Socialist Calculation and the National Defense Monopsony

Economics Economics Questions
1

The Misesian Socialist Calculation argument goes, approximately, thusly:

If a government monopolizes all of the means of production, it will have no way to rationally allocate resources. Monopolizing the means, means there is no longer a market for capital goods. Capital goods cannot be bought and sold for their subjective use values as perceived by entrepeneurs. The values which are assigned to capital goods as prices in an act of exchange are not random or arbitrary. They represent a capital goods’ worth in a certain chain of production, which ultimately produces consumer goods. They represent the worth of said good in said production-chain to all of the market’s entrepeneurs and thus, a pretty good guess. It follows then, that if the consumer demand for a certain product falls off a cliff, then the price of an imaginary capital good in that process, whose only use is in producing said consumer good, will also fall off the cliff. Completely socialist governments can assign prices to their capital goods for accounting purposes, but they will not be gaining any information about it’s subjective use value.

It seems to us then, that the problem of calculation in the socialist commonwealth is fundamentally tied to that connection between capital goods and consumer goods. We know that socialist countries, such as North Korea or CCCP, will be poor, even if the private sale of consumer goods is permitted, because the producers and employers of capital goods have no access to the information of said good’s worth in a parrallel “market universe”, where prices convey information. But what about National Defense? It is neither purchased with the money of economizing individuals, nor is it consumed. Its demand is not determined our archetypal consumer, choosing which needs to alleviate, but by some kind of national planning board.

Let’s pretend that a country’s defense industry is nationalized. Tanks, munitions, airplanes, large arms, defense systems and technology are produced by the government. The non-specific means which contribute to those processes remain private, but the use-specific ones are nationalized as well. The nation has a defense budget which is ammended every five years but remains fixed in between ammendments. The nation does not intend on going to war in the next 15 years and no one will declare war on them, meaning they won’t be using those weapons they have produced? Now can you say that this state of affairs will be problematic in regards to the calculation argument? From what source are all of these productive and final goods supposed to get their exchange value as they are not consumer goods? Is this a black hole of catallactics or am I utterly lost?

2

I am not sure but to me the the Calculation Problem springs from the core issue that all goods have alternate uses. So the entrepreneur as part of their plan must not only judge land, labor and capital on a technical basis but must also weigh the basis of their expected scarcity. And by far the most accurate, the only accurate, measure of scarcity is the price which can best be defined as the amount of wealth required to control a scarce resource above all other possible uses of that scarce resource. Furthermore the free market price system is the only non-arbitrary measurement of relative scarcity.

Now examine how the bureaucrat would see the problem of alternate uses of most/all goods. The bureaucrat sees only the technical part of the capital good and need only worry about the appropriation of the capital good from other uses in a political process. But how does the political process make this determination by any means other than arbitrary means. Then take this issue to the multitudes of capital goods many of which exist as both consumer and capital goods at the same time. My company owned a minivan for example.

In your example the capital good has only one alternative use but that is simply not true for any good capital or otherwise that I can think of. For example the industry specific software that my company produces can be used in a variety of manufacturing processes outside of our core industry. Our customers must then value the software against alternatives in their own industry and then value the increased production of their consumer products against the cost of the software.

3

The calclulation problem doesn’t just mean that the people in the socialist counrty will be poor, it means that socialism would be impossible without the planning board to copy prices from abroad. The way I see it it doesn’t matter if the government is producing butter or tanks because the problem is whether they can be produced efficiently. Any sense of efficiency would simply be thrown out the window. The government would have no means of assessing the waste of resources going into making a tank and those resources would be pulled away from producing things like butter

The wikepedia page on North Korea says that their currency is called the won, they probably copy prices from abroad. The way I understand it if they wern’t copying prices from abroad the North Korean economy would be so irrational that society would break down it would be even worse than it is right now

-Joseph Salerno

4

I was thinking about economic calculation and a robot colony. I do not think a robot colony would be capable of expanding and procuring new resources economically, sure the robots would be good at repeating the same tasks over and over but the real world always involves unexpected events happening. Lets say for simplicity the two resources the robots need are iron and oil, and were technolgically capable of establishing their own oil fields and mines. The robots after all need energy and metals to maintain themselves and build more robots. They are programed to be fruitful and multiply because humanity has been destroyed by a plague.

The robots suffer from natural wear and tear so they must make decisions (since they are robots all thinking is done entirely mathematically) about what to do with old robots, if one gets damaged in a storm should it be repaired, broken down or used into parts or even abandoned. All robots will be specalized and decisions have to be made whether to build a robot that builds other robots, repairs robots, drills for oil or mines iron ore. How much resources should go into robot safety, not as a matter of ethics but simply of efficiency (for example robots being destroyed in a mining accident or oil explosion. How long should the process of building a robot take, the longer process builds a better robot but mabye it would be more efficient to build a simpler robot taking less time. What is the most efficient use of resources in the building or repairing of a robot or of the construction of a mine or oil field. Is it more efficient to expand current minning or drilling operations or to explore other resources and build explorer robots. If an explorer robot gets disconected from the rest of the robots, lets say in the storm, is it a more efficient use of resources to abandon the robot or search for it and try to salvage it.

