Free Capitalist Network - Community Archive
Mises Community Archive
An online community for fans of Austrian economics and libertarianism, featuring forums, user blogs, and more.

Knowledge and Calculation

rated by 0 users
Answered (Not Verified) This post has 0 verified answers | 51 Replies | 9 Followers

Top 75 Contributor
1,389 Posts
Points 21,840
Moderator
vive la insurrection posted on Tue, Jul 10 2012 10:01 AM

I would just like to hear in people's own words what they think about this issue.  No block quoting other people's works please

In particular, if you are against "knowledge", why you think knowledge is a non starter in praxeological inquiry

"As in a kaleidoscope, the constellation of forces operating in the system as a whole is ever changing." - Ludwig Lachmann

"When A Man Dies A World Goes Out of Existence"  - GLS Shackle

  • | Post Points: 50

All Replies

Top 10 Contributor
Male
4,987 Posts
Points 89,745
Wheylous replied on Tue, Jul 10 2012 10:04 AM

It's pretty useful to know stuff and to add stuff.

:|

What specifically do you mean? How well the market calculates demand? How much the market calculation has improved in recent years? How well governments can calculate demand and cost?

  • | Post Points: 20
Top 75 Contributor
1,389 Posts
Points 21,840
Moderator

I'm referring to this debate Wheylous,

http://mises.org/journals/rae/pdf/RAE7_2_5.pdf

So most of your questions are of relevance.  I am asking in a more either/ or, one or both,compare / contrast type of context though.  It is a question of how one views their relationship with oneanother to praxeology

 

EDIT

"As in a kaleidoscope, the constellation of forces operating in the system as a whole is ever changing." - Ludwig Lachmann

"When A Man Dies A World Goes Out of Existence"  - GLS Shackle

  • | Post Points: 20
Top 50 Contributor
Male
1,687 Posts
Points 22,990
Bogart replied on Tue, Jul 10 2012 12:22 PM

The article does a good job explaining the differeces in Knowledge and Calcuation.  My opinion is that the practicioners of Socialism, or its stepchild Fascism, experience two separate and ultimately destructive problems: Knowledge and Calculation, that can only be solved by prices on the free market.  So I would agree with Mises. 

Understand that this is a purely academic issue of the validity of the Knowledge Problem and the Calculation Problem.  It is just that in theory a machine could be able to use a lot of the knowledge that the pricing system conveys and still would not be able to centrally plan an economy as it would not be able allocate scarce resources among alternative uses through out time into an uncertain future.

  • | Post Points: 5
Top 75 Contributor
1,288 Posts
Points 22,350

A long time ago I agreed with Yeager's opponents but I've thought about this issue for a while and I think Yeager is correct.  I think some of the problem came with the misunderstanding of what Mises meant by granting the planners perfect information.  He granted them perfect information except for that needed for economic calculation, which can only be acquired through the existence of market prices for factors of production.

The Voluntaryist Reader: http://voluntaryistreader.wordpress.com/ Libertarian forums that actually work: http://voluntaryism.freeforums.org/index.php
  • | Post Points: 5
Top 50 Contributor
Male
2,439 Posts
Points 44,650

I honestly haven't read enough of Hayek's work to understand exactly what he meant, I don't understand why exactly there would be a shortage of "knowledge" as such in the socialist commonwealth, why would there be? All of the experts and technicians should still be there, so why wouldn't the productions board know the proper ratios and their production capacities? Now there may well be arrogance and misunderstanding on their part, but this could theoretically be minimized or corrected, especially if you're the bitch for democracy that many socialists are. But all of these are incentive problems inherent to government which are merely intensified by the disappearance of the market and an expansion of the government's role, these problems are practically the same as those which pervade with the modern state, which is obviously still functional no matter how poorly it functions.

At any rate, even if you allow for a state which functions perfectly, the fact is that the government cannot calculate without a market. If there's anything that Austrian value theory tells us it's that an is does not lead to an ought. Even if we know exactly what we can produce and how to produce it, the fact is that we still do not know what to produce. There's no reason why socialists could not come up with an arbitrary price system where, for instance, corn is worth 5 and peas are worth 3, but this would be totally arbitrary and wouldn't be subject to real consumer demand. The problem is calculation, that we don't know what we should produce just because we know what we can produce, and so the only rational way that this can be decided is if through the market, the "consumer's democracy", as Mises put it.

That's how I see the inherent problem with non-market socialism, if someone could expand on exactly what Hayek meant by the problem being one of "knowledge", then I'd appreciate it.

At last those coming came and they never looked back With blinding stars in their eyes but all they saw was black...
  • | Post Points: 65
Top 75 Contributor
1,389 Posts
Points 21,840
Moderator

@ Ari  and Neo

The points I am finding convincing for "knowledge" at the moment is this

1) Mises agreed with Hayek

2) The knowledge argument is a very specific part of the calculation argument.  It was dealing with specific problems in a specific context in a language that was being used at the time, after Mises main argument  (mainly market socialism and keynesianism.  It's just a subset of the same argument- dealing with the academic language of the time.  In other words, it is simply a footnote (an important footnote) to the calculation argument.

