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
No prices for means of production means no rational production for means of production. Production of consumer goods is dependant on producer's goods. When producer's goods are not produced rationally there are shortages of producer goods in needed places and excesses in unneeded places; wastes of energy. Capital complementarity cannot be acknowledged in such a system.
What good is 50 tons of pig iron if you're missing a certain copper wire or aluminum rod which pulls a machine together? And when the availability of such things requires a redrawing of plans?
The Anarch is to the Anarchist what the Monarch is to the Monarchist. -Ernst Jünger
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.
Under conditions of market socialism individuals are given a (typically equal amount of) ration book coupons which are used to bid for goods and resources in state-owned firms directly supplying consumer needs (in short, the nationalized first-order producers). Once these ration prices are established you can then derive the marginal "revenue" product of each factor in the various production processes through typical marginal analysis. i.e. you have the nationalized industries "play at the market". Much like in a private economy you would simply arrange the factors such that each earns the maximum amount of "revenue" possible given the prevailing "market conditions". Thus, the market socialists claim that government ownership of the means of production and income/purchasing power equality can be maintained part and parcel with a rational allocation of the factors of production (land, labor, and capital). The market socialists also note how this state of affairs is more efficient from a time perspective because it does away with active bidding for productive factors by capitalist-entrepreneurs.
While this analysis seems correct on a superficial level, and it is certainly superior to the Marxian claim that all relevant prices in an economy can be calculated by appealing to the value of labor imputed in each product, it fails to account for how the problem of calculating the natural rate of interest will be solved in an economy where individuals supplying present goods in exchange for future goods is impossible by definition. As a result, the planning authorities will be unable to gauge how "long" their citizens wish the structure of production to be and, therefore, it is extremely likely that they will fail in providing for both present and future needs. The Soviet Union under Stalin, for example, engaged in a massive lengthening of the structure of production via mass industrialization at the cost of depriving consumers of even the most basic of present goods like food, clothing, and housing, resulting in widespread starvation and poverty. Naturally, problems of innovation and motivation apply to the market socialist economic system just as they do to the Marxian economic system.
In regards to the original posters question on economic knowledge, I think that it's highly important and is best communicated through the price system (Hayek's example of a mine collapsing on the other side of the world and this explicit knowledge being translated to business owners implicitly via an increase in the unit price of the mine's output comes to mind).
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?
This is scientific knowledge, and it is readily available in both capitalism and the various forms of socialism. Hayek's main point is that relevant information primarily takes the form idiosyncratic and "tacit" knowledge, as opposed to this sort of scientific knowledge. The main objective at hand is not to figure out how to produce something but (a) whether or not we should produce it at all and (b) what is the "correct way" to produce it (figuring out the proper recipe, so to speak). In other words, what is the opportunity cost? Once the opportunity cost is known (perfect information) across the board, then the question becomes a problem of simple arithmetic.
This argument is far broader than Mises' argument, which really only applied to Marxian socialism (where prices or pseudo-prices do not exist in any form). Hayek's argument is really just an elaboration. Much to do about nothing.
"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."
Once the opportunity cost is known (perfect information) across the board, then the question becomes a problem of simple arithmetic.
That brings up an excellent point, Esuric; I've seen many a paper where the author assumes perfect/symmetrical information and then seeks to analyze firm, consumer, factor owner, or whatever behavior in the context of a price system. Why would you even need a price mechanism if knowledge of all facets of the economy are already known by everyone?
Rcder: Much like in a private economy you would simply arrange the factors such that each earns the maximum amount of "revenue" possible given the prevailing "market conditions". Thus, the market socialists claim that government ownership of the means of production and income/purchasing power equality can be maintained part and parcel with a rational allocation of the factors of production (land, labor, and capital). The market socialists also note how this state of affairs is more efficient from a time perspective because it does away with active bidding for productive factors by capitalist-entrepreneurs.
Much like in a private economy you would simply arrange the factors such that each earns the maximum amount of "revenue" possible given the prevailing "market conditions". Thus, the market socialists claim that government ownership of the means of production and income/purchasing power equality can be maintained part and parcel with a rational allocation of the factors of production (land, labor, and capital). The market socialists also note how this state of affairs is more efficient from a time perspective because it does away with active bidding for productive factors by capitalist-entrepreneurs.
