Economic Calculation, What is at the center?

Economics Economics Questions
1

There has been a recent debate between DD5 and myself regarding the central fundamental topic of the economic calculation debate.

For several pages I have made an unsuccesfull attempt to explain to DD5 that Economic calculation is about the formation of meaningful prices, and money.

He asserts that the focal point of Economic Calculation is that a true socialist common wealth could not plan and complete any project(literally), due to not having economic sanity. In other words they couldn’t complete the construction of a single warship. He maintains his argument only by consistent assertion and provides no logical explanation other then a few short quotes of Mises taken out of context.

I would like this to be resolved and hope that there are others who are familiar with the Economic Calculation problem to voice their corrections.

The argument spelled out

I maintain and have made several attempts to explain that at the center of the Econ Calc problem is money and prices. The formation of meaningful prices is the mechanism which ties producer and consumer together. Prices take into consideration the demands of consumers, while being aware of resource availability, production expenses, and much much more. It is the pricing mechanism in a free market that specifically allows a capitalistic society to function, without money there is no economic calculation.

What this explains is why a Socialist Common wealth fails to make rational economic decisions. It also explains why quasi-socialist states suffer from various degrees of price perversion. The closer a state gets to being socialist, the more perverted the pricing structure becomes and the more waste that ensues. I explained some of that here.

To finish my argument, I believe it is non-sequitur to state that a socialist commonwealth is incapable of completing a large scale project(Like building a warship). It may be that thousands die of starvation or go unsheltered as the socialist state fails to recognize other needs in the economy, but not necessarily that they can’t finish a single project. Sure the project would be at a great economic expense, but that doesn’t mean it’s not capable of completing it.

I also believe that simply asserting that a socialist society cannot plan is a poor choice of wording when debating with a socialist. I think that ignoring the money problem there will only ever be cross-talk and blatant assertions from both sides. However, if we explain to the socialist why meaningful prices are the crux of the issue, they can see fundamentally where the mechanics of socialism fail. Where-as if we only consistently assert that socialism simply cannot plan, they will just blatantly ignore our repetitive assertion. IT is with this that I think DD5’s position is trite, and does not bring forth the full qualities that the Economic Calculation carries as described by mises.

DD5’s position is that a Socialist Commonwealth simply cannot plan simply because they lost the ability of economic rationality. I believe it is non-sequitur to state that a socialist common wealth is incapable of planning. I believe a socialist common wealth can plan just fine, the problem is they may be planning for the wrong things. Like building warships when they should be building houses, or creating more food when clean water is at a higher demand.

DD5 states that the division of labor would break down entirely, and people would do what exactly? I haven’t a clue, stare at a wall? I do agree that there may be some truth and value to DD5’s position, but that his argument IS NOT the Economic Calculation argument, but instead it is a derivative of it. Being incapable of making rational economic decisions is a derivative of not having meaningful prices, and/or money.

For fear of mis-representing him(Because he has not yet really explained the logic behind his position) I encourage you to read up on his responses.

My next post will continued correspondence to him. Please feel free to join in and correct me, and continue the discussion.

2

When you take the argument away from money, then yes degrees make no sense. But money is the focal point of the economic calculation problem. IT explains why as a socialist country incrimentally moves away from capitalism, and into socialism, it’s pricing structure equally incrementally becomes ruined. That means incrimentally additional amounts of waste untill full scale socialism is achieved.

This is the problem with your argument, You cannot explain why partial socialism is bad. YOur argument simply implies that only full scale socialism is bad, but that if a certain amount of capitalism exists things will be ok. YOu cannot explain how much capitalism needs to be maintained, and you cannot explain the behaviors of the market.

Directing our attention away from money we loose our argument all together. The entire signalling and informational process is all housed within mediums of exchange. It carries the information capitalists and entrepreneurs use to make their decisions. Money is what makes capitalism work. Your inablity to understand this and consistent assertion that ECon Calc is not about money is your pitfall.

Because of this you essentially have no argument what so ever when discussing with a socialist. All you can do is repeatedly assert, argumentum ad nauseum, that socialists cannot plan, and a socialist will just assert right back that they can. You cannot prove your argument a prior, nor empirically. But when our focal point is placed over money the socialist theory is eradicated a priori, and the objective evidence we witness becomes more understandable.

MIses didn’t say anything like this, the statement is simply absured. THere is ALWAYS an economy. THere may not be a market, but you are conflating markets with economies. Regardless of whatever economic system you put in place, it doesn’t magically make an economy dissapear. It just distorts it’s functionality. Economies don’t go away, even in socialist commonwealths. Markets may go away, but economies do not. Mises said nothing of the sort, your continued conflation of terms puts you at a disadvantage when arguing with the socialist. You put up easy sham arguments that are nothing more then blatant assertions that any intelligent socialist will just knock down.

