dchernik:Suppose we have a complex socialist society which is in the state of an evenly rotating economy or equilibrium.
Mises (among others) routinely refers to the notion of an evenly rotating economy as a hypothetical or imaginary construction.
dchernik:There are numerous production processes operating. The planner, Smith, has before him equations like these: C1 = P1 + 2P2 + 3P3... C2 = 4P4 + 5P5 ... P1 = 6P1_1 + 7P1_2 + ... where C stands for consumer good, and P for producer good. These are methods of production. On the left side of each equation, C1, P1, etc. are the revenues yielded by the sale of each good. On the right side are the costs of production. It seems these costs can be discerned if we solve the equations.
C1 = P1 + 2P2 + 3P3... C2 = 4P4 + 5P5 ... P1 = 6P1_1 + 7P1_2 + ... where C stands for consumer good, and P for producer good. These are methods of production. On the left side of each equation, C1, P1, etc. are the revenues yielded by the sale of each good. On the right side are the costs of production. It seems these costs can be discerned if we solve the equations.
There are often, if not typically, multiple ways to produce something. Which way is most economically efficient? Furthermore, there's also the time factor of production to take into account - which doesn't seem to be indicated by the above equations.
dchernik:Suppose Smith knows the state of consumer demand.
How does he know this? How can he know it?
dchernik:It seems that we have a instant motion from one inferior ERE to another superior one without any need for entrepreneurial competition or market for capital goods. There is neither disequilibration and profits nor imitation and disappearance of profits but what seems like a perfectly efficient smooth move from one ERE to another. There are neither monopoly prices nor entrepreneural losses. Please advise.
Please advise.
A final note: one could say that the market is a giant, real-time, massively parallel, and (most importantly) self-modifying linear programming system that is constantly in the process of solving itself.
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So, if "local, delayed, sequential, inflexible, and disinterested" sounds like a description of a capitalist business firm, then we have something here. V.I. Lenin who, when asked about the economics of socialism, answered that it would be organized on the lines of the postal service, was hopelessly confused.
The commies confused the global world market with their local oil change place.
?? Why didn't it post?
Suppose we have a complex socialist society which is in the state of an evenly rotating economy or equilibrium. There are numerous production processes operating. The planner, Smith, has before him equations like these: C1 = P1 + 2P2 + 3P3... C2 = 4P4 + 5P5 ... P1 = 6P1_1 + 7P1_2 + ... where C stands for consumer good, and P for producer good. These are methods of production. On the left side of each equation, C1, P1, etc. are the revenues yielded by the sale of each good. On the right side are the costs of production. It seems these costs can be discerned if we solve the equations. The question is, why can't Smith introduce a marginal improvement to the ERE, say, a new product Cn? Cn = 3Pa + 6Pb + 10Pc Suppose Smith knows the state of consumer demand. He knows the revenues he will obtain by selling X Cn to the consumers for all X. In order to produce Cn, Smith has to withdraw the factors involved in making it from other lines of production. This means that some of the goods previously made will be unmade. So, why can't Smith find those products, canceling which will harm the consumers the least? He can do that by tallying up the lost revenues for the different possibilities and sacrifice those combinations of other consumer goods for the sake of Cn that already provide him with the least amount of revenue. If Smith finds that he receives a profit by producing X Cn, then he can keep withdrawing factors from elsewhere in the economy until the costs of the factors go up so much, and the revenues of an extra Cn go down so much that the two are equal. It seems that we have an instant motion from one inferior ERE to another superior one without any need for entrepreneurial competition or market for capital goods. There is neither disequilibration and profits nor imitation and disappearance of profits but what seems like a perfectly efficient smooth move from one ERE to another. There are neither monopoly prices nor entrepreneural losses.
The ERE is not impossible only unrealistic. Monetary profits can be 0 for every firm, as long as psychic profits from exchanges within the ERE are positive. An ERE is unrealistic, because of entrepreneurial actions that keep disturbing it. But under socialism, there is only one entrepreneur, Smith. Hence, an ERE is a natural state of a socialist economy. As for knowledge of consumer demand, Mises makes this assumption, too: "We may for the sake of argument at first disregard the dilemmas involved in the choice of consumers’ goods to be produced. We may assume that this problem is settled. ... We do not deal with the problem of whether or not the director will be able to anticipate future conditions." In other words, we assume that Smith does not make entrepreneurial errors. It's true that there are multiple ways of producing anything; that's why I am allowing Smith to make single marginal improvements to the economy. It is obvious that he can't reconstruct the entire production structure.
So, wait a minute... this is really neat. Is the socialist problem precisely that improvements can be introduced only sequentially, while the market does it in parallel, as Autolykos said "massively parallel"?
Under your scenario there would be no revenue, cost, or profit.
There is revenue, because there is a consumer goods market. There are costs, insofar as the system of equations is solved. And there are profits, until the central planner equilibrates the new production structure toward a new ERE by making marginal costs equal marginal revenues.
On the right side are the costs of production.
1. All the equations with a P on the LHs are flawed, because we are talking about a socialist economy, meaning the govt owns all the P's and never sells them to anyone.