I heard Rothbard in a lecture talk about the difference between technological efficiency and economic efficiency, our robots would have the same problems as the socialist commonwealth.

An ecosystem establishes efficiency by whether a species perishes or not. If a species can’t adapt to new conditions it dies. Capitalism has prices and losses. Our robots will not have any way at all to determine efficiency. They have no way to determine efficiency like living things do. Of course in reality the robots this technlogically advanced would need a huge variety of natural resources and there would be so many processes in turning them into things that they needed to “be fruitful and multiply”. This of course is a very futuristic scenario but while the robots could physically do all these things they would have no way to know how to use their resources economically.

Edit: Sorry to get off subject this was just something I was thinking about. In your example the government could probably establish prices based on similar capital goods in the private sector similar to how the Soviet Union was able to calculate based on prices on world markets (capitalist prices)

5

I am not sure if something whose whole thoughts are based in mathematics can be considered to be thinking. I imagine a sentient being having a brain similar to ours, so it would be capable of determining value for itself like humans would.

It would be disadvantageous, as a mind can only plan so far, but a sentient machine would have to manage all of those resouces in relation to its own life/wellbeing/purpose/whatever. So it would work towards those goals just the best it can, and all of his robot servants are more like tools than people. If it started creating other minds to help it, after awhile we could start talking about their economics.

6

Jargon, I think you have hit on something.

I’m not sure what you are asking, so I’ll try to look at your scenario from a few angles. Forgive me if this post rambles.

What will determine the cost of the tank? Answer: the govt will have to outbid everyone else to get the raw materials and labor etc. needed to make that tank. Whatever it takes to do that will be the final cost of the tank. In practice, there will be corruption etc that will raise the costs, but I don’t think that’s what you are asking about.

How will the govt know if it was “worth it” to make that tank at that price? After all, they are not going to try and sell that tank at a profit. They are going to use it themselves. Answer: According to the subjective theory of value, it would depend on the feelings of the one signing the checks. If he felt it was worth it, it was.

How will “the people”, who are ultimately footing the bill, know if the tank was “worth it”? Here, too, it dependes on their subjective feelings.

Should the govt decide to sell some tanks, what will their worth be? Answer: Since selling price and “worth” is not connected to costs of production, but to the subjective feelings of the buyers, then the answer is “whatever the highest bidder is willing to pay for it”.

How does the govt know whether it is better to make tanks, or just relax and not make them and not tax people for the tanks? The free market way would be to have anyone interested in the govt making a tank send in a check [=pay for it, or for part of it] and those who don’t want a tank won’t send in a check.

What is the effect on the economy of making a tank? Whenever Thing A is made, it means less of Things B, C, D etc will not be made. Was it worth having A at the expense of not having B, C etc? That is a question for each individual to decide, according to the subjective theory of value.

How does this tank differ from anything the govt does under Socialism? If it’s all subjective, can we not say that if everyone feels good about how the govt allocated resources, that it’s fine? Answer: Actually, that’s correct.

Then why all the fuss about Socialism being doomed? Answer: This is a deep one. Here goes:

Since all value is subjective, whatever the people want is what should be made. But how do we know what the people want? In a free market, it works like this. Mr A is convinced the people want fancy cars. He calculates or guesses or whatever as best he can what he will be able to sell a fancy car for, say $50,000. He then estimates his costs of production. If they add up to $55,000, that means someone, call him Mr B, is willing to pay $55,000 for the materials he wants to use for making the car. Obviously, Mr B is only going to pay that much if he will sell for more than $55,000. Meaning the consumers have voted with their money how to allocate the available resources and declared that they prefer whatever Mr B is making to a fancy car. Thus we know what they want, and can proceed to make it.

The key here is that the “votes” for what should be made are cast at exactly the correct stage, before anything happens at all. The votes for the allocation of resources and of what should be made are cast by the prices of raw materials [and other costs of production], which are determined by estimates of businessmen of what people want, as above. It’s not a perfect scheme, but it’s something.

Under Socialism, there are no prices for raw materials, because the govt owns them all and is not selling, because it is the only one who uses raw materials. So that there is no mechanism for “votes” to be cast about what should be made and how resources should be allocated.

