The difference between Hayek’s and Mises’ views of knowledge is one of generality. Hayek’s theory is a generalization of Mises’ socialist calculation problem, in that Hayek applies it to other problems. Hoppe’s example of a firm owner who applies a central plan to his business as not falling victim to a calculation problem is correct. The market is telling him that his plan is better than that of all of his employees. However, the fact remains that his employees have knowledge of the business that he doesn’t have, and that a decentralized information structure within the business could serve him to improve his plan.
I’m not convinced that Hayek’s argument is fundamentally different from Mises’, except that Mises’ argument is more basic as it strikes at the very root of what is necessary for prices to form (anyone familiar with Menger can see this.)
Hayek, at best, confuses the issue, but at worst, suggests there is more to it than what Mises explained. I would argue that private ownership in the factors of production, which implies prices in the factors of production, is both the necessary and sufficient condition for economic calculation and the success of the free market. An absence of these and only an absence of these is why socialism must fail. Any argument that suggests there is actually more to the issue than this, IMHO, is confused and wrong. My take is that Hayek was both. The only important information that is missing in socialism that is available in free markets is knowledge of yesterday’s prices in the factors of production; and this information does not exist in socialism because private property in, and a market in those factors do not exist.
Well the way I’ve understood it is that Mises’ is the fundamental argument, and Hayek’s the addition of further presumptions against socialism, but I haven’t really read into the debate.
Both Hayek and Mises’ arguments are complementary to me.
Right. Prices are important information, but they don’t convey all possible information. They’re just better than the socialist bureaucrat without price information.
What we need is to come up with an example of how centralization in a socialist state causes the socialist state to be rendered impossible. Let’s compare Stalin with Gates, in respect to the centralization of say, the knowledge required in the activity of cleaning toilets. Is it the case that the socialists fail because knowledge of the optimal procedures of cleaning toilets cannot be contained in the head of Stalin, and yet must be for socialism to be viable, while Gates does not have this problem because he can safely delegate the cleaning of toilets and the specialized knowledge of how do this optimally to a janitorial staff?
I’m sure this can’t be what we are saying here, but correct me if i’m wrong. And if i’m right, and it is not what we are saying, give me a concrete example of how any knowledge problem but lack of knowledge of prices hinders socialism.
I didn’t mean to suggest that entrepreneurs face a knowledge problem to the same extent socialist planners do. Clearly, they do face a problem of not knowing all the private knowledge of their customers, suppliers, and such. It is just no where near as severe as the problem a socialist planner faces, and they receive feedback the planner does not (although this feedback is sometimes too late to save their “planning” from bankruptcy). I do believe to flat out state that entrepreneurs face no knowledge problem is incorrect.
Which is exactly what Hayek said. He did not explicitly mention private ownership, but it was implied in: “The problem is precisely how to extend the span of out utilization of resources beyond the span of the control of any one mind”. In order for other minds to utilize property, they must have rights over it; there is no other way when information is not communicable.
In what way?
Mises showed that prices were necessary for an economy to organize itself. Hayek showed why prices arising on a free market, and only those prices (as we know, prices always arise even in heavily regulated markets), can take advantage of knowledge that no central planner cannot possess. Prices alone aren’t enough, since those can arise in heavily regulated markets. Hayek’s point was that only when markets are free can tacit knowledge be completely utilized and the market is organized as if by an intelligence greater than any individual possess. In my view, this criticism strikes harder than Mises’ because it strikes at the root of the typical planner’s biggest flaw: intellectual hubris.
If entrepreneurial success was easy, they wouldn’t make so much damn money for it. However, I think most of the examples in that article seriously confuse causation with corellation. The basic point is still sound of course: the vast majority of entrepreneurs fail. They have private information, and they coordinate various factors of production to take advantage of this information. However, their private information is often simply incorrect.
Anyone remember “New Coke”?
"New Coke, would not mix with my rum nicely.
It easier for big guys to get away with ballin’ up. Everybody has to stay competitive or they lose their capital long term. We all consume and that is where market power lies.
One has to many market barriers to entry these days for real inovations. Entrepeneurs have guts, the state creates to many barriers.
