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Can someone summarize the economic calculation problem?

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fegeldolfy posted on Wed, Nov 7 2012 8:23 PM

I'm trying to explain it to a fried on facebook, but I don't understand it that well.

 

Thanks.

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there are a lot of problems when trying to calculate economics...

what are you asking about?

Eat the apple, fuck the Corps. I don't work for you no more!
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An idealist is one who, on noticing that roses smell better than a cabbage, concludes that it will also make better soup. -H.L. Mencken
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Well this my comment (I haven't hit enter yet), so I was wondering if i got anything wrong:

 

Actually, technically Communism is the one where the government steps back and Socialism is the one where government rules and private ownership rights are gone. Both of these systems must fail because they can't calculate economically. That is, neither system can rationally allocate scarce resources to their proper means. Under capitalism, and I mean actual capitalism not the crap we have today, individuals use the price mechanism-they determine the value of a good based on how much they are willing to pay, or, if they will pay at all. What this does is give market signals that indicate where scarce resources ought to go. Under a socialist/communist economy, where decisions are made by central planners or "the people" (i.e., central planners) this can't happen, because no central planner, no matter how nice they are can possibly know the constantly changing opinions and valuations of each individual in a society, and will thus be unable to allocate resources to their proper means.

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Very basically: the economic calculation problem arises due to a lack of a common unit by which to compare the uses of different factors of production (inputs).  Without a common unit to compare different kinds of inputs, production cannot be undertaken efficiently.

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It looks like you've got it right to me.

An idealist is one who, on noticing that roses smell better than a cabbage, concludes that it will also make better soup. -H.L. Mencken
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For a good fried facebook, try here:

http://smilingdavesblog.wordpress.com/2012/08/11/mises-calculation-problem-in-simple-language/

 

My humble blog

It's easy to refute an argument if you first misrepresent it. William Keizer

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Under a socialist/communist economy, where decisions are made by central planners or "the people" (i.e., central planners) this can't happen, because no central planner, no matter how nice they are can possibly know the constantly changing opinions and valuations of each individual in a society, and will thus be unable to allocate resources to their proper means.

No, that's not the economic calculation problem.  In framing it, Mises grants that the planners know all opinions and valuations of each and every individual.  But those valuations only apply to final goods and not to the factors of production, and therefore the rational calculation of the inputs remains impossible.

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You seem to pretty much have it down. With this said I'd forego trying to actually define socialism or communism in terms of "absolute definitions" like the ones you seem to use. The words mean so many things to so many people that they are pretty much meaningless... I wish I had the time back which I've spent arguing with socialists over the definition of socialism based upon the definition I've acquired from other socialists. With this said your definition of the two words is fine except that you need to elaborate upon your definition of communism.

I've also rarely seen someone try to extend the calculation problem on to decentralized socialisms like libertarian socialism. We reach a similar outcome but through a different way.

Anyway, things to keep in mind in trying to understand the calculation problem:

1. It doesn't have anything to do with the benevolence of socialist dictators or how democratic the system is

2. It doesn't have anything to do with technical knowledge (the number one mistake made by socialists)

3. The calculation problem ultimately exists because productive inputs have multiple uses. If every input, be it land or labor, had only one productive function then the socialist society would be perfectly possible. However most things have many use values, they are non-specific. Therefore you cannot calculate the opportunity cost of any productive input because utility is subjective. You can't say that productive input X can provide Y units of utility.

Aristippus,

Don't think that I've forgotten about the disagreement that we had over the calculation debate and market socialism. Some day I will return to that.

At last those coming came and they never looked back With blinding stars in their eyes but all they saw was black...
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This is a brief description of the problem, Socialism by Mises

Eat the apple, fuck the Corps. I don't work for you no more!
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Neodoxy - Oh I don't.  When I saw your name appear as the last poster, I thought that the time had finally come.  But I don't disagree with anything you've said above.

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Well I already posted it, but if anyone responds to it with an objection that I can't answer I'll post it here.

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I'm betting on them saying that new technology will somehow solve it.

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A brief summary:

Uncertainty. The future is uncertain - no one knows for sure how things will turn out. For example, a farmer might plant a drought-tolerant crop because there was a dry year last year and then his fields get flooded in unseasonal rains this year. Not only does impersonal Nature change unpredictably, but human preferences also change unpredictably. Last year, there was high demand for red clothing, this year, there is high demand for blue clothing.

Trade. When people trade voluntarily, we know they are better off because they reveal their true preferences by acting on them.

Money. The emergence of a widely used medium of exchange (money) is linked to and facilitates the process of indirect exchange. As the monetary good becomes universal, everything is priced in terms of money which permits the calculation of profit and loss for almost every line of production.

If you abolish trade under central-planning, you do not know if you are making people better or worse off. But let's say you could somehow magically know this.

If you abolish money, you cannot calculate profit and loss, at least, it becomes infeasible to do so on anything more than a very ad hoc basis.

While both of these are fatal problems in any economic proposal whose aim is to abolish trade or abolish money, these are still not the economic calculation problem, which is more serious yet.

The economic calculation problem arises from the abolition of entrepreneurship. Reference the first point above: "Uncertainty". Nobody knows what is the right combination of goods which will be demanded in the future, and what is the correct configuration of the time structure of production to best meet those future demands. The entrepreneurial market process discovers this mix of consumer production and capital structure by means of trial and error, that is, ventures that either succeed or go bankrupt.

To wave this aside is to pretend that there is no uncertainty, which is an absurd hubris.

It is also a crucial point that true preferences are only revealed in exchange. By definition, the bureaucrat who will supposedly get promoted or demoted on the basis of his job performance in allocating economic resources is not acting in an entrepreneurial role. There is only a weak connection - if any - between the bureaucrat's job-performance and his advancement. In the market, on the other hand, meeting customer demand is virtually the definition of business success. If you do not satisfy customers' demands, you will soon go bankrupt.

Clayton -

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Damn Aristippus, you and this thread have peaked my interest again and now I really want to go back and revisit the entire issue tonight but I don't have the time.

It's that sad part of the evening where I have to sign off from the internet and do some real life things

At last those coming came and they never looked back With blinding stars in their eyes but all they saw was black...
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