Economics Questions

Re: Socialist Calculation

z1235 — Mon, 29 Aug 2011 23:12:38 GMT

dchernik:

Of course, Smith is improving consumer welfare or trying to.

How does Smith measure (pre & post production) consumer welfare in order to (objectively?) establish an "improvement"?

Re: Socialist Calculation

dchernik — Mon, 29 Aug 2011 22:59:17 GMT

Why'd you want to take a single sentence out of context, without reference to the flow of discussion, and ask a silly question like that?

Of course, Smith is improving consumer welfare or trying to.

Re: Socialist Calculation

z1235 — Mon, 29 Aug 2011 22:41:54 GMT

dchernik:

Then Smith will be able to make his improvements.

What (measure) is he "improving"?

Re: Socialist Calculation

TANSTAAFL — Mon, 29 Aug 2011 22:16:47 GMT

In the ERE every variable is held ceterus paribus. There would be a fixed bumber of individual actors. All of their individual value scales would remain constant. They would repeatedly make the same choices ad infinitum. Employment, production, and consumption would all be constant.

We can start with the fixed number of actors to prove that the ERE coming into existance is not possible. People are born and die all the time. Once there is one birth or death the ERE would cease to exist. Likewise it would cease to exist the moment your planner decided, by whatever method, to alter the production of A,B,C, or, X,Y,Z.

Re: Socialist Calculation

dchernik — Mon, 29 Aug 2011 21:57:15 GMT

I am not interested in intimidating anyone, just in learning something from this discussion in hopes of improving my book.

Action is defined as an exercise of human power over nature that causes the future to be different from the past. Within an ERE cycle, there are such actions. In between them, there are not.

Re: Socialist Calculation

Autolykos — Mon, 29 Aug 2011 21:49:03 GMT

dchernik:
It's an obviously possible, even somewhat realistic economy.

Really? How so?

dchernik:
I think you misunderstand Mises and me.

Really? How so?

Obviously I'm not intimidated by these bare assertions.

dchernik:
Again, Smith knows that there is going to be demand for C and in fact, knows the actual demand curve for it. Just as he knows, by stipulation, the demand curves for every other good.

So now you're ascribing to Smith the divine power of omniscience. How far from reality would you like to get? Or do you think omniscience is somehow "possible" too?

dchernik:
Existing goods are treated the same way. That method is chosen for their production that will deprive Smith of the least amount of revenue from the goods he had to sacrifice. If a new method is chosen, then the factors released from employment by the previous method will need to be re-incorporated into the rest of the economy. But this task is similar.

How can there be revenue if there are no prices and, indeed, no money whatsoever?

dchernik:
It is true that socializing a capitalist economy must involve somehow getting to an ERE. One way to do this is to outlaw disequilibration but permit imitation and arbitrage. The economy will reach the SEQ by using capitalist methods. Then Smith will be able to make his improvements.

If the evenly rotating economy is an imaginary construction (as Mises obviously says it is, and you've implicitly accepted his definition of it), then there is no getting to it. Period. Why is this so hard for you to understand/accept?

Also, keep in mind that Mises considers the evenly rotating economy and the stationary economy to be completely separate things. Or did you conveniently overlook that as well?

Re: Socialist Calculation

dchernik — Mon, 29 Aug 2011 21:40:15 GMT

It's an obviously possible, even somewhat realistic economy.

I think you misunderstand Mises and me.

Again, Smith knows that there is going to be demand for C and in fact, knows the actual demand curve for it. Just as he knows, by stipulation, the demand curves for every other good.

Existing goods are treated the same way. That method is chosen for their production that will deprive Smith of the least amount of revenue from the goods he had to sacrifice. If a new method is chosen, then the factors released from employment by the previous method will need to be re-incorporated into the rest of the economy. But this task is similar.

It is true that socializing a capitalist economy must involve somehow getting to an ERE. One way to do this is to outlaw disequilibration but permit imitation and arbitrage. The economy will reach the SEQ by using capitalist methods. Then Smith will be able to make his improvements.

Re: Socialist Calculation

Autolykos — Mon, 29 Aug 2011 20:48:37 GMT

dchernik:
The Crusoe-Friday economy just described is an ERE.

Is it? What I do know is that it's most certainly an imaginary construction.

dchernik:
There is no entrepreneurial action designed to bring about monetary profits. But there is action insofar as psychic profits are had from exchanges (relative both to not exchanging then and there and to life without division of labor at all). As long as this keeps happening, the ERE will be a "world of soulless unthinking automatons" because there is no creative advance in it, no improvement in how people do business, but the members of this economy will remain living and breathing human beings, because they produce, exchange, and consume, even if in the same way over and over again.

The ERE has a market in which exchanges are made, but no "free market," because the relevant freedom is to try to improve one’s own life and the lives of one’s customers within an overall utilitarianism-satisfying framework. And we disallow this freedom.

