Alright, I'm trying to wrap my head around the problem with socialist calculation.
From what I can tell, it's that without prices for the factors of production, you will not be able to tell if you are transforming resources into a more desirable state since you will not know if you're making a profit.
However, if there is still a market for the final product, why can't the socialist government direct resources into where it thinks it will make the most money from that?
It can try, but without competition and market processes, there is much less information about the consumer's marginal utility transferred to the "sellers", in this case the socialist planners. It will just be extremely inefficient and wasteful compared to true market processes.
It can. But in what measures and ways should it use said resources to those final ends? To transfer them across country, should it use people carrying the goods in baskets by foot, or should it use this labour to create a railroad, which needs further labour to gather iron and coal. Or should it have carry them by horse and cart, which means people must be deployed to breed horses and cut down trees for wood, and make them into carts? Or should it build ships to carry the goods by sea, which then means the harvesting of a great deal of resources? Or some other method? Which of these is the most efficient, the cheapest method of transporting goods? To answer that question, we need a common unit by which to measure cost. Can you point to one? Is the title of the thread suggesting labour hours?
@LogisticEarth I don't just want to show that the calculation would be less efficient, but that it'd be impossible.
@Aristippus Ah, apologies. Yes, I've been trying to talk to someone about this whole issue, and they essentially wanted to break everything down into labor hours. What's a concise way to explain that all the factors of production cannot be broken down into the single unit of "labor"?
Also, it seems that you are saying the socialist economy with a market for the final product would still be able to tell how many much of X is required to be made, right? I guess that makes sense. I ran accross some confusing wording when I was looking at this earlier that essentially said that the socialist economy doesn't know whether something should or should not even be made in the first place, without knowing the cost of producing it.
Well they wouldn't necessarily, but for the sake of argument the problem of economic calculation is framed in a way that assumes that the planners know the exact amount of final (consumer) goods that must be produced.
What's a concise way to explain that all the factors of production cannot be broken down into the single unit of "labor"?
Labour is heterogeneous, i.e. that the same 'labour' cannot be deployed for all different kinds of production. Complimentary factors of production make this even more the case. Thus any particular kind of labour is not necessarily common to all production.
But can 'labour hours' be used as a unit in economic calculation? The company that considers building a railroad can assess the cheapest method of doing so by comparing market prices for the inputs and can also assess the overall social efficiency of it existing at all by comparing the cost (due to the existence of prices) with the revenue (again, due to prices) in order to calculate profit. What calculation can be done with labour hours, without the existence of prices?
So the question is: how can labour hours be compared with labour hours? If certain capital goods were considered to save an amount of labour, they could be considered labour hours saved. For example if an item that saves 4 labour hours takes 8 to make, it would pay for itself in labour hours after 2 uses. Therefore two production processes could be compared to find that which uses the least amount of labour hours in producing a certain good over a particular time horizon.
Wait...what?? To be continued...
As ever I recommend reading this paper. It shows that the real problem with socialist calculation is not money prices but monopoly .
The atoms tell the atoms so, for I never was or will but atoms forevermore be.
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Physiocrat
"essentially said that the socialist economy doesn't know whether something should or should not even be made in the first place" - Thats right and also they have no clue what to make products out of.
just think about the millions of products over the years that are now extinct. How does a business in a profit and loss system know to stop making a product? They lose money on it, if people arent willing to pay for a product even at cost that means they dont want it over other goods on a market. In a pure socialist system how do you know? You have no clue. There are plenty of dead technologies that continue to produce small amounts of goods even in capitalism. Glass bottles of cokes, we know glass is more expensive to produce because we live in a capitalistic society (so it stands to reason we shouldnt be producing glass bottles), but how would a socialist without prices? Even if they DID know how would they know whether or not even to produce glass bottles for cokes? What incentive is there to produce nonglass bottles? We know glass bottles are wanted because people buy them at a more expensive price.
In a pure socialist society they have no clue what to make products out of. If there werent prices how does one know what to make a bridge out of? They quite literally have to ask should we make it out of steel, gold, diamonds, titanium, ect ect. How do they know? They dont. There a thousands of bridges in a capitalist society using thousands of different materials that arent 'best' for making a bridge. But since they had prices they knew to go after the cheapest products that will get the job down. The cheapest product means that it is the cheapest to produce comparative to demand for that product. So builders are forced to weigh an infinate amount of products/materials to produce their good. Then on top of that the owner of the bridge is taking a risk on whether people will actually use that bridge so they can make their money back (and hopefully and then some). If they lose money then they will go out of business because it wasnt wanted by the people. Only the people who have the best understanding of consumer demand will succeed and thats best for an economy and the people. In a socialist society how do you know who is best to serve? Someone has to make an opinion on who is best. While in capitalism you can use the empirical data of profits and losses.
