I found something rather interesting today. Thought I could search for answers here at the Austrian forum. Here is the piece:
"The Austrians entered the fray under with a cannonade by Ludwig von Mises. In a famous 1920 article “Economic Calculation in the Socialist Commonwealth”, Mises went on the attack - arguing that pricing systems in socialist economies were necessarily deficient because if government owned the means of production, then no prices could be obtained for capital goods as they were merely internal transfers of goods in a Socialist system and not “objects of exchange” (unlike final goods) - thus they were unpriced and hence the system would be necessarily inefficient.
But Mises’s argument was erroneously construed - as H.D. Dickinson (1933) was quick to point out. After all, as Barone and Taylor had shown, if we see the world as a system of Walrasian equations which need “solutions”, there is no issue about not being able to price internal products."
The section further down basically gives you the idea:
Basically, Lange (probably the most well known opponent) just assumed the answer.
The Walrasian equations are the system of all supply and demand equations that must be solved – you can posit an “auctioneer” that simply solves these equations by finding prices that clear all markets. Hayek argued that of course this was not possible.
also Hayek needn’t have worked so hard. Mises had already given everything that was needed, even if socialists (and perhaps Hayek a little) didnt grasp that.
further links if you are interested can be found here .
Characteristic overstatement by Hoppe. The idea that you can separate knowledge and calculation issues, and act as if Hayek did not appreciate the role of private property, is, to use Hoppe’s description of Hayek’s arguments, “fallacious,” “absurd,” and “nonsense.”
That’s sort of the idea, it’s really a theoretical concept that the socialists have tried to argue is actually practical.
As I understand, Hayek essentially argued that there is not a system of equations out there to be solved, even if that was possible. You can’t just tell managers to “minimize costs” and act like there’s a market. Cost minimization is the result of discovery and competition.
Let me try putting some more of my thoughts in. As I understand the calculation problem it is one of the lack of a proper pricing mechanism for capital resources because of the lack of private ownership of capital resources under a centrally planned economy. Unlike a private competitive regime, where multiple buyers exist to bid for the non-specific capital resources, in a centrally planned economy the usage of these capital resources are merely internal transfers, so there is no bidding happening, and hence no prices can be determined for capital goods.
I hope I’m right in getting Mises’ argument.
One of my doubts is, why can’t allocation of these non-specific capital resources happen based on the planner’s own rational calculations?
Let me take an example to illustrate the issue: Assume there are only two consumer goods, namely pasta and cakes. The capital good required to make them is flour. Suppose there is a drastic change in the tastes of the consumers and they decide not to buy cakes, and opt only for pastas, the price of pastas would shoot up. That would mean high profits in selling pastas, and losses in selling cakes. Don’t these profits and losses serve as good enough signals for the planner to send flour to pasta makers(or may be managers)?
“Let me take an example to illustrate the issue: Assume there are only two consumer goods, namely pasta and cakes. The capital good required to make them is flour. Suppose there is a drastic change in the tastes of the consumers and they decide not to buy cakes, and opt only for pastas, the price of pastas would shoot up. That would mean high profits in selling pastas, and losses in selling cakes. Don’t these profits and losses serve as good enough signals for the planner to send flour to pasta makers(or may be managers)?”
You assume automatically floating prices a la in a private property economy, rather than a command economy which was in your premise.
Market for consumer goods exists in a centrally planned economy. So prices of consumer goods can be determined by consumers bidding for the concumer products. It is only the capital goods which can’t be priced exactly according to Mises.
Read “I, Pencil” and think about how a central planner would decide what resources to use, how to get them, the best way to use them, etc. Now multiply by about a billion. Presto!
One of my doubts is, why can’t allocation of these non-specific capital resources happen based on the planner’s own best intuitive feeling? (irony)
already we hit a curious problem and we are not off the first line. in a centrally planned economy the single planner decides what is finally produced, ergo, what are goods available for consumers to consider consuming. if pizza was technically produceable, and the planner did not choose it (for any reason). pizza consumer good production is set at zero and there is not even the presumption of playing count the fiat tokens to ratchet production up and down.
in your example i dont understand what consititutes money? is it commodity is it fiat? how are the workers motivated and incemtivised to produce as to the planners dictates? how is the cost of the production process established? how expensive are units of pasta to produce compared to cakes (in the different possible ways? how can the planner know that?
will the planner tolerate unplanned commercial activity?
you pack quite a lot into your short example statement, but I cant even discuss your supposition of ‘profit’ and ‘loss’ until you fill in the gaps for me on your unit of account, and how costing is achieved.
No. I meant that, you’re assuming a command economy where finished goods prices are set by the consumer, and not established by quota or allocation from the central planners.
Nirgraham, Oscar Lange actually agreed to the fact that consumers’ good would be set prices on a trial and error basis, and thus the market clearing price would be determined. So, it is not that there is complete lack of pricing system in a centrally planned economy. Look here for instance:
It is true that retailers, given the stock of a certain type of good, can clear the market by adjusting the prices of that good upward or downward. But, as Mises pointed out in his original 1920 article, consumers goods are not the real problem. Consumers, these “market socialists” are postulating, are free to express their values by using money they had earned on a range of consumers’ goods. Even the labor market — at least in principle — can be treated as a market with self-owning suppliers who are free to accept or reject bids for their labor and to move to different occupations. The real problem, as Mises has insisted from the beginning, is in all the intermediate markets for land and capital goods.(source: http://mises.org/daily/2401#3)
And take it for granted that the socialist economy uses sound money. So prices are expressed in terms of a standard monetary unit like in a capitalist economy.