3) They both elaborate on the problem of uniqueness.  That is, knowledge is not a "Platonic" concept, or anything special to focus on.  It's an argument against quantative BS in the social sciences.

 

I'll elaborate further per request,I just thought it best to state that for now so I don't forget.

"As in a kaleidoscope, the constellation of forces operating in the system as a whole is ever changing." - Ludwig Lachmann

"When A Man Dies A World Goes Out of Existence"  - GLS Shackle

  • | Post Points: 5
Top 75 Contributor
1,288 Posts
Points 22,350

Neo - as I see it the problem of calculation is a problem about having the required knowledge concerning the costs of using different factors of production and in different ways - knowledge about costs which market prices provide.  This is how I took Yeager's argument that the problem of calculation is necessarily a problem about knowledge.

The Voluntaryist Reader: http://voluntaryistreader.wordpress.com/ Libertarian forums that actually work: http://voluntaryism.freeforums.org/index.php
  • | Post Points: 20
Top 50 Contributor
Male
2,439 Posts
Points 44,650
Neodoxy replied on Tue, Jul 10 2012 10:25 PM

If the prices of consumer goods are properly known then the prices of producer's more or less falls into place as long as the productive relationship between them is basically understood.

At last those coming came and they never looked back With blinding stars in their eyes but all they saw was black...
  • | Post Points: 50
Top 200 Contributor
Male
429 Posts
Points 7,400

I didn't read the whole thread, but just wanted to throw something out there.

To the extent a computer could plan an economy, wouldn't it be utilized by entreprenuers in the first place?

 

However, I don't really think a computer could, because the future is uncertain. But I think that ^ is additionally true. 

  • | Post Points: 5
Top 10 Contributor
Male
6,885 Posts
Points 121,845
Answered (Not Verified) Clayton replied on Tue, Jul 10 2012 11:03 PM
Suggested by gotlucky

The calculation argument flows from the nature of money, which is the universally exchangeable good. As such, it causes every good to be ranked against every other good in terms of its objective exchange value, that is, its money price. So many apples are worth so many oranges and you can figure out what that ratio is by simply looking at the money price of each and dividing.

Under barter, we would have to track the price of each type of good against every other type of good. In other words, when you walk into the grocery store to buy oranges, the grocery store would need to post the price of oranges in terms of every other good including, say, how many SUVs an orange exchanges for. But a "market price of oranges in terms of each and every other good" would still never emerge since there isn't exactly an SUV:orange market - that is, while Jones Grocery may exchange 10,000 oranges for an SUV, Smith's Grocery may only exchange 5,000. But if we look at the lawnmower price of oranges at Jones Grocery, we may find that it is 300 while over at Smith's Grocery it is 600. Not only will the specific amounts vary, but the order in which goods are traded against oranges at Jones Grocery will be completely different than the order in which they are traded against oranges at Smith's Grocery. This means that when you ask "What is the price of oranges", not only must you give that price in terms of every good, but you must give it in terms of every good as ranked by every seller. And keep in mind that since every individual has goods in his home - even if they are not formally "for sale" - at any time, any individual can choose to sell something. So, basically, everyone has to be treated as a "seller" and their ranking of the price of oranges against every other good must be included.

Of course, we're dealing in counter-factual absurdities but the purpose is to fully illustrate the role that money prices perform in allowing the individual to trade off every good against all other goods.

Socialism aims to eliminate money and substitute the central-planner's wisdom instead. Unfortunately, this wisdom cannot begin to meet the task at hand, even if they have market prices to cheat off. And as Mises showed, once you eliminate market prices to cheat off, the socialist system is doomed to immediate collapse. The reason is simple: by eliminating money, what you have actually accomplished is to eliminate indirect exchange.

The masses falsely imagine that the elimination of money will eliminate wealth inequality, not realizing that an equal share of the goods themselves will not magically fly into the hands of each and every citizen. Rather, the distribution will be handled by the commissar and even common sense tells us that the obvious outcome of this is that the commissar will keep more for himself and his friends than he gives out to others.

Clayton -

http://voluntaryistreader.wordpress.com
  • | Post Points: 5
Top 75 Contributor
1,288 Posts
Points 22,350

If the prices of consumer goods are properly known then the prices of producer's more or less falls into place as long as the productive relationship between them is basically understood.

Doesn't Mises allow for the assumption that the government knows consumer demand?  His argument is concerned with the uses of factors of production.

"Calculation in natura, in an economy without exchange, can embrace consumption goods only; it completely fails when it comes to dealing with goods of a higher order."