There is a reason the Russians had TONS of spies in the United States... they needed them to determine how to produce. I used bridges because the Russians used to put spies in businesses that produced bridges so they can tell mother Russia how they did it. How many men is needed to produce a bridge? How many men supervise? How long did it take to build the bridge? How many people do you need demanding a bridge to start building one? What do you make the bridges out of?
The only way socialism survives for an extended period of time is because there are other markets that have a pricing system that they can leech onto. The only way socialist programs survive is leeching onto profitable business.
For example if an item that saves 4 labour hours takes 8 to make, it would pay for itself in labour hours after 2 uses.
The trouble here is that not only is labor heterogenous, but individuals possess heterogeneous skills. For example, let's say Bob knows how to dig ditches (doesn't everyone?) and he knows how to engineer a freight train engine. Which task should the politburo put him to? They have no way to say "Bob's engineering skills are more valuable than his ditch-digging skills" because an hour of labor is an hour of labor.
As with any price-fixing or central-planning scheme, we can predict a glut of overproduced labor skills and underproduced labor skills. The democratization of "labor" results from an ignoramus conception of why one man's time is more valuable than another's. My breakdown is: 10% training and upbringing, 45% experience and practical knowledge, 45% diligence and punctuality (these are, of course, pure BS numbers).
The fact is that each individual is making an investment with each hour of his life, whether to learn something new, whether to perfect an existing skill, whether to repeat the tried and true (and, sometimes, discover unexpected, new knowledge), whether to take leisure, whether to talk to people, whether to listen to the news, and so on. The sum of his capabilities - as well as he can advertise them - constitutes what he is as a good on the labor market. The value of this good, then, is determined by the supply (how many other people have similar skills) and demand (how many people demand those skills).
Clayton -
I think the socialist calculation problem is fundamentally about being unable to find out how urgently people want different things. If everything is distributed based on the average socially necessary labor-time it takes to produce it (i.e. what Marx calls "value"), then all differences among individuals regarding how urgently they want each type of product are ignored. The most that can be done is to record how many people come to a distribution center to get something that's out of stock.
Furthermore, I think the socialist calculation problem isn't due so much to the absence of prices as it's due to the absence of any exchange at all. After all, prices emerge from market exchanges, which themselves indicate how much people value what the others have over what they have. Marx was entirely wrong about how prices originate. He thought they originate from their purported objective values, but they actually originate from people's subjective appraisals of them.
The socialist calculation problem becomes the most glaring in the face of multiple, mutually exclusive demands for the same scarce good or service. In the absence of exchange (and thus, derivatively, prices), there's no way for anyone to indicate what he's willing to give up for it. How, then, is a central planner going to determine which of its possible uses is demanded most urgently?
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Voluntaryism Forum
It must also be realised that labour hours only capture one aspect of production, while the attributes of the other factors of production are important as well. It might take the same labour hours to construct a bridge out of stone as it would steel, but out of which should the bridge be made? Prices in a market do not reflect cost as does the labour hour calculation, but they reflect the subjective valuation of all in the market, as well as the scarcity of particular goods. But labour hours calculation depends only on the cost of the production process in labour hours. The allocations of the scarce factors of production for different production processes still cannot be calculated.
In addition, there are many parts of the production process that cannot be calculated for labour hours saved. How many labour hours are saved by erecting a building in which to work? How many labour hours will be saved by building work-benches instead of working on the floor? Can one really calculate the labour hours that machinery or a railroad saves over its lifetime? Only ad hoc labour hour calculation can take place, and the future use or re-use of factors of production for purposes other than that set out by the initial production plan are ignored.
That brings me to my next point. 'Labour hours calculation' could only be undertaken ad hoc, with an entire structure of production set out for a particular final good. This means that stockpiling of resources for future could not take place without waste, since the only calculable uses of those resources are in the planned production processes, and beyond the needs of those there is no need for surplus production at that particular moment. That means that with a new production plan, production must begin again with the most basic factors, rather than drawing upon an already established stock. If, however, the planners do in fact just send workers to stockpile capital goods, they are simply groping in the dark again.
Labor hours in and of themselves are useless for calculation. It still does not subscribe value to anything, and it only derives productive value from land and capital. Marx's idea of there being some average unit of labor that is in any way relevant is entirely fallacious.