I thought this was important enough to deserve its own thread because it is a confusion I frequently see among fans of the Austrian school.
The process of calculation is to ex post calculate - based on prices - wether or not a business venture was successful. Or, at least, that's how I got it.
This is a perfect example of the error of Hayekian 'knowledge' theoretics misapplied to calculation. Past prices are nothing but data, of no more necessary relevance to business plans than the specific gravity of iron atoms. All entrepreneurial action is forward-looking, and thus to be of any use to the entrepreneur so must calculation. Whether a firm or product sold at a profit or loss in the past tells him nothing about whether it 'will' in the future (necessarily). What the existence of money an capital ownership allows is for the entrepreneur to look forward and by use of the concept of money articulate whether his expected returns will offset his expected costs, and whether such a venture is worthwhile compared to the expected returns of other alternatives. Neither of this is conceptually possible without money or the control of capital.
Past prices and profits are the province of accountants, not entrepreneurs. Entrepreneurial calculation would continue even if all knowledge of past prices were wiped out.
What you write makes sense to me, but for one minor point.
"Neither of this is conceptually possible without money." I don't see why not. Can we not imagine a primitive barter economy, or a Robinson Crusoe econonmy, where someone plans ahead how to make best use of his time and equipment?
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It's easy to refute an argument if you first misrepresent it. William Keizer
If you take stuff out of context, it's conceptually possible that you represent something wrong. Just sayin'.
Let me reitarate: nobody denied the fact that entrepreneurial decision making is forward looking.
Nobody said: 'well, looking at past prices helps to guide the business owner in future decisions'.
My terminology was wrong. And I admitted it and apologized for it.
What I did say - using the incorrect terminology - is that without prices you have no mechanism to compare profit and loss. You have no mechanism to check, ex post, wether or not a certain business venture was successful. Compare this to government programs; where they have no mechanism of (1) appraising future situations and (2) knowing wether or not a certain venture was successful. The process of comparing costs to general revenue tells you wether or not a certain venture was successful. You make money, you were successful. That's the only thing I said and I called this process calculation. You have convinced me that this is a wrong use of words - calculation is reserved for a different kind of thing - but the idea conveyed isn't wrong. We can talk about that idea, if you want, but I don't see anything controversial with it.
I'm _not_ saying: past prices guide an entrepreneur in his actions.
If you just take the sentence: "x is the process to ex post calculate - based on prices - wether or not a business venture was successful." than the question is; does it make economic sense to name x. I would say it does, because it's a part of economic theory.
The process of appraisement is the entrepreneurial process of forward looking and acting based upon those estimations. The process I was talking about - comparing costs and revenues - isn't part of the act of the entrepreneur qua entrepreneur, but is something that is important and can only work in a money based economy. The price system allows to compare wether or not we created value, by allowing the ability to see wether or not we made a profit (we are discarding the difference between entrepreneurial profit and the interest rate). Prices allow us a mechanism to know wether or not we created value: profit and loss.
Is there anything wrong with this idea, in your opinion? If so; what?
If you weren't so focused on the terminology used, but instead looked at the ideas conveyed, you might have realized this before you went all 'oh no u didn't!'
The state is not the enemy. The idea of the state is.
No, because there is no way to compare the relative scarcity of the means of production.
The price system allows to compare wether or not we created value, by allowing the ability to see wether or not we made a profit (we are discarding the difference between entrepreneurial profit and the interest rate). Prices allow us a mechanism to know wether or not we created value: profit and loss
So they do, but that has nothing to do with their function in the economy. Their function in the economy is to allow an investor to know which alternative allocation of his capital will create the highest profit. Calculation will yield past figures, but this is not an economic function; as useful as the data might be it is no intrinsically important as data than the color of sandalwood; what is important about economic calculation is the role it plays in forward looking action. The point is not to discover whether past actions were productive but to be able to figure out if future actions will be.
Ricky James Moore II: So they do, but that has nothing to do with their function in the economy. Their function in the economy is to allow an investor to know which alternative allocation of his capital will create the highest profit. Calculation will yield past figures, but this is not an economic function; as useful as the data might be it is no intrinsically important as data than the color of sandalwood; what is important about economic calculation is the role it plays in forward looking action. The point is not to discover whether past actions were productive but to be able to figure out if future actions will be.
It depends on what you mean by 'point'. Entrepreneurial decision making doesn't care about past prices, that is true. It doesn't follow that the concept of the ability to have a mechanism to check wether or not business ventures were successful/useful isn't important. Au contraire; the whole point why the process of appraisement is because it creates a mechanism to know what we have to produce and having the ability to check wether or not what we did was right. Not that this is important for an individual entrepreneur - but it is important in understanding what the market as a whole 'does'.
Since you said 'so they do', I'm taking we are in agreement here.
Since all you seem to be capable of doing is missing the point I am, once again, done talking to you. For future referenence I will probably extend this forward. I forecast uselessness of any discussion with you.
Epistemologically I agree completely, practically.... less so. Good luck planning your production processes and outlays if you can't at least fit a simple moving average to some past data and establish a trend. Extrapolation is the best (though still deficient in many ways) method an entrepreneur has of anticipating future states of demand.
So you deny that profit and loss is important?
Epistemologically I agree completely, practically.... less so. Good luck planning your production processes and outlays if you can't at least fit a simple moving average to some past data and establish a trend.
I have stated, here and elsewhere, that past prices are not intrinsically relevant; that this is not the essence of calculation. Of course as real world-data prices, among other things such as an understanding of the cause of those prices, the tastes of consumers, etc. can obviously be important data. But this is not the essence of calculation. These two factors are totally different and not reliant in any way on one another (except, obviously, that for past prices to exist there must have been money exchanges in the past).
The way I understood the Calculation Problem, it does not refer to how any particular individual (entrepreneur or socialist central planner, alike) calculates anything. It suggests that because of the complex, interconnected, and dynamically changing network of individual means and ends -- private property and voluntary exchange of such for individual profit is the only way for resources to be allocated for the benefit and prosperity of all. In short, it is the economy (the network) that "calculates" when individuals pursue individual profit via voluntary exchange of private property. Money just happens to be the most liquid (exchangeable) private property through wich these voluntary exchanges are being facilitated.
Z.
Right, no individual makes economic calculations in the sense of choosing 'the best allocation of resources'; but the act of appraising prices and making economies of profit is what constitutes the system economic calculation; and it is only of relevance for forward looking planning, not for its historical results.