In a relatively narrow sense. If you want to use this very broad definition then yes, you’re right.
Student, what would you call this? How can we have rational discussions in good faith when this is the position that neoclassical, and you on occasion, continuously retreat to? But I agree with you. This conversation has become hostile and entirely barren.
Well; I would add a few remarks to what already has been said.
First of all: the marketsystem is not ‘just’ calculation. It’s a co-dependant mechanism of appraisement and calculation. If people where ‘just’ calculating, then there would be no change. If we were ‘just’ appraising, there would be no mechanism to have rational feedback on wether or not we are doing well. Prices convey one piece of the puzzle: they convey the fact that people are willing to make these marginal trade offs for certain products. Prices arrange a tool for the human mind to grasp relative differences, more precise: the ordinal evaluations get a cardinal representation. (Not a A = A representation, of course.) These causes us to compare marginal and relative differences and convey to us certain kinds of information - but not all. There are still situations who should be appraised in the light of the prices that are there. We remember the example of the tin mine in the Hayek-article. (‘The Meaning of Competition’, I think? I’m not sure. Somewhere in Individualism and Economic Order, in any case.) The ‘problem’ with this comparison is that the implicit entrepreneur is a passive actor; who just ‘responds’ to price changes, but this ignores the fact that the entrepreneur (if succesful) is already appraising the situation and responds to the technical changes (decrease in tin) by ‘causing’ price changes. The price system than works as a check to check wether or not we are making the right appraisements.
The price mechanism is an indispensable tool because the cardinal prices are caused by value judgements when facing the costs and benefits concerning certain concrete objects. Mises, by the way, was well aware of the limits. In HA he discusses the limits of economic calculation; in so far it can’t deal with prices - he gives the example of a ‘beautiful’ landscape - it’s limited, but not useless. Economic calculation can provide the tools to decide how much the landscape is worth in an indirect fashion: do we destroy it and do a certain process at price x or keep it and do it at price y (which is higher?) The difference can serve as a tool in thinking how much we value the landscape (more or less than this difference?)
Externalities and all are illustrations because of the indispensability of the price system; without it, we would just face technical ‘externalities’, but in a market process, we have a way of trying to discover the value of it - for the victims and the people who cause the externalities - and thus we can find mechanisms to deal with specific externalities in specific cases. If it’s worth a lot to me to be able to cause the externality, but the victim just wants a little settlement, we can find ways to deal with it. (I’m not making a Coasean argument, by the way.)
The argument for capital goods is also important. As we know; factors of production derive their value from the consumer output they produce. So ‘obviously’ we just need a market for consumer goods and collective property of the means of production, because they just ‘derive’ their value from the consumer goods. But this ignores the convertibility and possibility of alternatives in the capital market. If the capital structure of a society was fixed and impossible to change, they this might be an argument. But this market socialist argument assumes away the fact that different things can be build by differnt ways, i.e. that there is no fixed ‘capital structure’. You can build a bridge many ways, but what’s the most economical one? This can’t be solved if all the capital is owned by one owner; because it can’t reach marginal valuations by consumers. They can’t ‘bid’ away factors of production (land, labor, machines, etc.) to do their bidding. Appraisement, obviously, is possible, but their is no mechanism to know wether or not your estimate of the valuations was correct or not. This is why Austrians call a socialist economy ‘impossible’: you just can’t know.
This is sort of my drift. I hope it helps.
Well; this is obvious. A firm needs an entrepreneur. ‘Models’ are part of entrepreneurial activity: you try to predict what actors will do and you base your ‘policies’ on them. They are, however, not science. They are more like an art.
(Austrian) Economists, however, try to understand the way an economy works. One can be an awesome economist and still be a lousy entrepreneur.
Who besides Hayek is a prominent Austrian who agrees with this, and what do you define AE as (to distinguish it from other schools of economic thought) such that it can include Rothbard, Hayek and Mises simultaneously?
I call it satire.