I've never heard this before: that entrepeneur's tasks are to seek maximum revenue. I'm only familiar with the notion that they are profit maximizers as Mises outlined. That said, in an accounting sense, profit is the positive difference between total revenues and total costs. When producer's goods have no price, costs are incalculable, so profits are incalculable, and the discovery of the most profitable endeavor cannot even be attempted.
Secondly, it is not his task to maximize profit (or even revenue) in accordance to prevailing (I take it you mean current) market conditions. Mises stressed that profit was the entrepeneur's anticipation of the future. As such it is not necessarily the most profitable scenario in the immediate-term that is the 'most profitable', seeing as most entrepeneurs choose to hold their businesses longer than the the first 'data set' of the market. The issue then becomes an issue of capital formation in accordance with the entrepeneur's expectations of the future. In this case there is not a clearly 'correct' path, as there most definitely is when one is dealing with only the 'data set' of a single moment in the market. There may be different formations for different entrepeneurial time preferences, and on top of that formations which anticipate the future better than other ones. What this means is that planners, if they have any ambition, will be trying to arrange for the future before it arrives, only without the guidance of prices on factors, labor included I believe.
Jargon,
Entrepreneurs do seek the largest profit possible given current market conditions, but factor owners seek maximum "revenue" (the highest DMVP possible).
Factor owners in the sense of capitalist/shareholder? Could you maybe expand on the difference between the two? And doesn't the entrepeneur traditionally hold control of given resources, whereas capitalists expand the pool from which the entrepeneur draws? I would assume that there would be appointed managers acting as entrepeneurs.
And did you read the rest of my post because it seems you think that I agree with you that entrepeneurs seek profit from 'given market conditions'. I take the term 'given market conditions' to mean the current (as current as current can be) 'data set'.
@Dave
"And yet Mises assumes both those things."
Are you sure that he does? Can you cite where he does this? His main argument is against traditional socialism in which there are no prices, merely direct distribution except in those cases where he addresses market socialism which have always seemed like much less devastating criticisms to me.
@Vive and Esuric
So could you explain to me the differences between Hayek's and Mises' arguments? The way that Esuric explained Hayek's argument was exaclty how I understood Mises'
Neo,
1. ...you know consumer demand...
From Chapter One of Economic Calculation in the Soc. C.:
The principle of exchange can thus operate freely in a socialist state within the narrow limits permitted. It need not always develop in the form of direct exchanges. The same grounds which have always existed for the building-up of indirect exchange will continue in a socialist state, to place advantages in the way of those who indulge in it. It follows that the socialist state will thus also afford room for the use of a universal medium of exchange–that is, of money. Its role will be fundamentally the same in a socialist as in a competitive society; in both it serves as the universal medium of exchange. Yet the significance of money in a society where the means of production are State controlled will be different from that which attaches to it in one where they are privately owned. It will be, in fact, incomparably narrower, since the material available for exchange will be narrower, inasmuch as it will be confined to consumption goods...
The relationships which result from this system of exchange between comrades cannot be disregarded by those responsible for the administration and distribution of products. They must take these relationships as their basis, when they seek to distribute goods per head in accordance with their exchange value. If, for instance 1 cigar becomes equal to 5 cigarettes, it will be impossible for the administration to fix the arbitrary value of 1 cigar = 3 cigarettes as a basis for the equal distribution of cigars and cigarettes respectively...
Variations in exchange relations in the dealings between comrades will therefore entail corresponding variations in the administrations’ estimates of the representative character of the different consumption-goods. Every such variation shows that a gap has appeared between the particular needs of comrades and their satisfactions because in fact, some one commodity is more strongly desired than another...
The administration will indeed take pains to bear this point in mind also as regards production. Articles in greater demand will have to be produced in greater quantities while production of those which are less demanded will have to suffer a curtailment.
Bottom line, sounds to me like there is a thriving price system for consumer goods, with numerical values in money, and that the powers that be will have to take this into account when they schedule what to make next.
That whole chapter goes on and on about how the problem is no pricing for production goods, since one person owns them all, and he can't sell them.
Here's another quote from Chapter 2:
...All this is necessarily absent from a socialist state. 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.
2. ...you know the technical knowledge...
I've heard this in Joe Salerno's lecture on this page: http://www.libertyclassroom.com/mises/
In addition, the whole tenor of the book Econ Calc in the Soc C is about economic ignorance that the socialists will face, never a word mentioned about technical ignorance. The socialists will know every possible way to skin a cat; they will not know which is the most economical way.
