Need feedback on an article about von Mises and the Economic Calculation Problem

Economics Economics Questions
1

Hi,

I’m currently writing an article about von Mises, and I came here because would like some feedback from people who are familiar with and fond of his work.

The target audience of said article is people who are not very familiar with economics overall, and are assumed to be unfamiliar or just superficially familiar with Austrian Economics and von Mises. The article is meant as an introduction to the Socialist Calculation Problem.

I need to summarize the problem, and this summary must be brief, accurate, unbiased and understandable to an amateur. I have written such a summary, I’d like it if people here could read it and say what they think. My hope is that it is accurate enough that a follower of Austrian Economics would accept it.

Remember, this is meant to be simplified, basic and short - an introduction. So please don’t get to fixated on the details or different possible interpretations. I would really appreciate any input.

The summary:

In very simple terms, the calculation problem is about information limitations due to the lack of a market. Without the information markets carry, there can be no rational method of resource allocation in an economy, especially in the production process.

In a market economy, people can decide how resources should be allocated by showing their willingness to pay for them in the free market. Since price is determined by supply and demand, it thereby conveys information about the availability and desirability of resources [question: would “goods” or “goods or services” be better instead of “resources”?].

The strength of a market economy is that an entrepreneur does not need to have all the information to make a decision, something that is in practice impossible, but just needs to know the price and act on self interest. The result is still that production is coordinated in a way that meets needs and avoids shortages or surpluses. Something that is impossible in a centrally planned economy.

I appologise also if the English isn’t perfect; I’m writing the article in Swedish and I just quickly translated it so people here would understand.

2

Not bad. And the English is perfect.

It inspired me to try my own version, which follows:

Mises’ insight is that anything you produce, say a television set, has a price, the price being all the other things that will not get done because you used up time and money and material making that tv set. So that the question arises, what is the “best” use of a set of resources. Should we go ahead and make that tv set, or should we use those resources for any one of millions of other things? And who gets to decide?

One answer is that whatever people want so badly they are willing to give up on all the other uses of the resources to have it, is what the resources should be used for. If that thing is a tv set, fine. If it is something else, then it should be used for something else, obviously. Now socialists also agree that the point of an economy is to give people what they want. So everyone is in agreement that the above criterion is a very good way of deciding what to do with the resource.

Now the question is, how will people let us know what they want? We certainly cannot go out and ask them. They are ignorant, as we all must be. Nobody can possibly sit down and think through every possible way of mixing together a country’s resources, envisioning all possible the resulting outputs, and saying “I want this to happen.”

As for using some supercomputer, no computer in the world can even figure out how to win for sure at chess, which has a board of 64 squares, 32 pieces, and a few rules of movement. So it is ridiculous to talk about a computer setting up a giant catalogue of many trillions of possible combinations for us to examine. Not to mention that there is not enough time to read that thing before the sun burns up all its energy.

In a socialist system, what happens is that someone or other just takes a wild guess and hopes for the best. Obviously, this is like dialing a phone number at random and hoping it finds you a doctor you need to perform open heart surgery. In short, the odds are overwhelming that resources will be wasted. Indeed, every socialist country has quickly declined into abject poverty and starvation for all.

But if you have a price system, the problem is solved. Motivated by profit, there are people out there, entrepeneurs, who spend all their time figuring out what they think people will want, and exactly how badly they will want it [=how much they will pay for it]. For every resource, there are many entrepeneurs bidding for it, meaning that they estimate people want him to use the resource so badly they are willing to pay him X dollars for it, but not a penny more. The ones who estimated correctly make money, and get to stay in business and continue estimating peoples wants. The ones who guess wrong lose money and go out of business. The system isn’t perfect, of course, but it has impressive results.

3

Mises’ calculation problem really has little if anything to do with deciding what people want to consume - this is more akin to Hayek’s argument about the problems of socialism. Mises’ problem is in deciding which series of inputs (capital goods of various orders, different kinds of labour, different uses of natural resouces, and of course the factor of time) can efficiently provide consumer goods, whatever those may be. Lacking a cardinal unit to compare the costs of the almost infinite possibilities of production, one is simply acting on a hunch. Without the possibility of calculation, massive waste of all of the factors is an inevitably - which makes the lengthening of the structure of production prohibitively expensive, resulting in a very primitive capital structure. The economy reverts to pre-industrial conditions.

