http://www.cvoice.org/cv3cox.htm [The economic calculation article] has been discussed here at great length by various posters, with discursions into side topics guaranteed to amuse.
The discussion focused more on the absurd solution proposed by that paper than his critique of AE per se. So a word or two about that will follow:
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One objection he raises, that a mere price cannot possibly show the intensity of subjective values, was refuted. Bottom line: If you want it that badly, it will show up in how hard you will work to make money and pay for it.
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Another, that the poor do not have their subjective values considered at all, was also refuted. Bottom line: In a world of scarcity, one cannot consume without somehow replenishing the existing stock of goods, or they will be all used up rapidly. On the other hand, forcing A to work so that B can get things means enslaving A. Mankind has found voluntary charity to be the best way out of this dilemma for the truly helpless.
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He wrote:
Certainly, accounting costs are amenable to “exact calculation” using monetary prices but the question is what exactly is being accounted for in the process?. “Precise measurements” doesn’t tell us much; a game of monopoly entails precise measurement too but nobody suggests this implies some earth-shattering insight we would be foolish to overlook. What then is the significance of what is being precisely measured using monetary prices?
This was explained at length there, with a homely example of a chemist who uses an acid test to determine the exact shade of color a mixture of the acid with an unknown chemical produces. The chemist then knows what the unknown chemical was. The above critique could be applied to the chemist, word for word:
Certainly, colors are amenable to “exact calculation” using acid but the question is what exactly is being accounted for in the process?. “Precise measurements” doesn’t tell us much; a game of monopoly entails precise measurement too but nobody suggests this implies some earth-shattering insight we would be foolish to overlook. What then is the significance of what is being precisely measured using acid?
- He goes on to say [with my comments in bold]:
The ECA asserts that a socialist economy would be unable rationally to chose between different combinations of factors to arrive at a least cost combination. In answer to the obvious retort that a socialist economy would not concern itself with costs in this monetary form, it might be contended that there will still be a need to reckon costs in some other guise and that it is precisely these substantive costs – or if you like, “real world” costs – that the price mechanism is able faithfully to represent via its pattern of objective exchange ratios. But how could this be proven.?
By deductive reasoning, and an observation of the world as we know it. See point 1 above, the more you want it, the more you will pay for it.
To prove this is the case one would have to demonstrate a precise correlation between these “substantive costs” and their monetary representations. One can determine whether such a correlation exists only by measuring one against the other.
No, not necessary, as just explained.
But that presents a problem for the ECA since, in doing this, one would have inadvertently shown that costs can indeed be independently measured, and rendered calculable, without recourse to market prices.
No, this is wrong, as just explained.
- There is a list of things he claims are not priced into capitalism. These include externalities, spill over effects, pollution. Walter Block has invested a lot of time showing that these problems will fade away by privatization, and by stricter enforcement of property rights
The article then adds “social costs” to the list, which he says means the anguish to the worker and the disadvantage to society when he loses his job, and which are not accounted for on any firm’s balance sheet.
Yes, it is indeed a sad thing when a man loses his job. The article makes two mistakes, however. It does not consider the “societal cost” of keeping an unproductive man on his job. We can observe the effects of such policy because the unions have forced it on many companies, causing them all to go bankrupt eventually.
Also, the article errs in assuming the place to look for the cost of a job is in some company’s balance sheet, ignoring the other siude of the equation, the price a worker is willing to accept for his labor.
- There follows a straw man argument, or at least a regrettable misunderstanding of the written word. Quoting Mises directly, he then procedes to forget what the quote actually says, and imputes to him the idea that calculating profit and loss “ensures” “unerringly” the efficient allocation of resources. He then points out, quite correctly, that it “ensures” nothing of the sort, and is subject to error. Here’s what he says:
As Mises put it, “Every single step of entrepreneurial activities is subject to scrutiny by monetary calculation. The premeditation of planned action becomes commercial pre-calculation of expected costs and expected proceeds. The retrospective establishment of the outcome of past action becomes accounting profits and losses.
This statement is revealing. It inadvertently highlights a serious flaw in the ECA. The ability to compute profit and loss is what in theory is supposed to ensure the efficient – that is “profitable” – allocation of resources. But it turns out that it ensures nothing of the sort. Just because a system of market prices affords one a set of figures with which one can perform precise calculations does not mean that these figures will turn out to be correct – that is to say, will unerringly guide the entrepreneur towards a positive net income.
Mises said nothing of the kind, quite the opposite. He makes clear that a capitalist can never know the future with certainty, but at least he knows the present. A socialist cannot even know the present. Here is quote from Human Action:
The socialists, it is true, object that economic calculation is not
infallible. They say that the capitalists sometimes make mistakes in their
calculation. Of course, this happens and will always happen. For all
human action points to the future and the future is always uncertain. The
most carefully elaborated plans are frustrated if expectations concern-
ing the future are dashed to the ground. However, this is quite a different
problem. Today we calculate from the point of view of our present
knowledge and of our present anticipation of future conditions. We do
not deal with the problem of whether or not the director will be able to
anticipate future conditions. What we have in mind is that the director
cannot calculate from the point of view of his own present value judg-
ments and his own present anticipations of future conditions, whatever
they may be. If he invests today in the canning industry, it may happen
that a change in consumers’ tastes or in the hygienic opinions concerning
the wholesomeness of canned food will one day turn his investment into
a malinvestment. But how can he find out today how to build and equip
a cannery most economically?
Some railroad lines constructed at the turn of the century would not have
been built if people had at that time anticipated the impending advance of
motoring and aviation. But those who at that time built railroads knew which
of the various possible alternatives for the realization of their plans they had
to choose from the point of view of their appraisements and anticipations
and of the market prices of their day in which the valuations of the consumers
were reflected. It is precisely this insight that the director will lack. He will
be like a sailor on the high seas unfamiliar with the methods of navigation,
or like a medieval scholar entrusted with the technical operation of a railroad
engine.
OK it’s a long post already.