I think what you are saying, Jargon, is that when a govt decides to spend money, there is also no voting. If it decides to make a fancy car [or tank, it makes no difference], they don’t care about costs of production, because they are not paying out of their own pocket. Thus a govt taking money by coercion and doing what it wants it is also acting like a socialist who makes things blindly without knowing if his final product is what people want. And, of course, in that sense when the govt makes a tank it is doing damage to the economy, just like socialism. It’s a question of degree. A socialist country uses all the resources in the country blindly. A govt that makes tanks leaves some resources over for the private sector.

7

One issue is that government spending does not represent the will of the consumer but is instead the consumptive decisions of bureaucrats. But what if, in the area of natural defense, the consumer wanted less national defense than was required and then the bureaucrat would spend? in that case the bug would become a feature.

8

In the context of this thread, I think “national defense” is actually the accumulation of certain kinds of capital (weapons, other equipment, supplies, etc.). Think of it this way: if you bought a firearm so you can better defend yourself in the event of a home invasion, would you say that firearm is a consumption good or a production good?

So presumably things like mines, refineries, etc. would be privately owned and operated, right? In that case, the government would ultimately pay private sources for the raw materials used to make weapons and so forth. The government would also spend money on the wages and salaries of employees in the defense industry, or otherwise compensate them for their labor. But when you talk about “all of these productive and final goods”, are you talking about the weapons being made? Or the privately produced raw materials used for making them? Or what?

9

@ Auto

I honestly do not know.

Yes, I’m talking about the producers goods and final goods, all in the field of weaponry, hypothetically possessed by the government in this case.

10

Dave

I think you’re getting at what I’m trying to express but it’s difficult for me to do, so with all that I’ve typed above as pretext I’ll try to reformulate my question:

1a) So, we know that the exchange value of producers goods are determined by the exchange value of the consumption goods which they contribute to. If a producer good is specific to one consumption good, it is highly sensitive to that one good’s sales.

The valuations of consumers are communicated to planning entrepeneurs through the price system.

1b)Mises wrote that, because there is no market for producers goods under Socialism, the planners are effectively blind (if they’re unable to ascertain prices from capitalist countries). Without knowing the exchange values given under Capitalism, the planners don’t understand how to economize the useage of a producers good, even if they have perfect technical knowledge of a production process, which Mises granted in his argument. This is because entrepeneurs will only buy X quantity of said producers goods for their enterprises production-lines if they predict it will be profitable. Because there are no prices in Socialism, the planners are deprived of a meaningful unit of account all of their producers goods industries.

  1. Let’s assume nationalization of military industry (tanks, planes, munitions, artillery, ships, IT systems, etc.) Enterprises producing non-specific machinery, resources, etc remain private.

The government taxes people, thus depriving them of some choices with their own resources (debatably giving them some), and puts it in a fund to be spent on the military industry. The government dominates this industry. There is no supply or demand of final goods, there is simply planning and production. The supply of the final goods is arbitrarily determined by a congressionally passed budgeting bill. Thus, there is no information about consumer valuations communicated up through the chain of producers goods.

2.1) (DIGRESSION) In a Socialist economy, where all means of production are owned and produced by the government, but private consumer goods may remain, the consumer’s valuations of each good produced by the planners is not communicated to the planners.

  1. (CONTINUED) So what can the calculation problem tell us about a situation where profit based on the valuations of consumers is irrelevant to the purpose of the production of these goods (military ones) in the first place? It seems like the concept just doesn’t connect, like two lines running perpendicular but one a foot higher than the other. Does this then mean that there is a permanent calculation problem in the military, because the “demand” for its goods is not determined by economic factors, but rather political ones?

I think I may have just realized the issue here. It might be that it’s not an issue of economics. It’s analogous to a lone farmer building his tools and sowing his seed on his own initiative. He constitutes the demand and supply. As would the military in the aforementioned situation. Socialism is not analagous here because the demands of the consumer are not taken into account.

I hope I’ve communicated this effectively because it really freaked me out when I started thinking about it.

11

Okay. I’d say the firearm is a production good.

Okay, so you’re talking about the weapons, supplies, equipment, etc. for the military, right? In that case, I’d say that none of those things have prices because they’re not being put up for sale, and thus there’s no way to find out how much other people value those things relative to other things (like certain amounts of money).

But notice that the same is true in a Robinson-Crusoe situation. Crusoe makes everything for his own use, so there are no prices (indeed, there is no market). Even so, he can still engage in economic calculation, which is just weighing expected costs versus expected benefits. As there’s no possibility of exchange, the only costs he faces are his own time and effort.

I think it’s important to keep in mind that socialists seek to eliminate market exchange (and thus market prices and so forth). They consider the allocation mechanism of market exchange (which implies private property) to be unfair and/or inefficient. However, given “Crusoe economics”, it seems clear that economic calculation can still occur in the absence of market exchange and market prices. An important implication of this is that Mises and others are actually incorrect when they say that economic calculation is impossible in socialism.