I would concede that it wasn’t an entirely pleasant comment, but it wasn’t singling anyone out and it wasn’t overly insulting. I was addressing the fact that Austrians, even when engaging in debate with sympathetic listeners (like me), tend to simply accuse unbelievers as ill-informed and leave it at that.
Personally, I don’t care how rude you are (and, let’s remember, your first response here included an insult), so long as you also include stimulating content. You never fail to do so, and I like that. I read what you write thoughtfully, because I know you wrote it thoughtfully. I have nothing but respect for that, even if you feel like calling me a troll.
Could we please stop this meta-discussion and go back to the original topic, which was actually quite interesting?
Student,
When you say the price mechanism can’t handle (or sometimes can’t handle) asymmetric information, what are you including and excluding? To use EIT’s original lemon example (even though Smiling Dave pointed out its failures a few pages ago), if buyers decide to pay $100 for inspections to hedge against getting a lemon, or sellers decide to include inspections (and therefore guarantees) as part of their offered product, then the true price of a good car is $2,100. Are you not considering these extra pieces as part of the price mechanism?
__Asymmetric Information:__The calculation argument is so powerful precisely because of the existence of asymmetric information, that is, that individuals have their own entirely subjective value scales, expectations, etc, and the price mechanism facilitates a free flow of tacit and idiosyncratic information amongst economic actors coordinating economic activity. It attempts to match entrepreneurial expectations with reality (optimal production techniques and capital combinations inline with consumer preferences).
Actually, I’d put it the other way around. The asymmetric information argument is so powerful precisely because it acknowledges the existence of dispersed and private information, which is what the calculation argument is all about. The market price mechanism generally does a good job of aggregating this information in the form of prices, but in some instances it is both feasible and profitable for market actors to withhold some of this information which causes inefficiencies.
In fact, thanks for bringing this up, because it helps me illustrate my main point. The calculation argument is a lot less powerful than most people here seem to assume. Because, as I said, under certain conditions the free flow of information is not always possible, and its theoretically possible (ignoring public choice arguments) that government can improve on the market outcomes by facilitating the flow of information (which Hayek himself admitted) either by Pigovian taxes in the case of externalities or regulation concerning what information producers must provide.
Such phenomena are considered inefficient by those who adhere to a very broad and primitive understanding of economic efficiency, namely those that focus solely on allocative or “x-efficiency.” Allocative efficiency concerns itself with maximizing “total surplus” which is then distributed to either producers and/or consumers, i.e., it attempts to eliminate so-called “dead-weight losses.” But there is another type of efficiency, first introduced in the 17th century by Spanish economists (school of Salamanca), and it is known as “dynamic efficiency” (Schumpeter is given credit for this insight). Dynamic efficiency states that the ability to earn supernormal profits creates an incentive to innovate and elevates total investment in the long-run (firms invest and innovate in order to gain competitive advantages, create cost barriers, and capture additional market share). This, in turn, pushes the production possibilities frontier outwards. Simply put, the argument is that it’s better to be under the frontier and continuously pushing outwards than to remain on the same frontier forever, in a completely static state.
Actually, I studied dynamic efficiency for a piece of work I had to do (and yes, believe it or not, I’ve taken an IO class). But does the point you raise concerning dynamic efficiency mean that monopolies are always good? I’m going on the assumption that you believe otherwise (if you don’t feel free to correct me), in which case you’ve not really done anything to counter my original point. The calculation argument is no longer an a priori “proof” that the market is always superior to government but we need an empirical investigation to decide whether the losses in the form of x-efficiency are sufficiently offset by the gains in dynamic efficiency.
It implicitly assumes cardinal measurements of utility. It attempts measure geometric areas of value, usually denoted in monetary terms. Value is not an area to be measured; it is simply a list.
Presumably you learned about willingness to pay in your welfare economics class?
Why can’t governments use rules of thumb in order to centrally plan the economy? See “the calculation argument.”