3. Now that I think about it, that quote from Chapter 2 is saying my reasoning is wrong. I assumed that if you know what's needed [and how urgently] , and how to make it, that's good enough. Mises is clearly saying in that quote that it isn't. Like I said , I have to think about this more. There are wheels within wheels.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
I think the key to his argument is outlined in this passage:
Picture the building of a new railroad. Should it be built at all, and if so, which out of a number of conceivable roads should be built? In a competitive and monetary economy, this question would be answered by monetary calculation. The new road will render less expensive the transport of some goods, and it may be possible to calculate whether this reduction of expense transcends that involved in the building and upkeep of the next line. That can only be calculated in money. It is not possible to attain the desired end merely by counterbalancing the various physical expenses and physical savings. Where one cannot express hours of labor, iron, coal, all kinds of building material, machines and other things necessary for the construction and upkeep of the railroad in a common unit it is not possible to make calculations at all. The drawing up of bills on an economic basis is only possible where all the goods concerned can be referred back to money. Admittedly, monetary calculation has its inconveniences and serious defects, but we have certainly nothing better to put in its place, and for the practical purposes of life monetary calculation as it exists under a sound monetary system always suffices. Were we to dispense with it, any economic system of calculation would become absolutely impossible.
WTF?
I always thought that Mises was critiquing socialism based upon a model of distribution only and that any sort of indirect exchange was the area of his critique of market socialism, that's certainly what his argument in HA seemed to be...
Any way, Mises has got some explaining to do, because as Rothbard made very clear non-specific factors only gain set prices through their possible monetary yield in other areas of production in the process of turning out consumer goods, which in turn makes their opportunity costs. If this occurs then things can be priced without any difficulty and if prices form based upon consumer demand then calculation follows.
So what is the problem with socialism?
My current guess would be that it has inherently to do with the matter of estimation of the effects of the shifting of factors will have upon the prices of the consumer goods and therefore the determination of where these should go, what will the effect be of an increment of X additional unit upon the price of product Y?
@Aristippus
What?? But in the first passage quoted by Dave he assumed that money exists and is active in the pricing of consumer goods. If this is the case then the effect of the railroad upon the prices of certain goods could be seen as opposed to the reduction in prices that could be achieved if the relavent building materials were used in other areas... Couldn't it?
Hopefully Esuric will answer, as he's way better at this than me
ultimatley, you should recognize it as the same argument.
After Mises book on socialism new problems arose: such as the market socialists and the keynesians. Mises and Hayek were absolutel confused by the fact that the market socialists used economic language to try to explain socialism. So they thought that they simply weren't clear enough in their argument before.
This sent Hayek back to try to speak the language and address certain things the market socialists were bringing up. Hayek had to point out that there were all types of knowledge (much of it is not communicated, so this hurts statistics) and that markets and prices acted as "knowledge surrogates", or to be fancy "epistemological ecologies". Something Mises hinted at when he called them "aids to the mind".
Essays by Hayek that reflect this are:
Economic Calculation in a Socialist Common Wealth
Economics Plus Knowledge
The Use of Knowledge and Society
All of which can be found in his book Individualism and the Economic Order if that kind of thing sounds interesting to you.
Also,maybe to help some up with what I am getting at:
You can't talk about rational calculation without prices. So it is the same argument
EDIT:
Damn two accounts, this is going to give me grief. This is Vive la Insurrection...and this is a continuation off of my last post
Ok: The problem of economic calculation under Socialism refers to the inability to compare relative costs for the uses of factors of production due to a lack of a common unit with which they could be compared. Let's have a look at Mises' railroad example, but take a step back to the question 'should it be built at all?'. We'll assume that we need to transport x amount of goods from point a to point b and that we want to do this in the least costly way. What, in fact, is the least costly way of doing this? We could get people to take it by hand, we could breed horses to pull it by cart, we could build automobiles, or a railroad, or an aeroplane, or a ship. But how can we know which is the least costly? By what unit would we measure these costs? You might say that you could use time, which then falls back on technical efficiency. But the question remains - what are we comparing as efficient? It is not simply a matter of technical efficiency, since we need to deploy scarce, and where applicable non-specific resources in different amounts and fashions in order to do any of these things, and because they are scarce we must necessarily forego their other uses by employing them. So it is a question of the opportunity costs both of scarce time and scarce, non-specific resources. Technical efficiency, therefore, does not approach the problem of comparing costs.
If you think this doesn't hold because there is in fact a common unit of measuring costs, can you please explain what this is? Or, if you think a common unit is unnecessary, point that out instead.