First, I'm not sure if I understand what is so uniquely Austrian about the calculation argument. As I understand it the point is that entrepreneurs maximise profits by putting goods to their most valued uses and the price system is exactly what allows them to do this by means of relative price adjustments and profit and loss accounting (very briefly put). My first point is that this implicitly assumes some sort of harmony of interests, in some cases where this assumption doesn't hold, I don't see how the calculation argument is valid. In the case of asymmetric information, externalities or monopoly power entrepreneurs maximise profits by going against what is in the public interest (yes, Austrians will find this term objectionable). But the other point I'd like to make is that this is a pretty standard point in even principles level micro...
Second, in reality firms costs are highly interdependent and often inextricable from one another. What implications does this have for profit loss accounting? Well, as far as I can tell a lot of big firms don't actually know exactly how to maximise profits so they resort to rules of thumb. My can't government do this? And more importantly, in firms still exist and are efficient, clearly there are some other considerations as to what serves consumers best, why shouldn't they be applied to governments as well?
Third, one of the big arguments against math that I've noticed is that it isn't necessary, something along the lines of "we can express these arguments in verbal logic". I think this is completely besides the point, identifying correct arguments and saying, ex post, that we can say what is in mathematical terms in verbal logic misses the point. The math was useful in fleshing out these arguments in the first place.
Four, I've asked this before, but I want to ask it again: what justifies the large salaries of econ PhD in the private sector? Their model building abilities and econometric skills are often used so what causes firms to be so systematically misguided (that is, according to Austrians).
Five, what is wrong with the concept of willingness to pay?
okely dokely.
The problem is that mainstream neoclassical economists have a very narrow and incomplete understanding of asymmetric information. Asymmetric information is not a problem arising out of capitalism or a failure of the price mechanism, but rather it’s the inevitable result of human interaction in general. The market attempts to remedy this problem by creating dynamic and responsive social institutions, such as the price mechanism.
The problem is, according to many New Institutional economists, that the price mechanism is not efficient “enough” (according to them), and they come up with these scenarios where mutually beneficial exchange is impossible in the face of asymmetric information (EG Akerlof’s “market for lemons”). This is why the phrase “asymmetric information” has become synonymous with the failure of capitalism/price mechanism and why individuals, like the OP, believe that this single phrase somehow constitutes an entire argument in itself. What is never mentioned, though, are the billions of mutually beneficial transactions that take place every single day in the presence of asymmetric information thanks to the price mechanism and other capitalistic institutions.
Of course, this argument is only a reactionary outcry to the fact that Hayek and Mises not only entirely refuted communism with the calculation argument, but government intervention in general. Let’s look at another example. Stiglitz made an argument in favor of low interest rates in order to reduce adverse selection and moral hazard. Essentially, the most risk-prone borrowers are willing to pay any interest rate and will actively seek out loans in order to chase high returns (risky ventures) and thus are most likely to be selected by lenders (that are unaware of this fact). The problem occurs when most of these risky ventures fail and when the borrowers are unable to pay back the lenders, causing severe financial problems. Therefore, according to this argument, low interest rates are desirable.
But is this argument actually valid, and will it reduce asymmetric information? Of course not. Even if we accept this argument, there is still a problem with inter-temporal coordination. We’re merely replacing one problem with another, much larger problem. Entrepreneurs will be entirely unaware of consumer’s preferences for future goods and will therefore invest and allocate capital in inefficient combinations, yielding immense macroeconomic problems. Never mind the fact that bankers are supposed to identify risk and hedge.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
What is never mentioned, though, are the trillions of mutually beneficial transactions that take place every single day in the presence of asymmetric information thanks to the price mechanism and other capitalistic institutions.
as i noted previously, that little "and other capitalistic institutions" is an important addition that you neglected to include in your previous post.
you can argue that there may be voluntary solutions to problems of asymmetirc information, but the fact is that the price system itself is not the solution. indeed, the price system becomes the "victim" of these problems in the sense that if these problems are strong enough and go unresolved it can no longer do its job of allocating resources.
but this is turning into a very slippery conversation. first EIT's thought was restricted to the calculation debate (which centers around the price mechaisnism) and now we're starting to move into discussing any and all voluntary solutions to problems that may interfere with the price system?
not sure i want to go down that road personally. so at this juncture i think it is enough to say that EIT's intuition was correct and that there are issues that may interefere with the functioning of the price system (though as I mentioned earlier I don't think this refutes austrian insights from the calculation debate). and if one just doesn't feel comfortable leaving it at that (i know it makes me feel like a dirty neoclassical just typing it), one can point EIT toward this or that anarchist argument in favor of voluntary solutions to this or that problem.
PS* i think its funny how its implied that i don't realize that there are voluntary solutions to asymmetric information problems when i am the one that noted the possibility in the first place (after esuric's fumble on the relevance of asymmetric information to the functioning of the price system). kinda strange, huh?