You cannot explain mechanically why socialists cannot calculate without referring to the money problem.

An example of what? I haven’t the slightest idea what your talking about. It’s hard enough to keep up with what your argument is as you conflate key terms and re-word your paragraphs which make your positions appear different.

Citing some historic event doesn’t prove that 2+2=4. Logic does that, and your missing several key variables in our equation. For that matter I don’t even know what historical examples you want. There has never been a true socialist commonwealth to cite, and likely never will be. Such models are near impossible to sustain themselves for any lengthy period of time.

But citing a historic example neither proves nor disproves either one of our points and you being hung up on this is only detracting from the actual discussion. It’s irrelevent, get off it already.

You cannot prove this logically, it doesn’t follow logically at all. It’s a non-sequitur statement and gross mis-representation of the economic calculation problem. Your entire position on economic calculation discredits the argument itself, as it moves the attention away from the structure of pricing which should be at the center of the argument.

There is no reason why a socialist common wealth cannot send it’s serfs to toil and build a pyramid.

DD5, you quoted Mises here

*_

Whats odd is you ignored the last few sentences where Mises then goes back and explains why that example worked, and why without prices it couldn’t have worked for as long as it did.

Without the aid of these prices their actions would have been aimless and planless. - Mises

IF you do a simple search through Human Action, the PDF copy, you will see that nearly every explanation of Economic Calculation MIses refers to the formation of meaningful prices.

ANd Again

Back in the beggining of Econ Calc MIses explains that Economic Calculation specifically has to do with money, period!

And again

I could go on, there are numerous references to money and prices and why that is at the very CENTER of the economic calculation problem. All other failures are derivatives of that problem. The problem of money prices being perverted, or absent.

How many more quotes of Mises do you want me to get for you where he clearly explains that Economic Calculation is about money.

3

DD5 lets say I am socialist country? I have a schematic for building a warship, and all related schematics for building it’s sub-components.

Lets assume there is no money and that my socialist council is directing resources. Why is it impossible for me to complete the construction of a single warship. (Starvation or lack of other needed goods aside, the argument is not about being efficient/inefficient as running an economy, but about being capable of completing and planning 1 single object in production)

4

The socialist calculation problem doesn’t prevent battleships from being built in a managed economy. Instead the calculation problem explains how the same battleships could be built more effeciently in a free market economy. Without the pricing mechism of the market, central planners have no way of gaging the effecientcy of various methods of production. This is also combined with lack competition that stifles innovation. The result is that inefficiency becomes common throughout the economy which overtime lowers everyones standard of living.

5

This is correct.

6

They do that, ie. procure, by force.

Who’s “their”? The mining of resources is the market. When I say free market, that doesn’t necessarily mean it’s not threatened by initiated aggression in some particular moment. Nobody said the free market is a utopia, meaning, absent of criminals. Utopia by definition means perfect place and for a free marketer the perfect place is the free market unaggressed against but I don’t know of anybody that says no criminals will exist in a free market absent the gov’t, which the free market presently is distinguished from the gov’t, ie. criminals, politicians, by my theory.

The only individuals that complete a goal are those in the free market. What does a socialist add to the market other than force? The workers do all the work. The producers do all the producers. The consumers do all the consumers. But these are all the free market agents.

You’re saying the ‘socialist society’ is doing what exactly? Redistributing. Having factories form here and there. But that’s all conduits of power formation, not any type of market formation where the production takes place. As I said, the socialist may desire rubber chickens to be produced but will anybody actually want rubber chickens? If yes, it is because the consumers need rubber chickens or they are forced and still need rubber chickens. If they didn’t need rubber chickens even under threat of force, then the choice by consumer would be of self-defense. Choice is still present even under threat of force. Though nobody knows what their preferences, ie. the consumers, would be if the threat of force was not present but we do know by their very actions that they prefer to take the rubber chickens, or potentially die in the midst of rolling over or rebellion.

There is always economic sanity. Economics is a rational science. Economic and insanity together is an oxymoron.

7

Actually, if socialism was taken to its complete realization, then it would be the case that not a single warship could be built. The Soviet Union could achieve this kind of technology because an external free market allowed them to copy prices and engage in limited, but flawed, economic calculation.

8

Could you explain how you are coming to this conclusion? I fail to see how a central planner couldn’t complete a large scale project ( efficiency aside ).