2. All the equations with a P on the RHS are flawed, because the govt has no costs for using the P's. They own them all, and got them all for free.
3. All the equations with a C are flawed, because sometimes the consumer cares not what P's are on the RHS; other times he cares a lot. This will leads to contradictory solutions of what the P's are.
For example, whether toothpicks are made of wood or plastic, say he is willing to pay the same price. On the other hand, say he will pay ten times as much for wooden furniture as for plastic furniture.
1 penny for toothpick = one gram of wood = one gram of plastic. Conclusion: Price of wood equals price of plastic.
$100 = what one consumer will pay for wooden bookshelf = what ten consumers will pay for ten bookshelves [one each] made of plastic. Conclusion: Price of wood equals ten times price of plastic.
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Smiling Dave:3. All the equations with a C are flawed, because sometimes the consumer cares not what P's are on the RHS; other times he cares a lot. This will leads to contradictory solutions of what the P's are.
In other words, there's no way for the central planner to rationally prioritize the uses of means of production in producing different things.
Or even different combinations of means of production in producing the same thing.
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I think the answer lies in the idea that the market is a planetary, real-time, massively parallel improvement and optimization engine that is able to accommodate changes to the economy that are happening to it every second, as suggested by Autolykos. On other hand, socialism is a local, delayed, sequential, and inflexible system.
1. The govt cannot possibly actually make all the things corresponding to each equation, because there is not enough land on the planet for the thousands of different factories required to make every imaginable product ten thousand different ways. [Especially when multiplied by 32 million, see below about colors]. So that the Cs will not be found in the real world by going out and seeing what people are willing to pay, but rather by some kind of vote must be held. So that every citizen will have to vote on tens of millions of items appearing in a catalogue. And of course, every day millions of people reach voting age, so the voting will have to take place anew. Many people prefer variety, especially in their food, so that will have to be voted on every meal. Many times people think they want things, but when the time comes to actually pay for it, or when their eye is caught by something in the store or on TV, they change their minds. So that their voting will not reflect what they will actually spend their money on.
Many people have secret desires. Internet porn thrives because it is anonymous. How many people are willing to go on record with a govt agency saying they want a nice couple of Ps to be used to make perverted movies?
What if they want pets? Many people only decide if they actually want this particular dog after actually seeing it. How will the govt know whether to breed beagles or german sheperds. And how many?
I'm sure there are many more impracticalities to actually determining the values of C.
2. Since each C can be manufactured in tens of thousands of different ways, there will be many more equations than unknowns. What guarentees they will be consistent? [in the sense of guarenteeing the existence of a solution?] For example 3=P and 2=P is an unsolvable system. You are guarenteed solvability only if number of equations equals number of unknowns.
Even then, what guarentees exostence of positive solutions for all Ps? For example,
2= X+Y 4=X-Y. then Y must equal minus 1.
3. So you admit that the equations with the Cs are not flawed IF. That's a big if. What if they don't differ enough to make a difference, which is very often the case. Even as things are right now, plenty of things have the same price, in fact plastic and wooden toothpicks cost the same thing.
Or if they have offsetting advantages and disadvantages. Some people like one color, some like another. Some just don't care about the color of their plastic toothpicks. You will find different colors for toothpicks all at the same price, so that cost of white dye = cost of black dye. But very few people want a black wedding dress, which leads to cost of white dye = hundreds of times more than black dye.
4. I think we can agree that a consumer has a price range beyond which he will not go for a toothpick. Let''s choose from one to ten cents per toothpick, to be generous. But there are thousands of ways to make toothpicks. How will there be different amounts to pay the state for each of them?
4a. A good computer screen nowadays recognizes 32 million different colors. Each mixture of dyes to make those 32 million colors will have to have a different price. Remember, it's not enough, to be able to solve the equations, to say "I don't care". Every one of those 32 million options has to be given a price by every consumer. Same thing for cars. And clothing. And every possible thing on the face of the Earth.
I do not understand what you are talking about. Resources are scarce, whether under capitalism or socialism. The economic problem is to squeeze the most utility with the least amount of effort: to economize on those resources: to produce the most while laboring the least.
It is assumed that the socialist government's aim, exactly like that of a laissez-faire society, is to (1) satisfy as many desires of an many consumers as possible, given the factors of production, the environment, and the technology they have and (2) improve this satisfaction as time goes by. It is not to make people perfectly happy.
You may be thinking that the central planner will not be able to anticipate consumer wants, especially if the whole world is communized. How can the planner, located thousands of miles away from me, know what's going on in my local community? That is true. But it's not the only problem of socialism. Its fundamental defect is that the planner must introduce creative advance into the economy step-by-step sequentially rather than numerous improvements at the same time.
Another difference between capitalism and socialism is obviously incentives. In competing with other entrepreneurs, every businessman is offered a rigorous incentive to excel. He puts his own time and money on the line. He must do his utmost to win. Smith, on the contrary, would need to be “public-spirited” in order to push himself to get anything done. We all, however, know that the search for private profit is far more motivating than some vague desire to improve the world. Capitalism is a system whose every member struggles with a "will to power"; socialism is disinterested. Which is bad for socialism.