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

Can someone summarize the economic calculation problem?

rated by 0 users
Answered (Not Verified) This post has 0 verified answers | 85 Replies | 8 Followers

Top 500 Contributor
232 Posts
Points 4,905
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.

  • | Post Points: 110

All Replies

Top 50 Contributor
2,679 Posts
Points 45,110

Fool on the Hill:

I never said that the first sentence was true. If you would prefer to justify that one instead of the second one, go ahead.

There are many key differences between central planners and entrepreneurs that make it so that central planners cannot outpredict entrepreneurs, such as the lack of the profit motive or just plain old lack of knowledge. Entrepreneurs don't all predict correctly, but they have the incentive to predict correctly and they spend time gathering the relevant knowledge.

Fool on the Hill:

I didn't know "autistic" exchange was contrasted with voluntary exchange. I had always thought it was contrasted with interpersonal exchange. I had thought either could be voluntary.

Voluntary exchange implies interpersonal exchange. Alone, the word "voluntary" does typically mean "of one's free choice", but I've never seen "voluntary exchange" used to include autistic exchange, only interpersonal exchange.

Fool on the Hill:

I find the use of the word exchange to include "autistic" exchange to be confusing. No one talks like that outside of the Austrian community. Why not just use the term action? Anyway, that issue has been cleared up.

I agree with you, but when in Rome...

Fool on the Hill:

 

I don't think you understand what I am getting at. Your sentence is mixing up tenses. Even though "were" often refers to the past, here when it is followed by an infinitive, it communicates something about the conditional future. The sentence should read in one of the following two ways:

1. If you were to buy the CD, then you would benefit.

2. If you bought the CD, then you benefited.

Do you see the difference?

If I were to buy the CD, then I would not benefit.

There's nothing contradictory about that sentence. That's precisely the type of answer I would expect if I asked you why you weren't planning on buying the CD tomorrow.

My point had to do with your original statement:

Fool on the Hill:

 

This seems to be an argument of the form that I've seen many here make: "everyone benefits from voluntary exchange, therefore we should all engage in voluntary exchange." The problem with this argument should be obvious (in some ways, it's similar to the ontological argument). When we say that everyone who engages in voluntary exchanges benefits, we do so because we are taking those exchanges as actual. That is, if we see someone do something, we must conclude that he expected to benefit. The problem comes in when we try to transfer that conclusion to hypothetical exchanges. I could imagine going into Best Buy tomorrow and buying the latest Katy Perry CD. Thus this is a hypothetical exchange. If I actually do go into Best Buy tomorrow and buy the CD, then you could conclude that I expected to benefit from doing so. But at this moment, as I contemplate going to Best Buy tomorrow, as I imagine walking in and buying the CD, I cannot conclude that this voluntary exchange would actually benefit me. In fact, since I prefer to download the CD, I can conclude that such a voluntary exchange would not benefit me. Thus you can see that there is nothing beneficial in the pure form of a voluntary exchange. Rather the conclusion we draw about the expectation to benefit comes from the exchange's form of actuality. Thus, since libertopia consists purely of hypothetical voluntary exchanges, we can't conclude that anyone can expect to benefit from any such exchanges!

 
This has to do with counterfactual thinking. Humans do this all the time. Whatever you end up doing is what you consider to have benefitted you. However, when talking hypothetically, we can imagine you benefitting if you were to have acted hypothetically...your conclusion completely ignores the existence of counterfactual thinking.
 
So, in the real world, whatever you have actually chosen, we can say that you benefitted. But in the hypothetical or counterfactual world, you don't have to actually do these things for us to make claims. You only have to have done them in the hypothetical world for us to know that you would benefit. In other words, if - in a hypothetical scenario - I were to buy an orange, then we know that I benefitted in the hypothetical scenario. In the real world, I have not purchased the orange.
 
Your last statement in that paragraph completely ignores what counterfactual thinking is.
  • | Post Points: 20
Top 150 Contributor
664 Posts
Points 13,095

There are many key differences between central planners and entrepreneurs that make it so that central planners cannot outpredict entrepreneurs, such as the lack of the profit motive or just plain old lack of knowledge. Entrepreneurs don't all predict correctly, but they have the incentive to predict correctly and they spend time gathering the relevant knowledge.

I don't think there is anything I can say to this that I didn't already ask in a clearer context in response to Clayton. Namely, what "revealed preferences" does the market uniquely have that allows entrepreneurs to predict future demand?

