Dave,
I don’t see how that can be when Aristippus agreed with me when I clarified and framed what I wrote. If you’re relying upon his critique of what I said, then his admitted resolution should mean that we agree.
I don’t see how that can be when Aristippus agreed with me when I clarified and framed what I wrote.
He was right when he disagreed with you originally, and wrong when he agreed to your clarification.
I will explain why in a moment. But to make sure we are on the same page let’s lay out a few things.
Mises was talking about a best case scenario for socialism, where everything is in an ideal state and the only problems are those that MUST follow from one person deciding what to do with all means of production.
Thus he assumed perfect technological knowledge. It is totally known how many units of everything go into making a bed, a chair, and a walking stick. And those things are known numerically.
So that when you wrote," …in the production process how many materials are to be foregone to produce one bed? ", meaning we don’t know how much steel and man hours etc. go into making a bed, that is not what Mises was talking about.
Mises was even assuming [unlike what Clayton wrote] that there is money in the system. He also was willing to grant that there will arise a price system of sorts for consumer goods, in that it will become known that people would trade a cigar for five cigarettes and so forth, thus establishing prices for all consumer goods in terms of all others.
The only thing missing is what MUST follow from one man in charge of all means of production, mainly that there will be no price tag on means of production. One man, or the people, call it what you will, owns everything. There is thus nobody to sell to, and thus no price is possible.
And that is what will bring down socialism.
“Mises was talking about a best case scenario for socialism, where everything is in an ideal state and the only problems are those that MUST follow from one person deciding what to do with all means of production.”
I said as much in my first post.
“meaning we don’t know how much steel and man hours etc. go into making a bed, that is not what Mises was talking about.”
Considering the first part of the sentence and the sentence in the context of the paragraph then I should hope that it would have been obvious that I was saying specifically how much of a certaing factor of production should go into producing a specific consumer good, which cannot be known without valuation.
“Mises was even assuming [unlike what Clayton wrote] that there is money in the system.”
I was under the impression that this was only true in Mises’ discussion of market socialism?
“The only thing missing is what MUST follow from one man in charge of all means of production, mainly that there will be no price tag on means of production. One man, or the people, call it what you will, owns everything. There is thus nobody to sell to, and thus no price is possible.”
How does this follow?
At any rate, once again I was assuming that somehow consumer prices were perfectly known. So long as this is the case I don’t understand why productive factors could not be perfectly valued. This was to show further that the problem is one of calculation from the impossibility of total valuation within the socialist commonwealth. In the real world of uncertainty, a whole other dimension of difficulty arises within the market socialism paradigm.
In the real world of uncertainty, a whole other dimension of difficulty arises within the market socialism paradigm
But that is exactly what Hayek was addressing. He was saying there is no whole new problem,it’s the same oldcalculation problem - he just pointed to the nature of prices and production as feedback while showing the “market socialist” thought about “knowledge” is faulty
Same argument, different time
I can’t post anymore because I’m not supposed to speak english and I’ve already been naughty.
lol, what!?!
Well I think I misread what Neo was saying in his clarification - I thought he was referring to prices rather than technical knowledge.
I see I have to come back to this after I’ve thought it through a bit more.
What bothers me is that I do know that Mises wrote that the killer of socialism is going to be that there are no prices for means of production.
And yet Neodoxy’s line of reasoning, that if you know consumer demand and you know the technical knowledge, then what’s missing, has me stumped. In such a case, who cares about prices of means of production? And yet Mises assumes both those things.
If I am following the discussion accurately, I would say that capital goods cannot be valued for the same reason consumer goods cannot be valued. Their inputs cannot be valued, so no one knows whether to use the steel to make 15 anvils, 10 lathes, and 5 mills, or some other permutation. You cant just decide to make a mill or a lathe if you cant prioritize for uses of the labor and the materials. What about capital goods would exempt them from the calculation argument? Or did I miss something?
Edited.
Hey Neo. This will actually be my last response, I couldn’t resist.
I can if you’ll allow me. We may skip the ‘how are x prices formed but not y’ and just assume that consumer goods are the only prices that are correct and responsive.