Thanks for ignoring the OP. My point was this, for large corporations “maximise profits” is almost an impossible task in the sense that costs are highly interdependent, profits may be difficult to forecast etc. So they rely on rules of thumb such as “maximise revenue” or “maximise sales”, well, my question is simply why can’t the government operate similarly?
Because the government is structurally incapable of doing so. It is not bound by the profit/loss constraint, overrides the price mechanism, and is captured by special interest’s. See “the calculation argument” and various articles written by public choice economists.
I purposefully tried to leave public choice articles out of this, so please, let’s focus on the thoughts I provided in the OP. Firms override the price mechanism, Austrians have realised this as far as I’m aware. Indeed, Rothbard and Klein seem to have made a big deal out of this in terms of the size firms can grow to. So my point is, given that firms can’t calculate internally and yet they exist and are allegedly beneficial, why can’t the same be said of governments? Of course, you could make the case that governments are different, but this remains to be shown.
In order to refute Austrian economics, you need to actually refute it. Appeals to authority/majority wont cut it.
No appeal to majority, I’m not presenting this as a knock down argument again Austrian economics. But its empirical puzzle as far as Austrian economics goes. You posted an explanation of the price of labor recently, you said something along the lines of it being determined by the marginal productivity of labor (which is fair enough). Well, if PhD economists are being paid so much to construct these models and to run these regressions then presumably they must have a fairly high marginal productivity.
My question is, “if their training is useless, where does this productivity come from?”
Either way, the econometric models in question have failed miserably, and have tarnished the reputation of economics as a science
Because the layman knows so much about IV, for example. How have econometric models failed exactly?
but i think the austrians were still very much right that can not expect a centrally planned economy to effeciently allocate resources among their various uses. to me, the question then becomes whether moderate government interventions could improve on market outcomes in select cases.
Oh, don’t get me wrong, I agree that the market price system is very powerful at aggregating disperse information in the form of prices and allowing individuals to make decisions that usually lead to a socially optimal allocation of resources. More importantly, most academic economists would also admit something along these lines. I also agree that the question is moderate government intervention and not whole scale social engineering, but the fact remains that under certain conditions the calculation argument doesn’t prove what most Austrians think it does.
on a side note, i think you might be interested in the work of stiglitz, ackerlof, and others. i personally think that they don’t get enough credit from austrians for taking the insights of hayek on information and running with them to new and deeper insights. specifically, i think they revealed that the market process is much more complicated than just shifting relative prices.
One of my intermediate micro professors did some work on asymmetric information, so I’ve covered a bit there and in my public economics class. I always like to go back to the originators of ideas (when I can) and read their contributions but I’ve heard Stiglitz it pretty mathematical. So, any suggestions of where to begin?
How this topic has generated more heat than light since I’ve been away.
I think you may have been trying to be too clever, but I was referring to SL, student and EIT. They constantly have something to say about Austrianism, even though it has never been apparent they understand what it is they are criticizing in the first place.
They won’t define what Austrianism is, or if they do, it is an unsourced strawman, and then they proceed to critique that caricature.
Thankfully, most here have realized what a pointless endeavor discussing with these sorts are, and have passed beyond it. You are a clever guy, you might be wise to do the same.
Well then please, ask us which terms you’d like us to define and point out which positions we’re misrepresenting. I have to say, I’m somewhat amused that you criticize us for our lack lack of specificity whilst making blanket statements about three separate posters and our posting habits.
Every interventionist is for the price system, except when they are not. As Mises said, there is no third solution.
Well, I have to say you’re oft repeated remarks about the lack of a third way has got me confused. It seems to me that every society for just about ever has been some mix of government intervention of private enterprise, far from being non-existent, this third way seems to be pretty ubiquitous.
And statements like that ^^^ indicate you aren’t familiar with Mises’ arguments.
The issue is always the same: the government or the market. There is no third solution.
