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Does the calculation problem apply to big buisiness?

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Brainpolice Posted: Wed, Nov 21 2007 8:20 PM

An innocent, although interesting, question. Does the calculation problem apply to buisinesses? If so, to what extent do contemporary corporations suffer from the problem and how does this apply to the modern economic systems in place? If not, please explain how corporations are immune from this problem of bereaucracy.

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 Carson argues so. Kinsella, and other Austrians, have published rebuttals though.


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I've seen that article. I'm not a mutualist, but I have to say that Carson brings up some good points. Under the status quo, big buisiness does often face the calculation problem and is more centralized than a free market would allow. I think too many libertarians fall into the trap of defending the status quo as if it were a free market, when it clearly is not. I'd like to see these rebuttals.

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leonidia replied on Wed, Nov 21 2007 9:02 PM

Rothbard addressed this issue in MES.  His argument was that the limits of size for a large corporation were in fact the limits of calculability. A corporation must be able to guage its internal operations for its various branches to external markets. If these external markets disappear because they're absorbed by a single large corporation then the calculation problem appears.  The more this happens,  the more difficult it becomes for the corporation to allocate factors properly and so losses mount.  This then limits how much a single corporation can dominate a market.

In answer to your question then; the calculation problem could occur in a large corporation particularly if it's very vertically integrated, but cannot persist, since smaller firms would outcompete them.  However perhaps there is a possibility that a large firm could have a persistent small calculation problem if the losses that arise as a result are offset by efficiencies of scale.

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tgibson11 replied on Wed, Nov 21 2007 9:23 PM

Yes and no.  Strictly speaking, I think the calculation problem only applies when there is no market at all for a specific capital good.  As long as some market exists, there is theoretically no calculation problem, because the firm (or socialist planning board) can refer to the price in the external market, even if they are not participating in it themselves.

However, having worked as a consultant at several large corporations, I can tell you from first hand experience that there are definitely problems with rational allocation of resources.  Part of this problem is due to the fact that the users of services that are provided "in-house" do not (and are not incentivized to) consider the market value of the resources they are consuming.

To use an example from my own field, I think this is why there is so much in-house development of custom software when a solution purchased off-the-shelf would be perfectly adequate.  The thought process is something like:  We already have the programmers.  They are paid to do what we want.  This is what we want.  Why should we pay someone else to do what our own programmers could do (for "free")?

This is one reason why outsourcing can be so beneficial.  It makes the consumers of the services (IT services, for example) more aware of the market value of what they are consuming.

The problem isn't that external markets for these goods do not exist, it's just that they are not referred to.


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Stranger replied on Thu, Nov 22 2007 10:57 AM

If a market for a specific capital good exists, and a business decides to produce and consume this good itself, then it has calculated that it is more efficient than the other providers in doing so.

The separation of product design and manufacturing ("platform" companies) has shown how this calculation happens. The risky (capitalist) parts of the business are separated from the low-risk (manufacturing) labor because foreign industries bid for the production. However those companies that are not becoming platform companies are not suffering from a calculation problem. They have simply decided that it is in their best interests to control their own manufacturing, after being aware of the opportunity costs of doing so.

If your question is about whether there would be so many large corporations under a pure free market, this is really asking if there are costs involved in production that favor big corporations over small business. For example, the cost of legal protection in the U.S. gives an edge to big business; their per-unit lawyering costs are lower. However this means that economic calculation is working. If small businesses sell out to big ones in order to protect themselves from government, they have correctly calculated the cost of legal protection.

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Bostwick replied on Fri, Nov 23 2007 4:24 PM


If not, please explain how corporations are immune from this problem of bereaucracy.


Its not a problem of bureaucracy, its a problem of lack of information. Governments will never be able to correctly calculate because they experience no true demand, their income is confiscated.

Businesses, no matter how large, can keep track of what is profitable and what is not. Governments have no way of knowing if they are collecting too much or too little.


The problems of bureaucracy are corruption and inefficiency.  


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