So, in the real world, whatever you have actually chosen, we can say that you benefitted. But in the hypothetical or counterfactual world, you don't have to actually do these things for us to make claims. You only have to have done them in the hypothetical world for us to know that you would benefit. In other words, if - in a hypothetical scenario - I were to buy an orange, then we know that I benefitted in the hypothetical scenario. In the real world, I have not purchased the orange.

When considering these hypothetical scenarios, I was not talking about the expected benefit to my hypothetical self but to my real self. Anyway, I think we are straying from the topic at this point. Perhaps this disagreement is just a misunderstaning.

Your last statement in that paragraph completely ignores what counterfactual thinking is.
Out of curiosity, how would you categorize the last sentence?
"The limits of my language mean the limits of my world." ~ Ludwig Wittgenstein
  • | Post Points: 20
Top 50 Contributor
2,679 Posts
Points 45,110

I don't think there is anything I can say to this that I didn't already ask in a clearer context in response to Clayton. Namely, what "revealed preferences" does the market uniquely have that allows entrepreneurs to predict future demand?

I think you are under the impression that I am saying that entrepreneurs can "know" the future. "Predict" does not mean "to know the future". It means to "Say or estimate that (a specified thing) will happen in the future or will be a consequence of something".

So I don't really see what the relevance of your question is. I'm not claiming that entrepreneurs know the future. I'm claiming that they are better at getting it right. What are your reasons for claiming otherwise?

EDIT: Clayton's post below is excellent.

When considering these hypothetical scenarios, I was not talking about the expected benefit to my hypothetical self but to my real self. Anyway, I think we are straying from the topic at this point. Perhaps this disagreement is just a misunderstaning.

Then your argument got even more fallacious. To be clear, this was your conclusion:

Thus, since libertopia consists purely of hypothetical voluntary exchanges, we can't conclude that anyone can expect to benefit from any such exchanges!

Like I said, you do not understand counterfactual thinking.

Out of curiosity, how would you categorize the last sentence?

It's a non sequitur. Hypothetical voluntary exchanges fall under counterfactual thinking. If your hypothetical self considers something, then it is your hypothetical self that is expected to benefit. You cannot mix your hypothetical self with your actual self. The two are not related. 

  • | Post Points: 20
Top 10 Contributor
Male
6,885 Posts
Points 121,845

But if things are uncertain, then Business A who goes on producing red clothing with a government subsidy has just as much of a chance at getting future demand right than does Business C who decides to produce blue clothing. Perhaps you are saying that uncertainty is only relevant in the long-term but not in the short-term? So if people are buying blue clothes today, we can assume that they will buy blue clothes tomorrow, but we can't assume that they will buy blue clothes next year? If uncertainty applied in the short-term, then I don't see how transferring assets from A to C would be of any help. By the time they got there, there would be an equally likely chance that the demand would have shifted back to red clothes.

...

Once a preference is revealed, it is already too late to do anything about it.

No, it's not an "engineering problem" or "optimization problem", it's a structural problem - we already know that red clothing is not being demanded at the artificial level created by the government subsidy by virtue of the existence of the government subsidy! This has absolutely nothing to do with saying "Oh, if we did it this way, then we could predict future demand better."

Human behavior is plenty predictable. People need to eat. People need clothes. They need haircuts. They need to go to the doctor. What is not predictable is the relative makeup of consumer demand (how many apples versus how many oranges) and the capital structure which can best meet consumer demand. And to the Chicago conception of the free market as a kind of "omniscience of the crowd", the fact is that the market always gets it wrong! Every year, either too many oranges or too few apples or ________ will be produced. Your guess is as good as mine on what these ratios should be and the farmer's guess is little better. The speculators that work the futures markets do nothing but make these kinds of guesses... yet many of them will lose their shirt in the long-run and have to find other employment. The free market is not omniscient. It frequently gets the wrong answer. But we just don't know it's the wrong answer like we know government subsidy is the wrong answer. And, unlike central planning, the market has a clearing mechanism that allows the damage done by wrong guesses to be minimized. Price spikes (so-called gouging) plays the opposite role. And, over time, we are constantly learning from the market process whereas learning is not possible within a central planning system. The same mistakes will keep occurring ad nauseum and every attempt to correct those mistakes will only result in other, unintended consequences.

But surely the calculation argument is not concerned with past actions but with hypothetical future ones. Wouldn't then the psychology of decision making be a better reference point in analyzing the concepts than the form of revealed preferences that are only applicable to past actions?

Not for catallactics, no. But catallactics has nothing to do with helping entrepreneurs make better guesses. If you want to be an entrpreneur, yeah, I think it makes sense to say you better at least be an amateur psychologist. You have to have some kind of intuitive grasp of your customers' minds.