Mises defined profit as the entrepenurs anticipation of future conditions in the market. As it is, this definition is essentially tied to an element of time, now and some unknown future. He placed emphasis on the fact that the future is unknowable but can be anticipated correctly by talented persons, as did Lachmann. You are correct in that, if we can take the last ‘round’ (unit of time) from an ERE and give that information to an entrepeneur and assume that prices will not change (even though his purchases of capital in themselves postpone final prices, but we needn’t dwell there) he can organize a capital structure, which is more profitable than any alternative. So it would be true that there is a ‘correct’ capital structure, in that there is no structure more profitable than it if all prices were final. But these are not the conditions of the world. It is possible and plausible that a certain A structure of capital may be less profitable at Time 1 than structure B, but more profitable at Time 2. Maximizing your profit for only the first time ‘unit’ may be disastrous for the next four time ‘units’, if it is only a short-sighted anticipation. It is ultimately the choice of the entrepeneur if he wants short term profits, medium term, long term and if he wants to sell off his company at any time therein. It may be the case that an entrepeneur incorrectly anticipates conditions for Time 2, but his actions happen to luckily coordinate very well with Time 3, and so on.
The future does not exist. We may say in hindsight there was a correct or perfect capital path for a certain firm from 1900-present, but that is only with the aid of certain knowledge. The future is wholly unfixed. One may not claim that there is a correct capital path as it would require perfect knowledge of future conditions. I do not deny that “if there were set and perfect prices on every good that the amount of each capital good we should allocate is not pre-determined” if you mean this in the sense that such knowledge spans the time dimension. But such knowledge can never exist. So, as I believe you have framed the question, then yes I do deny it.
Well which is it? If it’s the latter then I believe you’re correct.
You’re saying if the planners know what is most demanded, then it doesn’t matter what kind of costs they’re incurring? This seems to me akin to saying that any capital structure is sufficient as long as its addressing demand, which isn’t true. As, one, not all capital structures are equal, and two, had a the planner forgone expansion in one area in favor of expansion in another he might have actually cheapened the costs of the first and made its expansion easier due to the complentarity of capital.
I only mean that the producer of producer’s goods considers his customers in the same way that producers of consumer’s goods consider their customers.
Imagine if the producer of consumer goods had no prices for his consumer goods. He’d be lost. This is how it is in this scenario for the producer of producer’s goods. From that we may presume that the array of capital supply wouldn’t be rationally organized.
Socialists happen.
At a language school. See y’all in August.
Hey Neo. This will actually be my last response, I couldn’t resist.
I can if you’ll allow me. We may skip the ‘how are x prices formed but not y’ and just assume that consumer goods are the only prices that are correct and responsive.
Mises defined profit as the entrepenurs anticipation of future conditions in the market. As it is, this definition is essentially tied to an element of time, now and some unknown future. He placed emphasis on the fact that the future is unknowable but can be anticipated correctly by talented persons, as did Lachmann. You are correct in that, if we can take the last ‘round’ (unit of time) from an ERE and give that information to an entrepeneur and assume that prices will not change (even though his purchases of capital in themselves postpone final prices, but we needn’t dwell there) he can organize a capital structure, which is more profitable than any alternative. So it would be true that there is a ‘correct’ capital structure, in that there is no structure more profitable than it if all prices were final. But these are not the conditions of the world. It is possible and plausible that a certain A structure of capital may be less profitable at Time 1 than structure B, but more profitable at Time 2. Maximizing your profit for only the first time ‘unit’ may be disastrous for the next four time ‘units’, if it is only a short-sighted anticipation. It is ultimately the choice of the entrepeneur if he wants short term profits, medium term, long term and if he wants to sell off his company at any time therein. It may be the case that an entrepeneur incorrectly anticipates conditions for Time 2, but his actions happen to luckily coordinate very well with Time 3, and so on.
The future does not exist. We may say in hindsight there was a correct or perfect capital path for a certain firm from 1900-present, but that is only with the aid of certain knowledge. The future is wholly unfixed. One may not claim that there is a correct capital path as it would require perfect knowledge of future conditions. I do not deny that “if there were set and perfect prices on every good that the amount of each capital good we should allocate is not pre-determined” if you mean this in the sense that such knowledge spans the time dimension. But such knowledge can never exist. So, as I believe you have framed the question, then yes I do deny it.
Well which is it? If it’s the latter then I believe you’re correct.
You’re saying if the planners know what is most demanded, then it doesn’t matter what kind of costs they’re incurring? This seems to me akin to saying that any capital structure is sufficient as long as its addressing demand, which isn’t true. As, one, not all capital structures are equal, and two, had a the planner forgone expansion in one area in favor of expansion in another he might have actually cheapened the costs of the first and made its expansion easier due to the complentarity of capital.