I think it would help if you presented the problem, as Mises does, from the point of view of the planner. What if he wants to build a railroad? If he were an entrepreneur of today, he could compare the monetary costs of different possible factors, and decide on the least costly in monetary terms. But the central planner must start from scratch - he cannot know how the cost of the production process he chooses compares to all the other millions of possible production processes.

4

Aristippus summed it up perfectly. People spend too much time focusing upon “information” in the calculation debate. Information is an important part of how prices work but this is not the crux of the issue. The simple and self evident problem that brings down any society without a market is this: How much is a service worth?

… Well?

How much is iron worth?

There is no answer in the absence of the market. You can say that say forks are worth 5 and spoons 4 but then how much iron should go to them?

When there are millions of goods in the economy and millions of ways of producing them there is literally no way to allocate goods, it’s absolutely arbitrary chaos, you don’t know how much should be allocated where, there’s no way that you could even do so! As soon as socialists hear calculation they think “computers” but a computer cannot assign value.

If you look at Mises’ section on human action about the socialist calculation problem the chapter dealing with the meat of the issue is actually very brief, he barely even answers the question because of the fact that just thinking about the problem makes the issue itself self evident.

The question “how much and where?” in and of themselves obliterate the anti-market thesis.

You’re article seems perfectly right about why it is that a market can and is good at calculating (although I don’t think that you put quite enough emphasis on the fact that it provides numbers for calculation) but the most important part of the argument is why socialists just plain can’t calculate anything that they do.

5

Thanx everyone for the answers!

Aristippus’s answer is pretty much how I imagined the problem more specifically, and hopefully how I will be able to explore it further if my article is allowed a sequel. I like it especially since I’ve read socialist critiques of von Mises that present the problem similarly, meaning that it is an unbiased and factully correct summary. I hope you don’t mind me perhaps borrowing bits of it in the future? :slight_smile:
Smiling Dave’s answer is what I was hoping to express, but in far fewer words.

For now I want to give a summary of the ECP as a whole, not emphasising von Mises’s contribution over Hayek’s too much. I also cannot be nearly as biased (either for von Mises or against socialism), since I am aiming to give a perfectly neutral description that both an Austrian Economist and an anarcho-communist could agree with.

Since you where all kind enough to comment on my summary, perhaps you’d take a gander on my suggestion for a deeper exploration of the problem. I tried to give an example of pretty much what Aristippus was talking about (I hope):

Let us say that we are manufacturing a product, and that we can produce it in three ways, all requiring different amounts of different resources, x, y, z. (assume that the result, quality, etc. is the same).

Method 1:
5x
10y
3z

Method 2:
10x
5
3z

Method 3:
10x
10y
5Z

von Mises acknowledges that even a socialist system can recognize that Method 3 should not be used, but the problem is the choice between 1 and 2. How do you choose which one is better, without a way to compare the value of x and y? In a market economy, we can easily make a decision because we can compare the price of x and y.
The price is determined by supply and demand, and thus, the cost of x and y to be that there is most access to (or least demand for). By choosing the cheapest method we have chosen the best allocation of resources, and this without doing anything other than simply trying to maximise profits.

Also, since I recall von Mises saying that a socialist planned economy could “embrace consumption goods only”, I added:

*It is mainly in so-called intermediate products that the problem becomes insurmountable, ie. goods which in themselves are components of other goods. [*not satisfied with following sentence: Concerning products that are to be directly used by people, and products that do not have many components (say, food cans), the problem is not as great.] One could for example imagine that a food can factory that can make their cans out of one of two metals could perhaps estimate, or in some manner investigate, what would be best. It is in complex cases, say an iPod, which have hundreds or more intermediate products, that the problem truly manifests itself.

Huga thanx, again! I just want this to be as accurate as possible.

6

Also, I actually decided to add the following to the original suggestion, freely based on/borrowed from Aristippus:

What combination of inputs (capital, labor, natural resources, time) can efficiently provide consumer goods? Missing a unit for comparing costs, and thus the ability to calculate, choices made are just a gamble and a waste of all factors is inevitable.

7

You might also contact Daniel James Sanchez if you’d like more input. He’s written extensively on Mises. On his blog as well.