<“Hayek’s point was that only when markets are free can tacit knowledge be completely utilized and the market is organized as if by an intelligence greater than any individual possess.”>
In a world of imperfect information, apart from accidental exceptions every outcome of an exchange has a relative winner and loser - even if only negligibly so (but even its repetition can grow significant too). Given the real constraints of time, location, and access - along with each participants’ hubris of having adequately minimized their risk impact of imperfect information - market transactions will almost always prove suboptimal to one side or the other’s relative outcome (and even to both sides in absolute terms - but that’s not germane to this point).
Exactly? You mean, no more and no less? That’s not how i interpret him, but anyways, if he is merely saying that lack of private ownership in the means of production causing a lack of prices in them is why socialism must fail, then that is good. I kind of doubt that’s all he was trying to say though.
“In what way?”
In that the lack of prices due to the lack of private ownership in the means of production is the single thing that keeps socialism from being viable. And since this is also the definition of socialism, socialism is by definition, not viable. To talk about a “knowledge” problem disconnected from the “private property” and “price” problem is bogus.
“Mises showed that prices were necessary for an economy to organize itself.”
Correct. No prices means utter economic chaos.
“Hayek showed why prices arising on a free market, and only those prices (as we know, prices always arise even in heavily regulated markets), can take advantage of knowledge that no central planner cannot possess.”
This comment: “… prices … can take advantage of knowledge that no central planner cannot possess”, confuses me.
The bottom line is socialism is completely missing a certain key type of knowledge that it cannot have, and that free markets do have: it is knowledge in prices in the factors of production. Socialism has no prices in factors of production because it outlaws private ownership in the factors of production. That’s the long and the short of it.
“Prices alone aren’t enough,”
There you go. You have been misled by Hayek into believing something utterly false (IMHO).
“… since those can arise in heavily regulated markets.”
Nope. Pure socialism absolutely does not and cannot have any prices in the factors of production. Such prices are impossible because there can be no private ownership in these factors. A heavily regulated market with prices still implicitly has, to a certain degree, private ownership in factors of production. It is a mixed economy.
“Hayek’s point was that only when markets are free can tacit knowledge be completely utilized and the market is organized as if by an intelligence greater than any individual possess. In my view, this criticism strikes harder than Mises’ because it strikes at the root of the typical planner’s biggest flaw: intellectual hubris.”
In my view, this is exactly why Hayek screwed up so badly. His thesis is merely a distraction from the true and single fatal flaw in socialism: there can be no economic calculation - only economic chaos - because there can be no prices in the factors of production, because there can be no private ownership in the factors of production. All economies are mixed. The more socialistic they are the more chaotic and impoverished they are. The freer they are, the more ordered and prosperous. That is the insight that Austrians should have pulled from Mises.
I think Hayek explains himself pretty well in the article; I’d suggest reading the whole thing. Much of the article doesn’t necissarily explain why socialism will fail or is impossible, but simply why markets act more intelligently than central planning. I don’t think this is anything Mises articulated nearly as well as Hayek.
Right, but why can’t a socialist planner just set his own prices? This is what Hayek was attempting to refute, so-called market socialism. He had to show why a central planner didn’t have the knowledge to set prices as a market might. The mere presence of some “price” isn’t enough; it must be a market price (the freer the better) or it doesn’t take advantage of the tacit knowledge the planner does not have.
Anyways, there are other flaws in socialism. The incentive problems, both to workers and planners, are huge.
I’ve read it.
A socialist planner cannot just set his own prices because it would be as meaningless as a child pretending to play “market” with Ken and Barbie, where no market exists. Whatever these things would be, they would not be prices. As you state, only real prices generated in a real market can allow for real calculation. Supposing the term “price” to have any place or meaning in the context of a socialist economy is a symantical trick. Logically, there absolutely can be no such things as prices in things that can have no buyers and no sellers, and no individual owners. The central planner is neither a buyer nor a seller of factors of production. He is an agent of the central socialist state, who, by coercion, directs all resources according to his whim and in absolute ignorance of market demands which would be demonstrated via prices and profits and losses available in a free market. Mises already explains this without a tangential discussion of “knowledge”. The root of the issue is private property and prices.
A price is just what someone pays for something, in the general definition of the term it doesn’t need to arise from supply and demand. Anyone, business or planner, can set a market-clearing price as easily as they can set one which does not clear. Why then do businesses succeed more often? They must have information the planner does not.
Again, if your only argument against socalism in all forms and degrees is its lack of prices, I think you’ll have problems arguing against it. Prediction markets, for example, could potentially find market-clearing prices for a planner (of course being markets, this would preclude pure socialism, but no one thinks that is currently an option anyways).