Ambition is a dream with a V8 engine - Elvis Presley
Student:you can argue that there may be voluntary solutions to problems of asymmetirc information, but the fact is that the price system itself is not the solution. indeed, the price system becomes the "victim" of these problems in the sense that if these problems are strong enough and go unresolved it can no longer do its job of allocating resources.
Evolution is smarter than you are. ^^^^ The price system
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
nirgrahamUK: Evolution is smarter than you are. ^^^^ The price system
No doubt brother Nir. Shout it from the rooftops.
Every interventionist is for the price system, except when they are not. As Mises said, there is no third solution.
about 1], the market for lemons. The price system has indeed done its job. It has told the crooked salesmen that they cannot foist off suspect cars on a discerning public. And if they want to sell cars they better give a decent guarentee.
I mean you are saying [as I understand it] that if no one wants to buy rotten eggs at ten dollars an egg, but the egg people insist on that price, that the price system has not done its job. The entire market for rotten eggs has collapsed, all thanks to that silly reliance on an inadequate price sysytem.
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It's easy to refute an argument if you first misrepresent it. William Keizer
No doubt brother Nir. Shout it from the rooftops. Every interventionist is for the price system, except when they are not. As Mises said, there is no third solution.
I think it's important to note that Mises and Hayek did not object to the emergence of certain institutions that compete amongst themselves and which operate within the price mechanism and markets, such as financial intermediaries and various ratings agencies. The calculation argument does not say, "only prices are useful." It says, in its most simplistic form, that we need accurate and undisturbed prices that reveal true subjective values and tacit information in order to achieve a rational economic order. This is why government intrusion, which is inherently ad hoc and arbitrary, is necessarily self-defeating and destructive (the government is structurally defunct when it comes to economic matters). It's also why governments can't use "rules of thumb" in order to plan the economy, as the OP suggested, and why arguments that include asymmetric information and "conflicts of interests" can never justify government intervention (in fact, they only support the argument made by the Austrians). Again, and I find myself saying this a lot these days, but just because the market is imperfect does not necessarily or logically mean that government intervention is appropriate (the very point of this thread before it got derailed).
about 2], externalities. have you seen this one: http://mises.org/freemarket_detail.aspx?control=367
Again, and I find myself saying this a lot these days, but just because the market is imperfect does not necessarily or logically mean that government intervention is appropriate (the very point of this thread before it got derailed).
well i wasn't offering an argument for intervention. i was simply filling in the huge hole you left in the discussion by inaccurately describing asymmetric information's relevance for EIT's comment (not to mention your total neglect of externalities). *shrug*
but its funny how some posters can never seem to stick to an economics discussion. apparently, by simply suggesting that asymmetric information problems can interefere with the price system, I was tacitly aiding the "enemy" by opening an argument for intervention. here i was thinking i was just answer an economics question in the economics question section.
normative arguments != positive arguments. maybe we should all work on that distinction.
It's not the market's fault that people are imperfect. And it makes no sense whatsoever to give certain elected (imperfect)persons privileges over others to allegedly address the issue.
Believe it or not Student, not everything is about you. You can't just hijack threads and expect everyone to cater to your demands. The fact of the matter is that asymmetric information does not justify government intrusion in anyway whatsoever, as the OP suggested. The fact that you never made such a claim is entirely immaterial to this thread. And once again, Hayek's coordination argument and Mises' calculation argument are almost exclusively about asymmetric information and they are uniquely Austrian, especially the more technical aspects (which are debated to this day).
oh, sometimes it is hard to tell if you are talking about me or not. i mean, in your first response on this page were making these weird passive aggressive comments about unnamed "neoclassical economists", so I just assumed you were referring to me. sorry for the confusion.
anyways, i did not set out to make this about "me" or derail the thread. in fact, i was just trying to make sure that EIT understood the full implications of asymmetric information and externalities for the functioning of the price system. i don't think your post did that at all (as noted earlier, i don't believe the insight that people can't read each other's minds is the most important implication of asyminf and you didn't really address externalities at all). so i was trying to correct the situation for EIT's benefit.
really my only goal was to address EIT's "thoughts". specifically, i wanted to make sure he saw the proper application asymmetric information and externalities to this situation and perhaps also to convince him that these concerns do not invalidate the central austrian insights from the calculation debate. and this seems pretty obvious if you read my first two posts in the thread (though flic's "quiz" did take things *way* off course).
sorry you thought i was trying to derail things. i apologize.
Student:if you want to keep pretending like you "proved" something that's fine. I think anyone reading this thread will see my point exactly.
Unfortunately, you're wrong. Your disagreement with Austrian economics is evidence that you are ignorant about Austrian economics.
Don't mind that your references to Stiglitz and Akerlof are met with silence. Rather than engaging you in debate, all Austrians need to do is quiz you on how well you know their knowledge! Even if you demonstrate sufficient familiarity with their beliefs, you are an unbeliever, and so that must mean you don't know all of their perfectly convincing ideas.
"I'm not a fan of Murray Rothbard." -- David D. Friedman