Failing at Calculation Debate?

Economics Economics Questions
1

I was discussing the calculation problem in the planned economy with someone and now I’m stumped. I’m not sure if I’ve maneuvered myself into the situation by arguing wrongly or if my opponent is unwilling to admit a defeat, so please help me out.

Background: planned economy, planner X has control over all resources, consumer wishes are found out by a sophisticated electronic polling system without prices (we’ll assume for the sake of the argument that this actually works).

Me: People can tell you what they would like to have, but without a pricing system, how do they coordinate their wishes? I.e., why should they not demand a racing car as urgently as a washing machine?

X: People will add preferences, i.e. “Most importantly, I need food, then a washing machine, then a racing car”. My polling system will demand this.

Me: Granted that it’s possible to accurately discriminate between goods of different utility, what is keeping people from demanding the best, most expensive, most lavish in every single utility field? I.e., a Lamborghini instead of a Camry? Caviar instead of potatoes? There’s no penalty for demanding the best because there are no prices to distinguish them.

X: They will have to add alternatives. If they don’t add proper alternatives, they may get nothing at all.

Me: So who decides whom to give what kind of quality product? By what standard?

X: Me, by my own.

Me: So you’re just acting arbitrarily and randomly, just like every central planner before you. You don’t have a concept for distributing resources at all. You just admitted my point.

X: You tried to prove that prices are necessary, not that my distribution system is bad. You failed.

Any ideas? Thank you in advance.

2

Where are the goods coming from in the first place?

3

Am I reading this wrong?

4

From factories which will be built after the demand structure is clear. I know that Mises made a point about calculation problems also affecting capital goods, but this fellow claims that his sophisticated computers can accurately determine the most efficient way to produce things, so I found the point to be rather moot.

5

Sorry, my error, fixed it.

6

How does the planner know the best way to build factories? How does he know how to program the computers to determine this?

7

forgetting the calculation debate for a minute.

why the fuck does the planner with all this earthly power give two shits about giving his public a prosperous lifestyle.

oh yeah. he is a saint. a saint with a gun that will kill you if you engage in a consenting capitalist act.

8

So, I write “Most importantly, I need my youth back” and up will spring a time machine factory? What are the factories to be made of? What about the computers? Where will the builders come from? The programmers? Capital goods are a crucial aspect of the Calculation debate.

Further, what were the terms of the debate? As prices are necessary to rationally allocate resources, the fact that he’s admitted his system was bad seems to concede the point.

9

this stuff helps : http://mises.org/daily/2401#3

10

Impossible to work correctly. When polling people make decisions that effect people other then themselves. A polling system won’t work for the same reason democracy doesn’t work. People’s decision making systems alter when they are allowed to use coercion. When purchasing general goods with a pricing system people’s decisions directly effect their own persons. They bear the consequences for any mistakes they make. In polling this is not the case. Therefore people cannot make rational decisions as to what resources they need most.

People don’t buy Ferrari’s because there are less of them and as such they cost a great deal more. When if the population placed Ferrari’s above everything else? Overproducing Ferrari’s does not make society as a whole wealthier, it makes them poorer by taking away other things they need to compensate in resources to build Ferrari’s.

The number one complaint of capitalism is the supposed exploitation of the poor and the hungry, So his justification here seems counter-productive to his argument. He’s just justified starvation.

Lawl

  1. Not only are they necessary. Even with a polling system if he were to attempt to allocate resources to the masses he would only do so in lengthy delay. There will be surplus’s of some things and shortages of others.

  2. He would have no way of knowing what the most efficient way possible is of producing and delivering the resources people claim they want. And since people are voting for the masses(others) and not themselves demand for consumer goods will likely be scewed. For example, in the US people think they need healthcare to live. They think healthcare is a need just as oxygen is a need.

  3. There will also be no innovation. As Billy Bob devices a new invention and marks on his ballet as an alternative “I want this invention”. Sicne he is the only one who votes his invention will never get realized and if he markets his invention and sells it he would be breaking the law. Likewise without prices there would be no way of telling if the masses actually want the invention in the first place.

11

Yeah

You proved prices are necessary, because his arbitrary decision making is a form of pricing. He sets the prices, and has nothing to test it against. Hence, it fails economic calculation. Remember, the calculation arguments is about calculating rational prices, not arbitrary prices.

12

Thanks for all of your responses. I will focus on some points that I consider the most pressing:

How does the planner know the best way to build factories? How does he know how to program the computers to determine this?

What are the factories to be made of? What about the computers? Where will the builders come from? The programmers? Capital goods are a crucial aspect of the Calculation debate

He has control over all the resources, so he just orders those computers to be built. He also has, for some reason, access to this very sophisticated planning technology. The scenario is pretty hilarious, but not necessarily impossible. And so, to avoid being called backwards, I tried to beat him on his own futuristic grounds.

Capital goods / Efficiency of production / Entrepreneurial innovation

This is a thing about the calculation debate I’ve never really understood. I’ve read at least parts of Nir’s article before, and still I don’t get why capital goods are supposed to be the silver bullet in the calculation debate.

After all, if I know what I want to produce, I can also come up with a way on how to build a factory. Even if I can’t, I can hire people to advise me, and then I’ll go for the best proposal. In the scenario above, after polling people for, say, a week, the planner has a set of data and plans the structure of production accordingly. While it may be improbable that this will lead to a desirable result, it is by no means impossible and we cannot a priori define the result of this planning process to be worse than what would have happened on a capitalist market - after all, if lots of mini-planners in a capitalist system assess a situation wrongly, they’ll fail just as much.

