of economic calculation is solved in financial markets.
The problem of economic calculation arises in an economy which is perpetually subject to change … In order to solve such problems it is above all necessary that capital be withdrawn from particular undertakings and applied in other lines of production … [This] is essentially a matter of the capitalists who buy and sell stocks and shares, who make loans and recover them, who speculate in all kinds of commodities”[8] Mises
The existence of financial markets is a necessary condition for economic calculation. The existence of financial markets itself does not automatically imply that entrepreneurial speculation will tend towards efficiency. Mises claimed that speculation in financial markets tends towards efficiency because of a “trial and error” process. Entrepreneurs who commit relatively large errors in investment waste their funds over expanding some lines of production at the cost of other more profitable ventures where consumer demand is higher. The entrepreneurs who commit the worst errors by forming the least accurate expectations of future consumer demands incur financial losses. Financial losses remove these inept entrepreneurs from positions of authority in industry.
[…]
Minimal waste of real capital goods implies the minimization of the opportunity costs of capital- economic calculation. The value of capital goods is brought into line with the value of future consumer goods through competition in financial markets, because competition for profits among capitalists financiers rewards entrepreneurs who value capital more correctly (i.e. anticipating future prices more correctly) and eliminates capitalists who value capital least correctly.
To sum things up, the use of money in trading all goods (capital/labor and consumer) in all markets (spot and financial) combined with profit driven entrepreneurship and Darwinian natural selection in financial markets all combine to make rational economic calculation and allocation the outcome of the capitalist process.
Mises insisted that socialist calculation is impossible because socialism precludes the exchange of capital goods in terms of a generally accepted medium of exchange, or money.
Finally…
Von Mises gave the example of choosing between producing wine or oil:
It will be evident, even in the socialist society, that 1,000 hectolitres of wine are better than 800, and it is not difficult to decide whether it desires 1,000 hectolitres of wine rather than 500 of oil. There is no need for any system of calculation to establish this fact: the deciding element is the will of the economic subjects involved. But once this decision has been taken, the real task of rational economic direction only commences, i.e. economically, to place the means at the service of the end. That can only be done with some kind of economic calculation. The human mind cannot orientate itself properly among the bewildering mass of intermediate products and potentialities of production without such aid. It would simply stand perplexed before the problems of management and location.[1]
Such intermediate products would include land, warehouse storage, bottles, barrels, oil, transport, etc. Not only would these things have to be assembled, but they would have to compete with the attainment of other economic goals. Without pricing for capital goods, essentially, Mises is arguing, it is impossible to know what their rational/most efficient use is. Investment is particularly impossible, as the potential future outputs cannot be measured by any current standard, let alone a monetary one required for economic calculation. The value consumers have for current consumption over future consumption cannot be expressed, quantified or implemented, as investment is independent from savings.
Mises insisted that socialist calculation is impossible because socialism precludes the exchange of capital goods in terms of a generally accepted medium of exchange, or money. Investment in financial markets determines the capital structure of modern industry with some degree of efficiency. The egalitarian nature of socialism prohibits speculation in financial markets. Mises therefore concluded that socialism lacks any clear tendency towards improvement in the capital structure of industry.
Why is the exchange of goods for money not allowed? Because ownership them is ruled out. If exchange in terms of money is allowed (e.g. between communes), you just have capitalism with mutually owned firms, really. In the world-government version of socialism Mises is critiquing, calculation is strictly speaking, impossible - literally. That is the problem you are out to solve but cannot. The same applies to a world filled with communes where ownership of the means of production and their exchange in terms of money is not allowed (but of course not where it is allowed, which is akin to syndicalism/mutualism and not true communism/socialism.) Obviously, when governments are pitted against businessmen are allowed to own capital goods (as an extreme case, the USSR; as a more mundane one, most governments), they can calculate. It’s just that with no profit motive, they have no ability and/or reason to do so efficiently. But that isn’t full-scale socialism/communism.
Also, Hayek’s points are worth bearing in mind:
Within capitalism, the overall plan for production is composed of individual plans from capitalists in large and small enterprises. Since capitalists purchase labour and capital out of the same common pool of available but scarce labor and capital, it is essential that their plans fit together in at least a semi-coherent fashion. Hayek (1937) defined an efficient planning process as one where all decision makers form plans that contain relevant data from the plans from others. Entrepreneurs acquire data on the plans from others through the price system. The price system is an indispensable communications network for plan coordination among entrepreneurs. Increases and decreases in prices inform entrepreneurs about the general economic situation, to which they must adjust their own plans.
As for socialism, Mises (1944) and Hayek (1937) insisted that bureaucrats in individual ministries could never coordinate their plans, not without a price system. If decentralized socialism cannot work, central authorities must plan production. But central planners face the knowledge problem in forming a comprehensive plan for production. Mises and Hayek saw centralization as inevitable in socialism.
Opponents argued that in principle an economy can be seen as a set of equations. Thus, there should be no need for prices. Using information about available resources and the preferences of people, it should be possible to calculate an optimal solution for resource allocation. Friedrich von Hayek responded that the system of equations required too much information that would not be easily available and the ensuing calculations would be too difficult.[citation needed] This is partly because individuals possess useful knowledge but do not realise its importance, or may have no incentive to transmit the information.[3] He contended that the only rational solution is to utilize all the dispersed knowledge in the market place through the use of price signals.[4] The early debates were made before the much greater calculating powers of modern computers became available but also before research on chaos theory. In the 1980s, Alec Nove argued that even with the best computers, the calculations would take millions of years[5]
It may be impossible to make long-term predictions for a highly complex system such as an economy.[6]
Hayek (1935, 1937, 1940, 1945) stressed the knowledge problem of central planning, partly because decentralized socialism seemed indefensible. Part of the reason that Hayek stressed the knowledge problem was also because he was mainly concerned with debating the proposal for Market Socialism and the Lange Model by Oskar R. Lange (1938) and Hayek’s student Abba Lerner (1934, 1937, 1938), which was developed in response to the calculation argument. Lange and Lerner conceded that prices were necessary in socialism. Lange and Lerner thought that socialist officials could simulate some markets (mainly spot markets) and the simulation of spot markets was enough to make socialism reasonably efficient. Oskar Lange argued that prices can be seen merely as an accounting practice. In principle, claim market socialists, socialist managers of state enterprises could use a price system, as an accounting system, in order to minimize costs and convey information to other managers.[citation needed] However, while this can deal with existing stocks of goods, providing a basis for values can be ascertained, it does not deal with the investment in new capital stocks.[citation needed]
Hayek responded by arguing that the simulation of markets in socialism would fail due to a lack of genuine competition and entrepreneurship. Central planners would still have to plan production without the aid of economically meaningful prices. Lange and Lerner also admitted that socialism would lack any simulation of financial markets, and that this would cause problems in planning capital investment.
You can bolster Hayek’s case by acknowledging that a lot of the data central planners would need to collect is not even amenable to collection, i.e. it’s the sort of subjective data (not amenable to computation) that only an individual can put into action via demonstrated preference. Mises is critiquing socialism based on a fundamental feature that characterises it, i.e. lack of private ownership of the means of production and inability to exchange it in money terms. He’s not just saying there’s too much data for a computer to handle.
Read here for more, and I would urge you to read Mises’s Socialism to fully understand what’s going on. A lot of the so-called “responses” to the calculation problem “solve” it by changing the parametres of the problem they’re trying to solve, e.g. assuming scarcity away. But then we’re no longer speaking of economic calculation. The challenge is to solve it within the parametres given.
Even supposing prices and economic indicators were fundementally based on events in the past, information conveying prices in the Hayekian sense, even if you had all the information it would not follow even in the Hayekian argument that socialism would fail since that data needs interpretation. If you legally restrict who can interpret the data with real responsibility, the market, then it succombs to the universal problems of monopoly.
This is sort of the rub of the Misesian argument as I understand it. Basically that socialism lacks that entrepreunerial-capitalistic judgement required to efficiently allocate resources. All you have are managers who are assigned production goals. You can try incentivise them to perform well (much like you can with a CEO or any other type of manager), but even then, with no competition between owners to price managers, even this much will be arbitrary. I guess to someone who confused an entrepreneur-capitalist with a manager it’d make sense, but the two (three) roles entail quite disparate valuations. The same applies to a computer playing manager.
It occurs to me that there might be a lack of understanding between the different parties here. If mattgeb84 is suggesting allowing people to spend their money how they want, and for computers to find the clearing price for property people are still allowed to own, then he has not solved the socialist calculation problem because he is not proposing a socialist system.
We are all pointing out how calculation is impossible under socialism, but I think we have let his use of the world socialism color our understanding. He is not proposing a socialist system, though he believes he is; he is merely proposing a capitalist system with computer software to help people determine clearing prices. As he queried, “Why can’t a number of servers be set up to take in information relating to the sales and production of products and then accurately calculate what the price should be to the consumer to properly coordinate consumption and production ?” In this case, property owners are still producing, exchanging and consuming goods. It’s not socialism.