I only mean that the producer of producer’s goods considers his customers in the same way that producers of consumer’s goods consider their customers.
Imagine if the producer of consumer goods had no prices for his consumer goods. He’d be lost. This is how it is in this scenario for the producer of producer’s goods. From that we may presume that the array of capital supply wouldn’t be rationally organized.
Socialists happen.
At a language school. See y’all in August.
No prices for means of production means no rational production for means of production. Production of consumer goods is dependant on producer’s goods. When producer’s goods are not produced rationally there are shortages of producer goods in needed places and excesses in unneeded places; wastes of energy. Capital complementarity cannot be acknowledged in such a system.
What good is 50 tons of pig iron if you’re missing a certain copper wire or aluminum rod which pulls a machine together? And when the availability of such things requires a redrawing of plans?
Under conditions of market socialism individuals are given a (typically equal amount of) ration book coupons which are used to bid for goods and resources in state-owned firms directly supplying consumer needs (in short, the nationalized first-order producers). Once these ration prices are established you can then derive the marginal “revenue” product of each factor in the various production processes through typical marginal analysis. i.e. you have the nationalized industries “play at the market”. Much like in a private economy you would simply arrange the factors such that each earns the maximum amount of “revenue” possible given the prevailing “market conditions”. Thus, the market socialists claim that government ownership of the means of production and income/purchasing power equality can be maintained part and parcel with a rational allocation of the factors of production (land, labor, and capital). The market socialists also note how this state of affairs is more efficient from a time perspective because it does away with active bidding for productive factors by capitalist-entrepreneurs.
While this analysis seems correct on a superficial level, and it is certainly superior to the Marxian claim that all relevant prices in an economy can be calculated by appealing to the value of labor imputed in each product, it fails to account for how the problem of calculating the natural rate of interest will be solved in an economy where individuals supplying present goods in exchange for future goods is impossible by definition. As a result, the planning authorities will be unable to gauge how “long” their citizens wish the structure of production to be and, therefore, it is extremely likely that they will fail in providing for both present and future needs. The Soviet Union under Stalin, for example, engaged in a massive lengthening of the structure of production via mass industrialization at the cost of depriving consumers of even the most basic of present goods like food, clothing, and housing, resulting in widespread starvation and poverty. Naturally, problems of innovation and motivation apply to the market socialist economic system just as they do to the Marxian economic system.
In regards to the original posters question on economic knowledge, I think that it’s highly important and is best communicated through the price system (Hayek’s example of a mine collapsing on the other side of the world and this explicit knowledge being translated to business owners implicitly via an increase in the unit price of the mine’s output comes to mind).
This is scientific knowledge, and it is readily available in both capitalism and the various forms of socialism. Hayek’s main point is that relevant information primarily takes the form idiosyncratic and “tacit” knowledge, as opposed to this sort of scientific knowledge. The main objective at hand is not to figure out how to produce something but (a) whether or not we should produce it at all and (b) what is the “correct way” to produce it (figuring out the proper recipe, so to speak). In other words, what is the opportunity cost? Once the opportunity cost is known (perfect information) across the board, then the question becomes a problem of simple arithmetic.
This argument is far broader than Mises’ argument, which really only applied to Marxian socialism (where prices or pseudo-prices do not exist in any form). Hayek’s argument is really just an elaboration. Much to do about nothing.
That brings up an excellent point, Esuric; I’ve seen many a paper where the author assumes perfect/symmetrical information and then seeks to analyze firm, consumer, factor owner, or whatever behavior in the context of a price system. Why would you even need a price mechanism if knowledge of all facets of the economy are already known by everyone?
I’ve never heard this before: that entrepeneur’s tasks are to seek maximum revenue. I’m only familiar with the notion that they are profit maximizers as Mises outlined. That said, in an accounting sense, profit is the positive difference between total revenues and total costs. When producer’s goods have no price, costs are incalculable, so profits are incalculable, and the discovery of the most profitable endeavor cannot even be attempted.
