I have some questions about economic calculation I hope someone can help me with.
Essentially, unless we have a total private-property natural order (anarchocapitalism), how can we tell what is “worth” doing (in a market sense)? I mean, how can we properly calculate profits and losses without total private property?
For instance, if something is profitable in the current quasi-free market, there is no guarantee that it would be profitable in a totally free market. Because of government ownership of roads, subsidies, etc.., these represent distortions to the free market which would theoretically alter the profit and loss of every activity. Does that mean that these activities really represent a “waste” (misallocation) of scarce resources, or does the current quasi-free market accomplish essentially the “best we can hope for under the current system” or does it represent something else?
I hope I explained the question well enough. I’m sure I’m probably misunderstanding calculation or some other related economic concept.
You might be making a good point as regards a heavily subsidized industry such as trucking. How can we really know whether this is an economically rational industry as compared with say railroads? What if private industry were responsible for building and maintaining raods?
Yes, I think so, but doesn’t virtually ALL industry rely in some way on roads for shipping? So doesn’t the point about trucking apply to almost every industry to some degree?
Trucking may be a heavily subsidized industry, but the trucking industry is still behaving rationally in calculating the profitability of taking government subsidies.
The economic calculation problem can be split into two subproblems. First there is the problem of individual economizing. Because there are no prices, we cannot know what supply to produce of any good. For example the Soviet Union produced very many tractors, but they would rust in open fields because there were no trains to take them to farms and no warehouses to protect them from the rain. Were there too many/too few tractors, trains or warehouses? You can’t tell unless you equilibrate the supply by selling for the maximum amount.
The second subproblem is that posed by the division of labor in ownership. If I am a train company and another train company figures that it can run my trains at much lower costs for greater profits, it can offer to buy my capital for more than I would earn if I continued to use it and less than they would earn if they used it. In that way capital goods will logically end up controlled by the most productive people and economic progress will follow.
Rothbard once asked Mises if there was a way to know for certain the difference between a capitalist and a socialist country. Mises said that a capitalist country would have a stock market.
First, even in a total private property order, the economic calculation will be imperfect. Because real world prices are imperfect.
The operation of the market process reduces the degree of imperfection in prices. The final competitive equilibrium prices will be perfect if there is no intervention.
In the competitive equilibrium profits are zero. Zero profits means that there is no possible allocation of the factors of production that is more efficient.
Government direct intervention in prices always tends to generate waste and misallocation. First, it reduces the scope for the operation of the competitive discovery process with reveals misallocation, and second, it can directly block the efficient allocation.
Forgive the rather curt answer but, well, you can’t calculate in an unfree market. In a mixed economy, of course, firms calculate what is in their interests given the present situation, but this does not reflect what would be profitable in a free economy, as you point out. This is why supporting free markets should not be taken to mean supporting sweatshops, Walmart, and so on - there is no reason to expect, without further evidence, that a free market would look anything like what we have at present. Walmart is a prime example - without socialist roads, it isn’t clear that people would travel as far to save money as they do now. Oil is another example - government intervenes to keep oil prices low, without which we would have been exploring alternatives decades ago.
The mixed economy, unlike socialism, has profits and losses, but they don’t reflect what the profits and losses would be in a free economy. When the cost of inputs is subsidized, or the price of outputs is propped up, what is produced is not what would be produced in a free market.
Okay, I think these responses answer my question (and help clear my misunderstandings).
So under the current mixed economy, firms calculate given the current situation, which is to say they “try to do the best with what they’re given,” so to speak. The current hampered market still responds to consumer demand and will thus serve consumers in the ways it is still allowed to.
Government intervention (eg, road ownership, energy) distorts the marketplace, which obviously leads to different results. A totally free market wouldn’t have the burden of government, thus it would be free to economize resources (and thus serve consumer demand) in ways it currently cannot–or in ways that government intervention has made less- or non-profitable.