"The administration may
know exactly what goods are most urgently needed. But in so doing, it has only
found what is, in fact, but one of the two necessary prerequisites for economic
calculation. In the nature of the case it must, however, dispense with the other--
the valuation of the means of production. It may establish the value attained by
the totality of the means of production; this is obviously identical with that of all
the needs thereby satisfied. It may also be able to calculate the value of any
means of production by calculating the consequence of its withdrawal in relation
to the satisfaction of needs. Yet it cannot reduce this value to the uniform
expression of a money price, as can a competitive economy, wherein all prices
can be referred back to a common expression in terms of money. In a socialist
commonwealth which, whilst it need not of necessity dispense with money
altogether, yet finds it impossible to use money as an expression of the price of
the factors of production (including labor), money can play no role in economic
calculation."

The Voluntaryist Reader: http://voluntaryistreader.wordpress.com/ Libertarian forums that actually work: http://voluntaryism.freeforums.org/index.php
  • | Post Points: 20
Top 50 Contributor
Male
2,439 Posts
Points 44,650
Neodoxy replied on Tue, Jul 10 2012 11:52 PM

1. Where is that quote from?

2. I think that there he's talking about valuation in the absence of a numerical expression. If we take a simple example, let's say that there are three goods: Beds, chairs, and walking sticks. The government might know that what is most desired are beds, followed by the other two in order. However, this does not answer the question as to how valuable one bed is, in the production process how many materials are to be foregone to produce one bed? This cannot be known if it is not expressed in a numerical manner.

This is also why Mises states that if all factors of production were entirely specific then socialism would be possible. In a world of specific factors there are no opportunity costs, and therefore no calculable prices on factors as such. Therefore production could simply be undergone without regard to any form of calculation except for those inherently involved with the production process, everything could just be put to work to give people as much of something as they would demand. As soon as you throw in a few important non-specific factors: iron, labor, wood, then the entire thing falls apart, because these things can be put to many different uses, but which ones should they be put to? Beds or walking sticks? I sure as hell don't know, neither would socialists planners.

 

At last those coming came and they never looked back With blinding stars in their eyes but all they saw was black...
  • | Post Points: 20
Top 75 Contributor
1,288 Posts
Points 22,350

It's from Economic Calculation in the Socialist Commonwealth, and yes - that's what he means.  But to return to the original topic, you've pointed out yourself that it is a problem of having the knowledge for calculation that prices provide.  This is why Yeager, following Hayek and (he argues) Mises, says that the calculation problem is a knowledge problem.

The Voluntaryist Reader: http://voluntaryistreader.wordpress.com/ Libertarian forums that actually work: http://voluntaryism.freeforums.org/index.php
  • | Post Points: 5
Top 75 Contributor
1,133 Posts
Points 20,435
Jargon replied on Wed, Jul 11 2012 12:42 AM

Sorry Neo but this is straight wrong. Firstly how are the prices of consumer goods known while higher order ones are not? May we assume that only consumer goods industries are private? My analysis will rest on that assumption, though it is doubtful in the extreme that business as a profit/loss based organization would exist in the absence of production-good prices. How would higher order goods even form prices in your scenario? It's kind of an important question but here we go:

Firstly, your statement assumes that there is one 'correct' capital path, from starting resources to finished product. This is not true. The role of the entrepeneur is to create a constellation of capital which leads to the product in the most profitable path. There is no correct answer to such a question, only continually arriving 'waves' of data. Not every constellation for the same product must be the same, even if we assume away location and decision-making error. Once we re-introduce those, it is even less clear what is the proper capital constellation to arrive at a certain good.

Secondly, the previous analysis did not include any discussion on the shifting of prices. If we assume as mentioned before, then consumer prices may shift in accordance with consumer demand. How then can there be a rational decision in response to higher reported sales? Remember profit/loss. How is loss calculated? When loss is incalculable, when there are no prices for higher order goods, no response to changes in first order goods can be rationally informed. Accounting for additions to the production structure is not possible. The planner can't know that an additional piece of machinery will be more costly than the expansion of sales it may bring. This is what Mises meant by 'groping blindly' (or something to that effect).

Thirdly, what about the producer of higher order goods? The final good he produces, he regards as a consumption good. His customers purchases of it are his income. So when there are no prices for these goods, how will the supply or even existence of particular units of/in the vast array of capital goods be determined?

Granting knowledge of consumer prices, not only would there be entrepeneurial blindness in a structure of production for first order goods, but even worse inter-blindness among higher order good producers. One may then presume that the needs of producers, without prices to guide the production of producer goods, would not be met in sufficiently inexpensive capital goods, thus further damning the whole system, making it even less possible for consumer goods industries to be profitable.

How is the productive relationship between items basically understood? This sounds like a lot of rebuttals heard when the calculation problem is introduced, a la "Hey it's easy. Engines, wheels, fuel, leather, and steel = Automobile. What's so complicated about that, huh?"

I can't post anymore because I'm not supposed to speak english and I've already been naughty. Reread Mises.

Land & Liberty

The Anarch is to the Anarchist what the Monarch is to the Monarchist. -Ernst Jünger

  • | Post Points: 65
Page 1 of 4 (52 items) 1 2 3 4 Next > | RSS