Secondly, it is not his task to maximize profit (or even revenue) in accordance to prevailing (I take it you mean current) market conditions. Mises stressed that profit was the entrepeneur’s anticipation of the future. As such it is not necessarily the most profitable scenario in the immediate-term that is the ‘most profitable’, seeing as most entrepeneurs choose to hold their businesses longer than the the first ‘data set’ of the market. The issue then becomes an issue of capital formation in accordance with the entrepeneur’s expectations of the future. In this case there is not a clearly ‘correct’ path, as there most definitely is when one is dealing with only the ‘data set’ of a single moment in the market. There may be different formations for different entrepeneurial time preferences, and on top of that formations which anticipate the future better than other ones. What this means is that planners, if they have any ambition, will be trying to arrange for the future before it arrives, only without the guidance of prices on factors, labor included I believe.
Jargon,
Entrepreneurs do seek the largest profit possible given current market conditions, but factor owners seek maximum “revenue” (the highest DMVP possible).
Factor owners in the sense of capitalist/shareholder? Could you maybe expand on the difference between the two? And doesn’t the entrepeneur traditionally hold control of given resources, whereas capitalists expand the pool from which the entrepeneur draws? I would assume that there would be appointed managers acting as entrepeneurs.
And did you read the rest of my post because it seems you think that I agree with you that entrepeneurs seek profit from ‘given market conditions’. I take the term ‘given market conditions’ to mean the current (as current as current can be) ‘data set’.
“And yet Mises assumes both those things.”
Are you sure that he does? Can you cite where he does this? His main argument is against traditional socialism in which there are no prices, merely direct distribution except in those cases where he addresses market socialism which have always seemed like much less devastating criticisms to me.
@Vive and Esuric
So could you explain to me the differences between Hayek’s and Mises’ arguments? The way that Esuric explained Hayek’s argument was exaclty how I understood Mises’
Neo,
- …you know consumer demand…
From Chapter One of Economic Calculation in the Soc. C.:
The principle of exchange can thus operate freely in a socialist state within the narrow limits permitted. It need not always develop in the form of direct exchanges. The same grounds which have always existed for the building-up of indirect exchange will continue in a socialist state, to place advantages in the way of those who indulge in it. It follows that the socialist state will thus also afford room for the use of a universal medium of exchange–that is, of money. Its role will be fundamentally the same in a socialist as in a competitive society; in both it serves as the universal medium of exchange. Yet the significance of money in a society where the means of production are State controlled will be different from that which attaches to it in one where they are privately owned. It will be, in fact, incomparably narrower, since the material available for exchange will be narrower, inasmuch as it will be confined to consumption goods…
The relationships which result from this system of exchange between comrades cannot be disregarded by those responsible for the administration and distribution of products. They must take these relationships as their basis, when they seek to distribute goods per head in accordance with their exchange value. If, for instance 1 cigar becomes equal to 5 cigarettes, it will be impossible for the administration to fix the arbitrary value of 1 cigar = 3 cigarettes as a basis for the equal distribution of cigars and cigarettes respectively...
Variations in exchange relations in the dealings between comrades will therefore entail corresponding variations in the administrations’ estimates of the representative character of the different consumption-goods. Every such variation shows that a gap has appeared between the particular needs of comrades and their satisfactions because in fact, some one commodity is more strongly desired than another…
The administration will indeed take pains to bear this point in mind also as regards production. Articles in greater demand will have to be produced in greater quantities while production of those which are less demanded will have to suffer a curtailment.
Bottom line, sounds to me like there is a thriving price system for consumer goods, with numerical values in money, and that the powers that be will have to take this into account when they schedule what to make next.
That whole chapter goes on and on about how the problem is no pricing for production goods, since one person owns them all, and he can’t sell them.
Here’s another quote from Chapter 2:
…All this is necessarily absent from a socialist state. The administration may know exactly what goods are most urgently needed. But in so doing, it has only found what is, in fact, but one of the two necessary prerequisites for economic calculation. In the nature of the case it must, however, dispense with the other–the valuation of the means of production.
- …you know the technical knowledge…
I’ve heard this in Joe Salerno’s lecture on this page: http://www.libertyclassroom.com/mises/
In addition, the whole tenor of the book Econ Calc in the Soc C is about economic ignorance that the socialists will face, never a word mentioned about technical ignorance. The socialists will know every possible way to skin a cat; they will not know which is the most economical way.
- Now that I think about it, that quote from Chapter 2 is saying my reasoning is wrong. I assumed that if you know what’s needed [and how urgently] , and how to make it, that’s good enough. Mises is clearly saying in that quote that it isn’t. Like I said , I have to think about this more. There are wheels within wheels.
I think the key to his argument is outlined in this passage: