On a side-line: Let us not forget that even a market economy suffers from a problem of arbitrary prices, at times. For example, stock prices are put to a reality check only very seldom, at most times they rely on expectations which again rely on expectations (and ultimately those of the Greater Fool). The formation of stock price bubbles can cause severe misallocation of capital, even in our "modern" economies.
It'd certainly help not to have governments meddling about in financial markets though.
Gabriel: In Human Action, Mises wrote, "In recognition of the fact that such an idea [the version of market socialism described above] would be simply nonsensical, the advocates of the quasi-market plan sometimes vaguely recommend another way out. The director should act as a bank lending the available funds to the highest bidder." In such a system, prices would be not be determined directly by the director. This is the version of market socialism that I was concerned with. --Gabriel
--Gabriel
Thinking it through in this way should help, Gabriel:
Imagine someone who receives the use of a $5000 credit card from his parents, who promise to make the payments for it...provided that the kid uses the card only to buy materials that he/she expects to make a profit off. If the parents have to make a payment on the card, then they frown and the kid feels ashamed unless he/she can explain why there's a debit balance using good business reasons. If there's a credit at the end of the month, the parents smile, teel their kid how good he/she is, etc. The kid is set loose on eBay and vows to make a profit so as to earn that psychic reward.
This is the first approximation to concretizing the socialist-entrepreneur question. I'm actually loading it in favour of the social-market advocate, because parents are usually closer to children than the State is, ipso facto. Thus, there would be less cynicism and gamesmanship with respect to the goal of making profit when a son or daughter is working for his/her parents in this way, in contradistinction to working for the State.
What do you think would happen? Just remember that the kid in question does not have to come up with any money at all; (s)he just has to face his/her parents once a month. Moral hazard studies indicate that some kids would become more risk-taking than they would be on their own dimes. Of course, the opposite is possible too: the kid could do nothing with the credit card and then explain how he/she has saved his/her parents from losses in a perilous market. The latter kind of kid would expect a certain reward for doing nothing. Note how the two kinds of kid can play off against each other.
This scenario, though, is only a first approximation, designed to flesh out an internal obstacle to the type of socialist entrepreneurship you were asking about. Such a kid still exists in a free-market milieu, with free-market prices.
For the second approximation, imagine that a crazed government passes a law forbidding any profit-seeker to buy or sell on eBay unless they've secured proven third-party financing for their purchases and use only the third-party source of finds to buy and sell there. Consumers, on the other hand, have no restrictions placed on them.
Imagine what that would do to prices. In contradistinction to the first scenario, there are now opportunities to game the price system: the inherent risk of doing so - going broke - only kicks in when the financing is maxed out, and the 'prices' have been detached from resource-owners' values. If any colluder imagines that collusion already exists, he/she can justify going broke as being beaten by "the riggers." Also note that plausible excuses would be part of any such system, and they'd be passed around fast. The literature on the principal-agent problem would be informative with this scenario.
This scenario, however, is only a second approximation. Such an auction Site doesn't encompass the whole economy, so market prices would act as a restrainer because of outside-goods arbitrage. If the market gets significantly out of whack, "tag teams" could spring up: Person A acts as the third party for Person B, and vice versa. This jury-rigging wouldn't be as efficient as a genuine market, but it would be a mechanism for outside arbitrage to keep prices somewhat tied to consumer values.
Of course, 'collusion' and 'conspiracies' would provide the perfect excuse for the government implementing the third approximation: people have to secure one, and only one, means of third party financing: the State itself. Down with private manipuation!
This sets up an interminable circle of second-guessing. Making a sale at a profit is no longer a question of, "what do the consumers really want?" It's: "How can I satisfy the consumers through using the prices set by people that are not acting in their pecuniary self-interest? How do those people set their prices? What are they really up to? How many of them are buying with money provided by the government [meaning, "buying to resell later"]? What is the good that I'm buying to make a sale really worth? Is that close to the price that's up there? Did the butler rig it?" A mystery, indeed...
Note that market prices would still have an influence in the third approximation. Also note that living in the interminable circle is too much of a cognitive task for everyone, as it becomes evident that the system has turned into an infinite regress. When people face such tasks, they metaphorize by imagining an "ideal customer." Given the source of the funding, the guiding star would most plausibly be: "what does the government really want?" Entreprenuers would tend to become servants of the State - and unpaid, too, except for non-pecuniary rewards (and punishments.)
The final approximation is one where the government imposes the third-party 'solution' on the entire economy, with the only third-party payer and receiver being the government itself. The first question to ask is: where does the money in consumers' hands come from?...
Gabriel: The answer to my original question, which cookmg helped me to realize, is that in order for the socialist entrepreneurs to establish exchange ratios for producer goods that represent real opportunity costs, the director would have to give them complete control over their capital. But this, by definition, would establish private property. Thus, "socialist entrepreneurs" is an oxymoron; and, as Mises said, market socialism is completely self-contradictory.
The answer to my original question, which cookmg helped me to realize, is that in order for the socialist entrepreneurs to establish exchange ratios for producer goods that represent real opportunity costs, the director would have to give them complete control over their capital. But this, by definition, would establish private property. Thus, "socialist entrepreneurs" is an oxymoron; and, as Mises said, market socialism is completely self-contradictory.
Fine by me, even though that's not Mises's argument. Your insight appears to dervive from an assumption of a very - well "specific" - way to structure a socialist entrepreneur's activity. Let me point out my belief that humans - under any system - will try to do things better, to help progress. The socialist system merely lacks an objective reality-check method to determine what's better.
Gabriel: There is no problem with stock market prices being based on expectations. Indeed, it would be illogical for them to be based on anything but expectations. Owners of a company profit from future income/asset values. It would not make sense for the value of a company to be based on its past income or the past values of its assets. The value of a company's stock, therefore, must be based on the expectations of its future income and asset values.
There is no problem with stock market prices being based on expectations. Indeed, it would be illogical for them to be based on anything but expectations. Owners of a company profit from future income/asset values. It would not make sense for the value of a company to be based on its past income or the past values of its assets. The value of a company's stock, therefore, must be based on the expectations of its future income and asset values.
That is not the point. The method described by you would be fine. I was referring to investors in stock markets - in particular during bubble times - who do not derive their decisions from expectations about those factors but from expectations about expectations, which is a game-theoretical problem, as Oskar Morgenstern first pointed out.
@ Inquisitor: That effect has nothing to do with any government intervention in stock markets.
HubertusVienna, Austria
Daniel M. Ryan:This is the first approximation to concretizing the socialist-entrepreneur question. I'm actually loading it in favour of the social-market advocate, because parents are usually closer to children than the State is, ipso facto. Thus, there would be less cynicism and gamesmanship with respect to the goal of making profit when a son or daughter is working for his/her parents in this way, in contradistinction to working for the State.
This is all very good, and a nice analogy, but remember, Mises said that socialism was not feasible, assuming even the perfect socialist man, who does his very best to "do the right thing". So although incentives are a major problem with socialism (and probably the leading reason why socialism has failed in the past), Mises said that even without the incentive problem, socialism couldn't calculate, that is, it couldn't figure out how to efficiently use it's scarce resources.
In the case of the kind of socialism where there are "Socialist Entrepreneurs", perhaps with the director acts as a bank lending to the highest "bidder", it is easy to see that there will be moral hazard issues. (Here it is important to remember that the bidding is not with funds, but rather with proposals to use the money in a more efficient way, or to earn higher 'profits'). But if you assume the moral hazard away, what goes wrong then?
In this sort of scheme, Mises argues, the Director has to reserve to himself the decisions on how to allocate funds based on his own estimates of the success of the entrepreneur's plans. However, for there to be true market prices in which to base the evaluation of these plans, the various 'Socialist Entrepreneurs" would have to be allowed to sell and buy parts of 'their' enterprises, and even sell or buy entire enterprises. If we go this far, we don't really have socialism anymore, which I think is what Gabriel is pointing out. The entrepreneurs become defacto owners, and the Director devolves to a central banking service.
In every concrete scheme for "Market Socialism", the authors never go quite so far. For example, Schweikart, in "After Capitalism", proposes a system with central control of investment, but the investments are only made into "Worker managed enterprises" (employee co-ops). No other form of enterprise is allowed. Is this socialism or just a very hampered market economy? Well, the workers can't sell their 'shares' in the enterprises, since they are still owned by the state, only managed by the employees. So, there is no financial market and this is a brand of socialism. For Mises, the financial market is the important market. In Human action, in talking about the buying and selling of firms and parts thereof, Mises says:
"These transactions constitute the market as such. If one eliminates them, one does not preserve any part of the market. What remains is a fragment that cannot exist alone and cannot function as a market"
It seems clear then in such a system, there are no prices for the various enterprises, which is part of the market for factors of production, so there can be no rational allocation of the productive resources, even if the incentive problem is assumed away.
Either "Socialism Entrepreneurs" are real entrepreneurs, in which case we don't have socialism, or they are not really entrepreneurs at all, and we are back to chaos.
rjljr2:This is all very good, and a nice analogy, but remember, Mises said that socialism was not feasible, assuming even the perfect socialist man, who does his very best to "do the right thing". So although incentives are a major problem with socialism (and probably the leading reason why socialism has failed in the past), Mises said that even without the incentive problem, socialism couldn't calculate, that is, it couldn't figure out how to efficiently use it's scarce resources.
I know; I was amplifying the point.
Socialism really does set up an infinte regress: there's no way to reach the needed data except through a tail-chase where the tail is never caught. People guessing what other people are guessing what other people are guessing...
...and none of them can get in touch with real consumer values.
As far as the moral hazard issue is concerned, I was scenarioizing about a hypothetical introduction of socialism in stages so as to show why calculational chaos develops. If everyone is chasing what can be found by no-one [I ask rhetorically], what other than calculational chaos would result?
Gabriel: Hello, I have been trying to understand why economic calculation is not possible in a socialist society. I think I understand why a completely centrally planned society could not economize. Planners would have no way of determining opportunity costs associated with the factors of production. I also see why planners could not economize merely by solving the various mathematical equations to determine what prices would be in equilibrium. Knowing what prices would be if the economy was in some theoretical equilibrium tells you nothing about how to move toward that equilibrium given that the real world is currently in disequilibrium. However, I do not understand why a so-called market socialist economy is necessarily impossible. Perhaps someone here can help me work out why. In Human Action, Mises wrote the following regarding market socialism: “One cannot play speculation and investment. The speculators and investors expose their own wealth, their own destiny. This fact makes them responsible to the consumers, the ultimate bosses of the capitalist economy. If one relieves them of this responsibility, one deprives them of their very character. They are no longer businessmen, but just a group of men to whom the director has handed over his main task, the supreme direction of the conduct of affairs. Then they--and not the nominal director--become the true directors and have to face the same problem the nominal director could not solve: the problem of calculation.” Salerno, in his postscript to Mises’ 1920 article, states basically the same thing: “…any attempt to implement monetary calculation by forcing or inducing managers of socialist enterprises to act as profit-maximizing (or even more absurdly, price-and- marginal-cost-equalizing) entrepreneurs founders on the fact that these managers do not have an ownership interest in the capital and output of their enterprises. Consequently, the bids they make against one another in seeking to acquire investment funds and purchase productive resources must result in interest rates and prices that are wholly and inescapably arbitrary and useless as tools of economic calculation.” In other words, Mises and Salerno appear to be saying that, if people are not risking their own private property, they will not act responsibly enough to be allowed to perform the entrepreneurial function. My question is this: how does one know a priori that the “socialist entrepreneurs” will not decide to act responsibly with “society’s” property? How does one know that there is no way for the socialist director to devise a system of incentives that would cause the socialist entrepreneurs to behave responsibly? Elsewhere in Human Action, Mises explains why entrepreneurs under capitalism do behave well: “Society can freely leave the care for the best possible employment of capital goods to their owners. In embarking upon definite projects these owners expose their own property, wealth, and social position. They are even more interested in the success of their entrepreneurial activities than is society as a whole. For society as a whole the squandering of capital invested in a definite project means only the loss of a small part of its total funds; for the owner it means much more, for the most part the loss of his total fortune.” Entrepreneurs serve the consumers under capitalism because their “property, wealth, and social position” depend on their doing so. What prevents a socialist director from creating an inventive structure whereby the “property [i.e. their consumer goods], wealth, and social position” of the socialist entrepreneurs depended upon their profit-making abilities? If the director did create such a system, would not the socialist entrepreneurs behave the same as capitalist entrepreneurs? --Gabriel
Hello,
I have been trying to understand why economic calculation is not possible in a socialist society. I think I understand why a completely centrally planned society could not economize. Planners would have no way of determining opportunity costs associated with the factors of production. I also see why planners could not economize merely by solving the various mathematical equations to determine what prices would be in equilibrium. Knowing what prices would be if the economy was in some theoretical equilibrium tells you nothing about how to move toward that equilibrium given that the real world is currently in disequilibrium. However, I do not understand why a so-called market socialist economy is necessarily impossible. Perhaps someone here can help me work out why.
In Human Action, Mises wrote the following regarding market socialism: “One cannot play speculation and investment. The speculators and investors expose their own wealth, their own destiny. This fact makes them responsible to the consumers, the ultimate bosses of the capitalist economy. If one relieves them of this responsibility, one deprives them of their very character. They are no longer businessmen, but just a group of men to whom the director has handed over his main task, the supreme direction of the conduct of affairs. Then they--and not the nominal director--become the true directors and have to face the same problem the nominal director could not solve: the problem of calculation.”
Salerno, in his postscript to Mises’ 1920 article, states basically the same thing: “…any attempt to implement monetary calculation by forcing or inducing managers of socialist enterprises to act as profit-maximizing (or even more absurdly, price-and- marginal-cost-equalizing) entrepreneurs founders on the fact that these managers do not have an ownership interest in the capital and output of their enterprises. Consequently, the bids they make against one another in seeking to acquire investment funds and purchase productive resources must result in interest rates and prices that are wholly and inescapably arbitrary and useless as tools of economic calculation.”
In other words, Mises and Salerno appear to be saying that, if people are not risking their own private property, they will not act responsibly enough to be allowed to perform the entrepreneurial function.
My question is this: how does one know a priori that the “socialist entrepreneurs” will not decide to act responsibly with “society’s” property? How does one know that there is no way for the socialist director to devise a system of incentives that would cause the socialist entrepreneurs to behave responsibly?
Elsewhere in Human Action, Mises explains why entrepreneurs under capitalism do behave well: “Society can freely leave the care for the best possible employment of capital goods to their owners. In embarking upon definite projects these owners expose their own property, wealth, and social position. They are even more interested in the success of their entrepreneurial activities than is society as a whole. For society as a whole the squandering of capital invested in a definite project means only the loss of a small part of its total funds; for the owner it means much more, for the most part the loss of his total fortune.”
Entrepreneurs serve the consumers under capitalism because their “property, wealth, and social position” depend on their doing so. What prevents a socialist director from creating an inventive structure whereby the “property [i.e. their consumer goods], wealth, and social position” of the socialist entrepreneurs depended upon their profit-making abilities? If the director did create such a system, would not the socialist entrepreneurs behave the same as capitalist entrepreneurs?
I think this discussion is missing a qualitative difference in the psyche of the capitalist entrepreneur and the 'socialist entrepreneur' you are theorizing about. It seems to me this qualitative difference can be found in the word "passion". What are the incentives to be an entrepreneur in a socialist system? Presumably, it would have an estate tax, so any wealth accrued in this life would have to be spent, or have probably half confiscated by the plunderbund. Not much point in saving to pass on to your descendents. And what would be the incentive for the socialist entrepreneur over the factory-line worker? They would both have their"property(i.e.consumer goods), wealth, and social position" guaranteed. Perhaps the entrepreneur would "be allowed" to have more, but the state would impose a ceiling above which the socialist entrepreneur could never rise. Nor, if he failed, would he fall further than being a factory-line worker. His security is unchanged, only the quantities of property, wealth, and social position. But for the capitalist entrepreneur, it's a sink or swim situation. Failure does not mean a lower level of security, but possibly total insecurity and starvation. So the capitalist entrepreneur is motivated by an existentialist passion to succeed that the always-secure socialist entrepreneur cannot understand. And the reward for success for the capitalist is unlimited. Great skill or great luck will be rewarded with great wealth; while under socialism, the difference in economic rewards between a better than average, excellent, and genius-inspired performance is negligible. In '63, Petrosian received about $2,000 from the Soviet government for winning(retaining) the World Chess Championship. A few years later Fischer got a million from the free-market for the same feat.
It is by observing one's reaction to one's own inner feelings if one imagined oneself an entrepreneur under either capitalism or destructionism, that one knows "a priori", with an instinctive certainty, the qualitative difference in the two varying mental constellations.
Hubertus:That effect has nothing to do with any government intervention in stock markets.
That effect has nothing to do with any government intervention in stock markets.
Is it just a natural instability in markets then? If so, what could mitigate it?
Daniel M. Ryan:Socialism really does set up an infinte regress: there's no way to reach the needed data except through a tail-chase where the tail is never caught. People guessing what other people are guessing what other people are guessing...
Great way to put it.... I going to save this quote :)
Cheers!
Inquisitor:Is it just a natural instability in markets then? If so, what could mitigate it?
Any market is not a natural thing but an institution created by humans, so I hesitate to call it a "natural" instability. Experimental markets for specific instruments and institutions - stock markets - have been shown to bubble. We also know about the pig cycle.
It is my opinion, that this happens for the same reason that Mises called socialism is not viable. People buy stocks for a price based on their expectation of people buying these stocks at a certain (higher) price because the latter people again expect other people to buy them at an again higher price, repeat ad nauseam.
The only difference to socialism is that ultimately, reality will bite, when fundamental numbers are revealed. However this may take months or years.
As for mitigation, several measures have been proposed to improve the workings of stock markets, including institutional rules regarding leverage, shorting, and the like. Personally, I am convinced that the solution lies in accellerating, improving and broadening the fundamental reality-checks for stock exchange quoted financial instruments.
rjljr2: Daniel M. Ryan:Socialism really does set up an infinte regress: there's no way to reach the needed data except through a tail-chase where the tail is never caught. People guessing what other people are guessing what other people are guessing... Great way to put it.... I going to save this quote :) Cheers!
Thanks; much appreciated.
- Daniel
Hubertus: Fine by me, even though that's not Mises's argument. Your insight appears to dervive from an assumption of a very - well "specific" - way to structure a socialist entrepreneur's activity. Let me point out my belief that humans - under any system - will try to do things better, to help progress. The socialist system merely lacks an objective reality-check method to determine what's better.
I think that is Mises' argument. Below is a quote from Socialism:
Syndicalism." [emphasis mine]
The argument does not derive from the assumption that the socialist director will structure his entrepreneurs' activities in a certain way. The argument is based on the fact that in order to set prices one must have control over property and that, by definition, would be private property (and not socialism).
Haha someone brought up this quote from HA:
"What these neosocialists suggest is really paradoxical. They want to abolish private control of the means of production, market exchange, market prices, and competition. But at the same time they want to organize the socialist utopia in such a way that people could act *as if *these things were still present. They want people to play market as children play war, railroad, or school. They do not comprehend how such childish play differs from the real thing it tries to imitate." *Human Action*, Third Edition, pp. 706-707.