Clayton -

http://voluntaryistreader.wordpress.com
  • | Post Points: 35
Top 75 Contributor
1,133 Posts
Points 20,435
Jargon replied on Thu, Nov 15 2012 8:47 PM

In his criticism of Socialist Planning, Mises concedes that the planning board has perfect technical knowledge of all avenues of production and all of the tastes of the consumers in regards to final consumers' goods.

The real problem lays in the factors of production; how to rationally allocate inputs toward an output. For instance, how can a socialist planner know, say if he were going to build a factory, where to build it, how many engineers, managers, simple-laborers and with how much machinery to equip it? In a pricing system, the entrepeneur would be guided by the cost of energy, various classes of labor and the machinery. The socialist planner has no way to aim toward 'breaking even' on his projects. In regards to profits and losses, his decisions are completely arbitrary. There is no way for him to acknowledge the underlying scarcity and quality of the resources he is using.

Now, so far, we have only applied our consideration one 'layer' deep. We are assuming a given stock of capital goods, whose prices, if they could be ascertained by the planner, reflect their underlying scarcity. What happens when that factory we were discussing is producing factors of production? How do they know in what quantity and quality to produce them or if they should be produced at all? What happens when the relative quantities between the factors of production to be allocated by the planners have gotten infinitely far away from the relative quantities they would be in a price-based system? Here guessing becomes an even less probable path towards rational allocation. The problem compounds on itself in a way that is hard to appreciate without a long reflection.

This type of scenario was manifested in the Soviet Union when they made a crapload of tractors, but no replacement parts. So lots of farms would have tractors, but they would break down all the time and there would be nothing to fix the situation with, because the producers of final goods had no way to submit their preferences for producers goods. That said, Soviet Russia was able to import much of its machinery during the regime, so it didn't suffer completely from the calculation problem, but for everything that it didn't, it was hurt.

Land & Liberty

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

  • | Post Points: 20
Top 150 Contributor
664 Posts
Points 13,095

It's a non sequitur. Hypothetical voluntary exchanges fall under counterfactual thinking. If your hypothetical self considers something, then it is your hypothetical self that is expected to benefit. You cannot mix your hypothetical self with your actual self. The two are not related.

But it's my real self that is doing the considering as well as the expecting.

"The limits of my language mean the limits of my world." ~ Ludwig Wittgenstein
  • | Post Points: 20
Top 50 Contributor
2,679 Posts
Points 45,110

Any counterfactual thinking you engage in is just you thinking. The only action you are engaged in is thinking. You are imagining what you expect will happen. It hasn't happened to your actual self.

  • | Post Points: 5
Top 150 Contributor
664 Posts
Points 13,095

Clayton: No, it's not an "engineering problem" or "optimization problem", it's a structural problem - we already know that red clothing is not being demanded at the artificial level created by the government subsidy by virtue of the existence of the government subsidy!

I'm not sure I understand. It almost sounds like you're saying that if we're playing roulette, the government is the one who bets on the same number every round, whereas the entrepreneur changes numbers every round. But if this is the case, then it doesn't follow that the government is getting it wrong by sticking to the same number. The chances are the same whether one changes numbers or not.

But we just don't know it's the wrong answer like we know government subsidy is the wrong answer. And, unlike central planning, the market has a clearing mechanism that allows the damage done by wrong guesses to be minimized. Price spikes (so-called gouging) plays the opposite role. And, over time, we are constantly learning from the market process whereas learning is not possible within a central planning system. The same mistakes will keep occurring ad nauseum and every attempt to correct those mistakes will only result in other, unintended consequences.

What kind of things do we learn from the market process that can prevent future mistakes?

"The limits of my language mean the limits of my world." ~ Ludwig Wittgenstein
  • | Post Points: 5
Top 150 Contributor
664 Posts
Points 13,095

Jargon: This type of scenario was manifested in the Soviet Union when they made a crapload of tractors, but no replacement parts. So lots of farms would have tractors, but they would break down all the time and there would be nothing to fix the situation with, because the producers of final goods had no way to submit their preferences for producers goods.

But just because there was no mechanism for farmers to communicate their preference for producers goods doesn't mean that the price mechanism is the only mechanism possible. The fact that you can judge that there was not enough parts despite the absence of market data proves that there are other means of making such judgments.

"The limits of my language mean the limits of my world." ~ Ludwig Wittgenstein
  • | Post Points: 50
Top 50 Contributor
2,258 Posts
Points 34,610
Anenome replied on Fri, Nov 16 2012 10:50 PM
 
 

Fool on the Hill:

Jargon: This type of scenario was manifested in the Soviet Union when they made a crapload of tractors, but no replacement parts. So lots of farms would have tractors, but they would break down all the time and there would be nothing to fix the situation with, because the producers of final goods had no way to submit their preferences for producers goods.

