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When and How Does Economic Calculation Become Necessary?

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Ricky James Moore II posted on Sun, Feb 6 2011 6:15 AM

In Mises' Economic Calculation in the Socialist Commonwealth he argues that even the best informed and most intelligent socialist leader can not possibly make the necessary comparisons to rationally allocate resources from his own point of view. However, Mises regards household economies of this sort as possible, if substandard. I find this highly convincing, but there is a problem: where do we draw the line? On what basis? Imagine a world where we have a superhuman dictator akin to the 'Red Son' Superman - superintelligent, with encyclopedic knowledge, perfect recall, supermental speed and infallible senses. Why could not such a person simply treat the entire world as a 'household economy'? Would not such a superlative individual short-circuit the argument? Not that this is a practical objection, but it is a theoretical one. Indeed, the incentive and information problems alone stop any real socialist economy from working, with or without economic calculation. This, however, seems to be a chink in the calculation armor that I have no seen addressed.

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Perhaps I'm misunderstanding what you're saying, but wouldn't the Red Son Superman's knowledge of the market (i.e. the possible supply and demand for all commodities) result in the creation, within his head, of a price for all commodities?  He would therefore still require a price system - whether it is mental or monetary - in order to calculate.

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That my friend, is a most excellent question. and a difficult one to answer. The complexity of the problem seems to exponentially scale as we increase numbers of types of capital goods, allowing for their generally imperfect substitutability to each other, allowing for more stages of production etc. A pathetically tentative but commendable attempt to help give some cognition of how this problem scales was made here:

http://vimeo.com/7479892

On a more pragmatic level, it's probably due to the fact that when one only produces for one's direct wants, with simple one stage production processes with relatively specific producers goods, one can tend to get away with evaluating one's opportunity costs fairly easily in terms of forgone wants. This is not to say the efficiency of even this simple decision process could not be improved when applied in the framework of an indirect exchange economy applying economic calculation.

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abskebabs:
The complexity of the problem seems to exponentially scale as we increase numbers of types of capital goods, allowing for their generally imperfect substitutability to each other, allowing for more stages of production etc.

If I remember correctly this was covered in some detail in Salerno's speech at MU2010 called "Calculation And Socialism":

http://mises.org/media/5220/Calculation-and-Socialism

He goes into more detail but abskebabs's answer covers the basics.  The more capital intensive the economy becomes, the harder it is to measure one's oppurtunity costs, and you then begin to need Profits and Losses to help direct resources towards their most valued uses.

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"This, however, seems to be a chink in the calculation armor that I have no seen addressed."

Even if a Red Son Superman could conceivably pull it off, it wouldn't be a chink in the "calculation armor".  The Misesian argument was always that socialist commonwealths can have no recourse to calculation, not that they couldn't conceivably take recourse to any allocative measures whatsoever.  Even Mises said in ECitSC that, "In trivial and secondary matters rational conduct might still be possible" under socialism.

Conversely, what the socialist camp was trying to assert, and what Hayek and Robbins unwarrantedly conceded, was that calculation itself was conceivable in socialism, not that alternative allocative measures were conceivable.

Whether meaningful prices can be arrived at under socialism (which they can't) is the crux of the issue.  A computer that can work with such prices is feasible.  A Red Son Superman global household manager is not.

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Even if a Red Son Superman could conceivably pull it off, it wouldn't be a chink in the "calculation armor".  The Misesian argument was always that socialist commonwealths can have no recourse to calculation, not that they couldn't conceivably take recourse to any allocative measures whatsoever.  Even Mises said in ECitSC that, "In trivial and secondary matters rational conduct might still be possible" under socialism.

Conversely, what the socialist camp was trying to assert, and what Hayek and Robbins unwarrantedly conceded, was that calculation itself was conceivable in socialism, not that alternative allocative measures were conceivable.

Whether meaningful prices can be arrived at under socialism (which they can't) is the crux of the issue.  A computer that can work with such prices is feasible.  A Red Son Superman global household manager is not.

Very good, this pretty much answers it for me. I was conflating two separate issues.

I will break in the doors of hell and smash the bolts; there will be confusion of people, those above with those from the lower depths. I shall bring up the dead to eat food like the living; and the hosts of dead will outnumber the living.
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I don't know if this is entirely relevant or it was addressed, but in terminology i'm not entirely familiar with, but one man cannot have the same preferences as everyone at the same time.

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