Interesting point. I am tempted to nitpick further.[8-|]. What I see that you’re saying I think could be split further and delineated into 3 points.
Economic calculation as a pure mechanism allows the institutional framework, even in the absence of past prices in which to even begin production and distribution in a rational manner for a complex economy.
Through the operation of the market economy, what can be defined as tacit knowledge is a skill posessed heterogeneously among the entrepreneurial class that can be utilised in order to correctly anticipate future demand and to gain profits and hence shift price movements in equilibrating directions when allocations are “found” to be out of balance with preferences. Equilibration as profit gaps are closed among these new endeavours consolidates these shifts in the structure of production. In this way, the market process could in one aspect as an “information filter.”(leaving aside the ways in which incentives are arranged to also allow for the production of useful knowledge)
As a result of this process, prices begin to incorporate and embody to a certain extent tacit knowledge about correct resource allocation up to a point, since they only provide a starting point to the entrepreneur who must then anticipate as to the way they may chainge in the future in order to continue.
I appreciate your point, but the reason I listed the above was to delineate the pure mechanism that is necessary for the latter 2 characteristics from them. Are we in agreement on this?
Also, I don’t doubt the existence of tacit knowledge but invite you to engage in a thought experiment. Suppose we have the same entreprenurial class with economic calculation as an instutional condition(means of production privately owned in an indirect exchange economy). To obtain the same equilibrating price movements following the operation of the profit loss mechanism do we even need to hypothesize that these individuals possess a special tacit knowledge?
The reason I state this is that the future price of a given good could be anything so, for the purposes of our thought experiment our entrepreneurs could come up with a whole host of different guesses in their anticipations, and it wouldn’t matter whether they had some special knowledge or not; the profit loss mechanism and the equilibration that follows it would still operate, since those that do the best in matching preferences would still be rewarded allowing for the same kind of optimisation achieved on the market regardless of what they knew or not. What do you think? This is kind of the reason I question how essential tacit knowledge is to explain the operation of the market economy contra a socialist commonwealth.
Will need to think on this though… I think my theorising might be getting too abstract here…
You’re looking at a dynamic process with static lenses. This isn’t about reaching some imaginary general equilibrium; it’s about the coordination of billions of individuals, and the division of labor. Economics (capitalism) is the cooperation amongst strangers, and what ties them together. Dispersed ownership of the means of production is the only method which can keep the links together, precisely because preferences not only differ regionally, but from one individual to the next–it’s great virtue is that it maximizes the accumulation of information. Also, tacit knowledge isn’t really a skill. It allows for the formation of prices (it’s what makes them meaningful), and is then passed from one actor to the next by prices, which are continuously fine-tuned (drops old superfluous information, and picks up new and relevant information). The market is a process of information gathering.
I think too much emphasis is placed on the entrepreneur as some extremely intuitive actor who has some profound understanding of market conditions. Tacit knowledge is not like scientific knowledge; it is not impressive. But scientific knowledge is a dwarf when compared to the aggregate level and importance of tacit knowledge.
Tacit knowledge is decentralized and specialized by definition. This scenario (means of production privately owned in an indirect exchange economy) presupposes the existence of tacit knowledge already. My point is that the calculation and coordination arguments are essentially identical.
“The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate “given” resources—if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.” -Hayek
I admit the word “skill”, provides a poor analogy for what we’re talking about. I think will have to get round to reading some of Hayek’s essays on this to get where you’re coming from with this.
I assume that the entrepreneurs in your thought experiment live in a dynamic and changing world, and that they service the needs of different individuals, with continuously fluctuating and entirely subjective preferences. And again, this isn’t about reaching some illusory general equilibrium, or about maximum optimization (Pareto or Kaldor-Hicks efficiency).
Tactic knowledge sounds like common sense. I have some sources on common sense so I’m not defining it ad hoc, though, common sense may act in an ad hoc manner. Common sense is everyday knowledge, in this context, used in the market. There isn’t a barrier between science and common sense unless the acting human makes it that way.