But just because there was no mechanism for farmers to communicate their preference for producers goods doesn't mean that the price mechanism is the only mechanism possible. The fact that you can judge that there was not enough parts despite the absence of market data proves that there are other means of making such judgments.

Regardless of what he said or meant, a price system and freedom to own the tractor is faaaar more efficient than lodging requests for producer's good. So sure, it's not the only way to do it, but it's a far better way than any other way anyone else has ever come up with. And there's unlikely to ever be a better one.

 
Autarchy: rule of the self by the self; the act of self ruling.
  • | Post Points: 20
Top 500 Contributor
228 Posts
Points 3,640
Blargg replied on Fri, Nov 16 2012 11:12 PM

But just because there was no mechanism for farmers to communicate their preference for producers goods doesn't mean that the price mechanism is the only mechanism possible. The fact that you can judge that there was not enough parts despite the absence of market data proves that there are other means of making such judgments.

A unique system for farming only would divorce farming resource decisions from the rest of the market. The price system communicates these things within farming, *and* evaluates their relative importance to the rest of the market.

  • | Post Points: 5
Top 150 Contributor
664 Posts
Points 13,095

Regardless of what he said or meant, a price system and freedom to own the tractor is faaaar more efficient than lodging requests for producer's good. So sure, it's not the only way to do it, but it's a far better way than any other way anyone else has ever come up with. And there's unlikely to ever be a better one.

Perhaps corporations should start applying this reasoning to their internal operations and make their employees pay for all of the equipment they need for their job.

"The limits of my language mean the limits of my world." ~ Ludwig Wittgenstein
  • | Post Points: 20
Top 10 Contributor
Male
5,255 Posts
Points 80,815
ForumsAdministrator
Moderator
SystemAdministrator

They do in a way via profit centres internal to the firm.  But no one is prohibited from competing with them by forming a cooperative, anyway. Whether or not corporations will emerge in a free market, when the transaction costs of dealing with the state exist no more, is another question entirely.

Freedom of markets is positively correlated with the degree of evolution in any society...

  • | Post Points: 5
Top 75 Contributor
1,133 Posts
Points 20,435
Jargon replied on Mon, Nov 19 2012 10:51 PM

@ FOTH - 

There is no other way for preferences/needs to be accurately transmitted throughout a system of production. Sure, one might run off of a mouth-to-mouth system of "I need X, Y, and Z", but how is one to know that said person actually needs said objects? What is to keep said person from asking for "A, B, C, D, E, F, G, H, I, J, K, L, M, N, O, and P"? Does he not need them because he says he needs them? How are we to know otherwise?

In a price system, this is impossible because the person requesting only has the cash on hand with which to request, so he will only request the most urgent items.

Wouldn't resources be better allocated under a system where they are rationally directed out of an acknowledgement of their underlying scarcity?

Land & Liberty

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

  • | Post Points: 20
Top 150 Contributor
664 Posts
Points 13,095

Jargon: There is no other way for preferences/needs to be accurately transmitted throughout a system of production. Sure, one might run off of a mouth-to-mouth system of "I need X, Y, and Z", but how is one to know that said person actually needs said objects? What is to keep said person from asking for "A, B, C, D, E, F, G, H, I, J, K, L, M, N, O, and P"? Does he not need them because he says he needs them? How are we to know otherwise?

But the only way to tell if one system is better at producing a result than another system is if there is an independent way of verifying the results of the two systems. So saying that the market is efficient at determining whether a person actually needs something, presupposes an independent, non-systematic, way of determining actual need. To deny any independent means of verification is to accept the market on a "leap of faith." If the market is the only way of knowing whether actual needs are being satisfied, then the most that can be said about alternative systems is that we don't know whether they are satisfying actual needs better or worse. And thus there would be no reason to choose the market over them, since what we really want is not to know needs but to satisfy them.

In a price system, this is impossible because the person requesting only has the cash on hand with which to request, so he will only request the most urgent items.

But if the "most urgent items" simply means "that which one most wants to spend their money on" then that's a petitio principii.

Wouldn't resources be better allocated under a system where they are rationally directed out of an acknowledgement of their underlying scarcity?

Can any such totalizing system be truly rational when the needs in question are the needs of individuals and not of a system?

"The limits of my language mean the limits of my world." ~ Ludwig Wittgenstein
  • | Post Points: 35
Page 3 of 6 (86 items) < Previous 1 2 3 4 5 Next > ... Last » | RSS