To the economist and a planner, the economy can be seen as a coordination problem. If not knowledge, what keeps the planner from being able to plan the economy as well as the market process?
He was saying that, and more. He was, I believe, trying to explain precisely why private ownership of the means of production produces price signals no planner could ever replicate. The reason is that markets extend the utilization of resources beyond the scope of understanding of any set of minds.
A price is exactly just what someone pays for something. But implicit in this is that there is and must be a buyer and a seller to have a price. The buyer, and what he is willing to pay constitutes demand, and the seller, and what he is willing to take constitutes supply. So with no buyer and no seller, no price. No planner of a socialist economy can set a price, because socialist economies do not have buyers and sellers. That’s socialism: the state owns all factors of production - that’s all of them. The planner has no one to buy from or sell to. If he did, he would be a participant in a market. But instead he monopolizes control over all factors of production.
Businesses in a free market can fail, but yet the market on whole always succeeds, because prices allow profit and loss calculations. This is economic calculation. Entrepreneurs who consistently fail to speculate correctly on future demand, are pushed out of their role’s as directors of resources because they go broke and it is apparent that they do. They are replaced by more competent speculators who are profitable. Central planners have no prices, no profits and losses, no means to calculate to know they are misallocating resources, and so they are not driven out of the market and so they therefore remain and must ultimately drive the economy into the dirt via their economically blind and arbitrary control over factors of production.
I also claim that socialism is a starkly criminal operation. That’s two strikes against it. But the reason why socialism is not viable, in practice or in theory is because it is unable to calculate. This means that it will be pure economic chaos, resulting in massive poverty, and starvation. It’s just not possible. And there are people, Marxists, lots of them who think that if pure socialism were to be implemented, that it would be great. They are simply ignorant of the economic obstacles. Any economy with prices, has a market, private ownership, possibly several black markets that are ignored by the state, probably outside markets with which to partially guage internal operations. But pure socialism is impossible because it cannot calculate.
The market is a million people trying to optimize their personal utility. They buy and sell towards this end. Profit seekers can exit certain lines of production or stages of production in favor of more profitable pursuits in the market. This tends to even out profits towards the rate of interest throughout the various states of production, and throughout the various lines of production. This requires private ownership in these means of production. There is no way this can be done by a few people. It requires a society of private property owners to undertake it.
Ok.
Prices are ratios of exchange, i.e. the ratios at which one is willing to buy and another is willing to sell a good, so demand and supply are centrally important to it; prices form from an interaction of demand and supply; the extent to which one is willing to buy or sell a good stems directly from their value scales. Within this range prices form. This is basic Menger. All the socialist planner can do is arbitrarily set some randon price, and play market. That is not real price formation.
permit me a gallon of red paint as eager buyers, and I mix it together with a gallon of yellow paint as willing sellers - I get an eventual full transaction that nets orange, and based on the total ratio of red’s initial shading to yellow’s initial shading (so that if I were to put in a little more yellow, it would lighten the transaction orange accordingly). A socialist tries to guess how much yellow paint he’ll need to make a desired orange, and just throw it in the red. Not only is it not mixed, creating various wrong transactions of orange shading throughout, but is likely the wrong total yellow to begin with - but there’s no way of telling because the proper equilibrium never happens. Just an allegory to kick-off the weekend 
I see the transaction’s realized price as a reflection of the merging valuation that each side has determined in its fruition - accounting for all their interests (relative BATNAs too) at that point in time and space. My only contention is of people holding this price as something sacred - that it’s the most correct transaction valuation that should’ve occurred. Simply, it’s not! It just is the best that could happen in those circumstances, by those willing individuals and their possibly flawed assumptions and definitely imperfect information (if they’d just gone down the street, they’d have seen another store where it was $5 cheaper - and it’s not that it wasn’t worth $5 to walk further down the street and lose some extra minutes - rather it’s that he simply didn’t know about the alternative equally-willing seller of the item he wanted). But a free market does allow for the high volume of interactions that bring price closer to where it would be if all was perfect (but it never is, nor shall be). And that’s okay, just as it’s okay that there will always be set rules and therefore permanent government of some kind or another (and it’s a disservice for those that know this already to pretend otherwise - even by not saying anything, as in “the silence is deafening”). Cheers