EIS, at this point in time you still have no coherent argument as to why the calculation argument does not entirely refute the possibility of efficient and rational government planning. It seems like you’re waiting for me to make your argument for you somehow. Also, I’d like you to clearly define how you’re using the term “government intervention.” You’re using a very broad definition; the calculation and coordination arguments, in my opinion, are not arguments for anarchy (though some may disagree with me here). They explain the effects of actions such as nationalizing the banking system, capital markets, money markets, forcing vertical or horizontal integration and/or disintegration, breaking up what they call monopolies (though they ignore the historical definition of the term, namely as a firm given arbitrary government privileges), price controls, completely socializing the entire economy, etc.
Yes, natural market “monopolies” (firms with significant market power) are always “good.”
I didn’t take welfare economics, but willingness to pay doesn’t tell you anything; it’s just a proxy. Additionally, it’s impossible to reach a definitive conclusion regarding the demand for any particular product when you include monetary transactions. You cannot separate the demand for that particular item, on the one hand, with the demand for the money employed in the transaction, on the other. In other words, if person A is willing to pay $100 for item “x” and person B is willing to pay $1 for that very same item, then we cannot assume that person A values the item more relative to person B with any degree of certainty (person A might have a very low demand for money, for example).
This seems like a confused version of Simon’s argument (Organizations and Markets), but I can’t tell. The fact that profits might be difficult to forecast does not, in anyway, justify government planning. Again, what’s missing here is an actual argument from you.
The fact of the matter is that those firms that incorrectly calculate go out of business, i.e., lose access to their capitals which are then redirected towards other, more efficient producers, precisely because of the price mechanism. It is true that firms essentially plan their own capital combinations based on what they perceive to be relevant prices (if the price of tin rises, for example, firms, in order to protect potential profits, may employ a substitute such as aluminum). But it is the price mechanism that attempts to coordinate and organize all of the various capital combinations of each particular firm into a coherent capital structure that actually reflects consumer preferences and desires. It does this, again, by eliminating those firms that organized their capitals in inefficient ways, and it disperses information regarding how to organize your capital, what production methods to employ, what inputs to use, etc.
Again, the price mechanism attempts to match entrepreneurial expectations with reality, in a dynamic process of competition and trial and error. Simply put, the price mechanism tells firms whether they’re correct or incorrect. Ludwig Lachmann writes about this a lot.
Because firms, even the mega conglomerates, still face competition, calculate internally and externally, and are bound by the profit/loss constraint. The same cannot be said for government. As a firm continues to grow, and as it increases the amount of internal calculation relative to external calculation (market prices), the information problem reveals itself. It begins to create massive capital combinations that are disconnected from actual consumer preferences. These large capital combinations are relatively inelastic, and once they are revealed as inefficient, which is inevitable, the firm has a hard time readjusting (it will either go out of business, or sell off entire sections of the firm). This variable, along with other variables (transaction costs, managerial diseconomies of scale, etc) prevents continuous firm expansion, i.e., why socialism hasn’t naturally emerged due to economies of scale.
But you still haven’t demonstrated that you actually understand the calculation argument or are even familiar with it at all. You’re trying to somehow invalidate the calculation argument by referring to firms that operate within the market, that have access to prices (which reflect consumer preferences, production techniques, etc), and that are bound by profit/loss. You talk about how they act like governments, but entirely ignore how they act like market institutions.
I will make a separate thread to properly respond to this point to give the subject matter its proper due and not derail this thread. I am quoting it in this thread not to single out the poster because I see the line of thought often. I do desire to level this argument.
I feel ignored. 
AFAIK, Smiling Dave’s posts from page 3 haven’t been addressed yet, either, so I think you have to wait in line. 
As long as we don’t have to read ‘the Austrians never give any good explanation to our remarks’ in 2 weeks, it’s all good.
Sorry, I completely missed your post. I’ll try to get to it sometime tonight, if not I’ll answer you tomorrow.
Don’t sweat it. It’s not that important.
With your last point, are you talking about something along the lines of requiring the Soylent company to tell people that Soylent Green is people?