I don’t think my opponent was arguing against the position that central planning is unlikely to succeed, but against the a priori assumption that it must lead to chaos. And indeed, I don’t think I proved this by any means.

As for innovation, you know, he has his software technology that is able to predict the results of changes in the process of production, and so if someone comes up with a new idea or invention, he just types in the new variables, watches the result and plans accordingly. It may be far-fetched, but not impossible. And since I remembered that Misesians consider the planned economy to be impossible under any circumstances, I figured I might be able to cope with this scenario, too.

You proved prices are necessary, because his arbitrary decision making is a form of pricing.

We defined pricing as the capitalist method of pricing. While I pointed out that he was just acting arbitrarily, he said that still, he can run an economy that way, without any pricing. And as I pointed out above, I couldn’t prove to him a priori that this is destined to fail, only that it is arbitrary and may be prone to failure.

13

I think there are 2 key things to take into consideration.

First, as Mises states on pg 207-208 of Human Action, utilisation of the quantitive relations between means and ends is ONLY feasible for calculation (called “calculation in kind”), when:

1.The means are absolutely specific. Hence only 1 means can produce each end.

2.The means are perfectly substitutable for one another, although according to different ratios possibly.

Neither of the above conditions is present in the real world, where we find the means may largely be specific and substitutable to an extent.

Hence the abandonment of one production process must take into account all the foregone production possibillities given the abandonment of other plans, and these plans may themselves have to take into account they may produce on the production of other goods etc, etc. Hence, the point is the optimisation problem in which to organise production is not trivial, and this is without even taking into account several stage production processes.

With those, we may find an nth order means to also be an end, an n-1th order end, n-2th order end…etc. Hence we find even further permutations, and our model starts to experience feedback, introducing time into our optimisation problem in the sense of causing us to consider the paths we may take for equilibration along several stages. This makes the problem far from trivial, indeed even without several stages of production we get an astronomical number of production possibillities to compare and consider for equilibration. I believe one person is currently investigating if the problem is NP complete.

However, the problem is still unrealistic. In the real world we have class probabillity, or “knightian uncertainty.”

What this does is to permute and distort production processes along any production path requiring optimisation under such an equilibrium seeking procedure. Capital structures could largely collapse and be useless a few stages along the line, introducing further complications along how the economy needs to be redirected, with the further uncertainty and instabillity on whether this new structure of production can survive and be relevant.

This may make one wonder how the problem is solved at all. The solution, is that the market does not solve the production problem like an equilibrium optimisation, and succeeds precisely because it guides by incentivisation via profit and loss entrepreneurs who are rewarded precisely because they perceive and deal with uncertainty well, expanding the structure of production accordingly. Action is truly a lever of change in this framework, and rather than suffering and having to respond to the disturbances of uncertainty, capitalising on uncertainty is the very driving factor of the market, enabling its success, allowing for the only feasible method for the production of a sustainable structure of production. That is basically the thesis of a recent paper of mine on Economic Calculation I will be presenting soon. I may send it to you soon if you like.

14

So you said, “You can’t make a peanut butter sandwich without bread” and he said, “Sure I can, I will use crackers and call it a peanut butter sandwich”.

If he can define “running the economy” any way, then he can’t lose the argument.

Well, the calculation argument is that without prices there is no way to rationally allocate goods. He has given you this point, because he admits he will arbitrarily allocate goods.

15

Let’s say he faces a situation where you and I come to him and say we need all of the (insert any scarce good here) in the world. He has to choose to give it to one, the other or neither. Either way, he will use prices, as he will assign values to his three choices.

As long as he acts rationally (towards a purpose) then he can’t argue against prices, unless he wants to call crackers bread. In which case, stop talking to him, he’s wasting your precious time.

16

Let me frame you the economic calculation debate in this way:

There are two (final output) consumer goods, A and B. There are three input goods that can go into producing A and B, which we shall call X, Y, and Z. Any combination of X, Y, and Z which equals 100 can produce 10 A and 10 B. The catch is that there is only 100 of X, 100 of Y, and 100 of Z, so that you can only produce a total of 30 A or 30 B or a mix. Lastly, you use up X, Y, and Z, so that you need to reproduce these resources. X, Y, and Z all are used up at a constant rate (say 10% is always used up in production of final output). You have 100 T, 100 U, and 100 V that can reproduce X, Y, and Z. 100 of T, U, or V can be used to produce 10 of X, Y, or Z in any combination.

So the central planner first has to find out how much of A or B to produce. Then, the central planner has to figure out which is a more efficient way of producing A or B: X, Y, or Z. Next, the planner has to find out how to replace X, Y, and Z by using T, U, and V. How can the central planner possibly know a rational and efficient use of these resources? He cannot. This is also a laughably simple economy. In the real world, there are thousands more variables.

17

This is just IMPOSSIBLE without the pricing system. Enrico Barone suggested this kind of a solution. Obviously it was trash!

Get into the practical difficulties. When you just assume the planner knows everything, you give away your case in the very first instance of the debate.

18

So first we survey everyone, then initiate a 5 year plan, then 5 years later everyone gets what they used to want. I don’t see any problem with that.

19

Another quick point:

A free pricing system organically shifts to provide more “resource usage voting power” to those who create value for the most people. In the hypothetical super polling system, everyone (ostensibly) has the same voting power, thus the certifiably insane person controls as many resources as does the noblest entrepreneur. Such a system would quickly lead to chaos, and would provide no incentive for people to create value.

20

You are assuming that people have a constant preference scale all through the five years.