I was expecting a better answer than that. I’ve not been talking about a general equilibrium scenario, there are not even profits and losses in such a scenario and hence not even a need for economic calculation.
In any case, while cleaning my dishes just now I was thinking about your statement and think I may kind of have an answer for my question that may satisfy you too. One could argue there is dispersed tacit knowledge which helps lead to the establishment of media of exchange through necessity of trade and through contractual orders that form at first via common customs and norms providing a legal framework to facilitate market transactions. Indeed, this is a bit of a chicken-egg argument that is temporal as opposed to exposing relations of logical necessity.
The following paper might provide a fresh perspective:
Have you read it? If so, let me know what you think.
That’s completely wrong. The socialist program has always been to nationalize capital. Hence, Mises’ refutation is based on the allocation of capital goods. This is why Rothbard said he only understood the problem when Mises pointed out that the difference between capitalism and socialism was a stock market.
You don’t know what you are talking about. Economic calculation uses prices. Prices come from people freely bargaining based on their preferences. Not using real market prices produces results out of sync with preferences. That is the entire point of the argument. The question of how the state builds warships is 100% irrelevant.
In a socialist commonwealth with no prices and money (and not attaching “prices” on goods based off of prices in capitalist countries, since that seems rather counter productive and meaningless in a socialist commonwealth) could the central planners, in the position of building a large scale project, successfully move all goods of higher and lower orders through different modes of production and correctly allocate resources (without wasting resources) to efficiently build the project?
If they order 5,000 1" bolts would they allocate enough steel to that industry to do so? Could they make sure enough of each type of material is sent to each industry to make each product? Plus, let’s say some industries need new machines and tools, you’d have to make sure that enough material and labor is sent to industries that would build that tools that would build the project. Would you know how much of what to send to what sector of industry? Would you know if material is wasted? Would you know if you sent too much steel to build the bolts when they could have been made cheaper and quicker by someone else?
You would need thousands of bureaucrats scrutinizing every mode of production and every product to make sure it would be perfect and that it was the best made at the cheapest price with the least amount of material wasted.
In a socialist commonwealth they would never actually know the value of any product whether it be a finished good or land. They’d fix a value to a given good and try to calculate situations as if everything has a fixed objective value and that every good in the market could be placed alongside another like a puzzle. They’d never know what would be the best use for any resource.
There is no economic calculation in the socialist commonwealth so they would never know if what they were doing is correct or not, and they never really know if the emphasis they are putting on a given sector needs that much attention compared to another.
If you don’t have economic calculation you really don’t know anything. You’d be making up every number as you go along. If you built a small hut or house on an island, you wouldn’t be worrying about prices, but taking in an unthinkable amount of material to build a large scale project with numerous workers on every stage of production to produce various goods is literally doomed to failure.
My point is actually pretty simple, and I think that you’re looking into it too deeply. The point of the price mechanism, why it’s absolutely vital, is because it relays tacit knowledge to other market actors. No price mechanism means no information dispersion, which leads to the complete breakdown of what Hayek called the “extended order.” The calculation argument is not an argument which claims that free markets and competition leads to Pareto or Kaldor-Hick efficient outcomes; in fact, such concepts are entirely dismissed by the Austrian school. You kept mentioning “price movements in equilibrating directions,” but that misses the point.
All of you are missing the point. Without prices, no wants that require the division of specialization, or Hayek’s “extended order” can be satisfied. The planner cannot satisfy himself without rational economic calculation at his aid. There is no economy in the modern sense of the term without prices.
There is no reason to believe Caley does not understand this and no one will disagree with you. But I think on the contrary you missed the point that Caley made. Money is the viewable language of praxeology and is the gateway into an intricate and vast pool of a complex divisions of labor. So in essence, economic calculation is about addressing the needs of all, on a per individualistic basis, not the needs of one, or of an elite few.