9

Socialism is a form of autarky. A central planner, no matter how smart he is, cannot know how to transform all the resources through all the production process that make a battleship, starting from the extraction of minerals from the ground and growing the food to feed the laborers.

10

right. the only way he would even know any of this would be in the generalized sense. As general as extract minerals, feed people, and make battleship. He can give the orders, but the know-how are the actual people performing the task and those people need to be able to communicate with each other to join the whole operation together. The central planner sitting in the armchair can’t put in every detail of thought, because even at the most basic level somebody on the ground has to talk to one another. The central planner is simply giving orders and having things moved around. It’s so complicated that one person will end up having staffs of people, such as all the czars in Obama’s current cabinet. Even before Reagan first made a czar position the cabinet members are in place to oversee a complexity that is simply beyond the reach of one person. And under those cabinet positions there are more organizations and hierarchy. All the way down to a guy that folds the boxes to put the metal bolts in to ship them off to where the battleship is to be made. And that whole operation is made voluntarily, though under extortion and duress. That whole operation is the capital market being coerced into mechanisms not driven by the consumer but by the socialist. But that doesn’t mean it’s not a market operation. It is. It a market being forced to do something just like the lone robber forcing the innocent apple seller to hand over all the apples. This way removes all the various degrees and outlines that the socialist isn’t the market at all. Just somebody wielding aggression. The market is all the individuals acting, doing what they prefer. The only reason a society being extorted by a socialist would even produce anything is not because of the socialist but because of the actual people doing the work and making it possible under such coercive weight.

11

With any calculation debate I suggest reading this

According to Machaj it’s not about the existence of money prices but the formation thereof; competition beats monopoly.

12

thanks. just bookmarked it.

13

The central planner is not in charge of the transformation of resources into usable products or growing the food to feed the population. The central planners job is to make sure these tasks are completed by people know how to do them. I work as a project manager and I do not personally know how to complete most of the tasks I am given to manage. What I do know how to do is organize a group of people who do to get the project done. I know my analogy Isn’t perfect because it is heavily dependent on the use of the pricing mechanism as a means of making economically responsible decisions. In the same why I am able to manage projects that I personally have limited knowledge of I believe a central planning committee could manage projects within an economy with the only difference being efficiency which in the long run would lead them to poverty.

14

Treat prices as individual semaphores (computing) being shared among many processes and you’ll see why a price is better than no price. What I mean by this analogy of a semaphore is that a price acts as an allocator of resources. That means each production process can occur without inspecting any other production process before it (like a car manufacturer not needing to inspect an electronics plant to know how the dashboard controller will work). The same follows for consumers, you and I don’t need to know how bread is made to buy it or want it for consumption. We simply observe the price and see if it fits our needs. Conversely, a bread maker need not know why or how people use bread as a final good to sell it as a given price.That means a price allows for dynamic allocation in contrast to a command economy where all allocations must be fixed for them to make sense or be synchronized.

A command economy is much like the early operating systems of the past which evolved out of fixed circuitry alignment of the first electronic computers in which operations must occur in a fixed pattern to be completed successfully otherwise the entire process and operating system will fail. That means a commander in the command economy must watch every step of every production process to make the right calculations. If it cannot observe what’s happening it cannot calculate rightly or at all. Thus, all decisions in a command economy or primitive operating system result in the same lumbering results of things being over produced or under produced by wide margins in contrast to a market economy (modern operating system) in which allocations are done dynamically when there’s over/under productions.

15

This is fantastic. Thanks for the response.

16

The problem with what you said is conflation.

1 - Does the manager at the business you mention aggress against their workers to get what needs to be done?

2 - You said the business uses prices, but a socialist system doesn’t.

Given that. The two systems are categorically nothing like each other.

17

Yep, great analogy. [Y]

18

No and that is the main reason that I am such a firm believer in free markets and opposed to collectivist ideologies. Socialism is immoral 1st and inefficient 2nd.

I understand that. My point is that free markets are more efficient then socialised economies due to prices and competition. Without market generated prices it is impossible for planners to know if they are efficiently utilizing scarce resources. Poor allocation of resources don’t necessaryly mean that it is impossible to complete any given project. It simply means that more resources were consumed throughout the course of the project then otherwise necessary. This effect touches virtually every sector of the economy until the system eventually collapses on itself.

19

I think/hope the following video may be congenial or useful for your discussion:

http://www.vimeo.com/7479892

20

Couldn’t grasp the back and forth in that long long one, but I think filc and socialdtk have it right.