12

Mises and others are actually incorrect when they say that economic calculation is impossible in socialism.

That’s like saying “I can figure out a strategy that will always win in tic tac toe. That proves I can figure one out in chess, also.”

Actually, Mises wrote that a simple economy, like Crusoe on his island or slightly bigger, can do just fine. It’s when the economy becomes more complex, like a whole country, that the calculation problem sets in.

The reason? In a simple economy, where there are a very few factors of production and a very few possible consumer goods, it’s possible to list all possible combinations of ingredients, and all possible outcomes, and Crusoe picks the one he likes best. Exactly like in tic tac toe, where you can [especially using symmetry arguments] list all possible games, and see which strategy wins.

In chess, the number of possible games are huge. Huge. As far as a human mind is concerned, they may as well be infinite. And chess has only 32 pieces, 64 squares, 6 different types of pieces. The numbers of possible permutations in an economy, all the types of resources, all the types of means fo production, all the various products, and the complexity of the interplay by which the creation of one product limits the possibilities of creating others, is stagerring. Makes chess seem like child’s play, excuse the pun.

No computer has even figured out chess yet, not even close. Certainly no computer has a chance at “solving” the economy. It’s to laugh.

13

No it isn’t. Expected costs can be weighed against expected benefits even with billions of factors of production and consumer goods. Keep in mind that 1) I’m talking about expected costs and benefits, and 2) the weighing is a value judgement (and hence subjective). So if Josef Stalin wants to order a huge portion of resources in the Soviet Union to be devoted to military production, even though this will throw most people there into abject drudgery, that’s still an economic calculation (i.e. a weighing of expected costs vs. expected benefits). Economics isn’t like tic-tac-toe or chess - you’re committing a category error in asserting otherwise. Economic calculation (as I’ve defined it) carries no requirement that all (possible) costs and benefits are factored in. Nor does economic calculation per se imply any kind of “optimality”. If Crusoe climbs a palm tree to gather coconuts, having assumed that the tree won’t fall over while he’s up there, but it ends up doing so, he still engaged in economic calculation as far as I’m concerned. His now-broken leg is a cost that he didn’t expect, but he nevertheless weighed the costs that he did expect against the benefits that he expected. Reality didn’t bear out his expectations, but that’s beside the point.

14

Yeah thanks, this makes more sense. I think I just came to that realization in the post directly preceding yours. But I disagree that economic calculation is possible in socialism because, in the robinson-crusoe situation, the lone man is producing for himself. He knows exactly what he wants along every stage so price information isn’t really necessary.

15

Expected costs…

How do you measure expected costs? You own everything, you don’t have to pay for anything.

..the weighing is a value judgement (and hence subjective).

Costs are a subjective value judgement? Why is this not true in a capitalist economy? Why do all companies compute costs in dollars? After all, it’s all subjective.

So if Josef Stalin wants to order a huge portion of resources in the Soviet Union to be devoted to military production, even though this will throw most people there into abject drudgery, that’s still an economic calculation (i.e. a weighing of expected costs vs. expected benefits).

How does Josef Stalin know which method of production will give him the best assemblage of weapons?

Economics isn’t like tic-tac-toe or chess - you’re committing a category error in asserting otherwise.

Are you familiar with the concept of “analogy”?

Economic calculation (as I’ve defined it) carries no requirement that all (possible) costs and benefits are factored in.

Do you admit that with Mises’ definition of calculation it is impossible to calculate under Socialism? If yes, why is he wrong? If no, then the burden of proof is on you to show why he is wrong while using his definition, not yours. To use an analogy, if Mises claims no one has solved chess yet, and you define “chess” to mean tic tac toe, and then show how by your definition “chess” has been solved, have you proven Mises wrong?

Nor does economic calculation per se imply any kind of “optimality”

Are you talking about your definition, or his?

If Crusoe climbs a palm tree to gather coconuts, having assumed that the tree won’t fall over while he’s up there, but it ends up doing so, he still engaged in economic calculation as far as I’m concerned. His now-broken leg is a cost that he didn’t expect, but he nevertheless weighed the costs that he did expect against the benefits that he expected. Reality didn’t bear out his expectations, but that’s beside the point.

Do you think that Mises would disagree with you there? Does Mises think that if he fell off the tree that means he did not calculate?

Bottom line, when you are asserting Mises wrong, you cannot back up your assertion by redefining terms. I can prove 2+2=5 if I define 5 to mean what everyone else calls four.

The way it works in serious discussion is this: You summarize Mises position in a way that he would have agreed is correct. You then show where exactly he erred, either in faulty assumptions, faulty reasoning, or by providing evidence from the real world if possible. You have not done any of that.