Mises states clearly that, in his concept of the evenly rotating economy, there is no action whatsoever. Are you deliberately mischaracterizing his statements?

dchernik:
We start with an ERE. Smith wants to make new product C. There are 10 different methods of producing C. Each method requires that scarce resources be taken away from other production processes and therefore, a diminution of the quantity of other goods available. Given knowledge of consumer demand, for each method, we compare which combination of consumer goods, when discontinued, will deal the least damage to consumer welfare. If there are 100 such combinations per 1 method, then 1,000 different possibilities must be compared. The comparison is in terms of the revenues that will not be received by Smith for the unmade goods.

That method of producing C will be chosen in which the foregone revenues are lowest. If the revenues from selling n C exceed the revenues lost from not making X, Y, Z, etc., then Smith equilibrates "in place" by continuing to withdraw resources from other lines of production until the marginal costs (i.e., lost revenues from X, Y, Z) equal the marginal revenue from the sale of more C.

As factors are withdrawn from elsewhere in the economy, they are taken away from more and more valuable tasks (the law of increasing marginal cost). And as they are employed in making C, the extra C produced yield less and less utility and revenue (the law of diminishing marginal utility).

Why would Smith want to make a new product C if there's no consumer demand for it? Also, how does Smith decide which method of producing an existing consumer's good or producer's good is the most economical way of producing it? Finally, I have no idea how you can presume an evenly rotating economy in the context of the socialist calculation problem. How would socialism give rise to an evenly rotating economy?

Re: Socialist Calculation

dchernik — Mon, 29 Aug 2011 19:28:19 GMT

The Crusoe-Friday economy just described is an ERE.

Mises states point-black that the evenly rotating economy is an economy where there is no action whatsoever.

There is no entrepreneurial action designed to bring about monetary profits. But there is action insofar as psychic profits are had from exchanges (relative both to not exchanging then and there and to life without division of labor at all). As long as this keeps happening, the ERE will be a "world of soulless unthinking automatons" because there is no creative advance in it, no improvement in how people do business, but the members of this economy will remain living and breathing human beings, because they produce, exchange, and consume, even if in the same way over and over again.

The ERE has a market in which exchanges are made, but no "free market," because the relevant freedom is to try to improve one’s own life and the lives of one’s customers within an overall utilitarianism-satisfying framework. And we disallow this freedom.

Can you please explain in more detail?

We start with an ERE. Smith wants to make new product C. There are 10 different methods of producing C. Each method requires that scarce resources be taken away from other production processes and therefore, a diminution of the quantity of other goods available. Given knowledge of consumer demand, for each method, we compare which combination of consumer goods, when discontinued, will deal the least damage to consumer welfare. If there are 100 such combinations per 1 method, then 1,000 different possibilities must be compared. The comparison is in terms of the revenues that will not be received by Smith for the unmade goods.

That method of producing C will be chosen in which the foregone revenues are lowest. If the revenues from selling n C exceed the revenues lost from not making X, Y, Z, etc., then Smith equilibrates "in place" by continuing to withdraw resources from other lines of production until the marginal costs (i.e., lost revenues from X, Y, Z) equal the marginal revenue from the sale of more C.

As factors are withdrawn from elsewhere in the economy, they are taken away from more and more valuable tasks (the law of increasing marginal cost). And as they are employed in making C, the extra C produced yield less and less utility and revenue (the law of diminishing marginal utility).

Re: Socialist Calculation

Autolykos — Mon, 29 Aug 2011 18:36:41 GMT

dchernik:
In my book, I actually reverse the definitions of ERE, FSR = final state of rest, and SEQ = state of equilibrium. For ERE connotes motion ("rotation") and therefore, time and money as a store of value. The SEQ and FSR, on the other hand, suggest static motionless snapshots: SEQ = all the exchanges made within one period of rotation abstracting from time, and FSR = all the time periods without exchanges.

Consider a Crusoe-Friday economy, in which Crusoe exchanges his fish for Friday’s berries. Every morning both men go to work, procure the goods, and exchange them in the evening. The equilibrium price, at which they exchange, is that price, at which quantity supplied equals quantity demanded. The act of exchange at the equilibrium price constitutes a SEQ. The SEQ prevails only at the moment of exchange; it is the state of neither before the exchange nor after it.

Crusoe and Friday then consume everything and go to sleep. Upon waking up, they start producing anew the next day. Every night, the economy enters the FSR which continues until the exchange of fish for berries in the evening of the next day.

But the next day, the exact same activities repeat. This interminable series of cycles is an ERE. An ERE is an established routine of production and consumption. I will, therefore, define the foregoing terms as follows:

An ERE is a sequence of identical cycles of production and consumption.

An FSR is a single cycle minus the instantaneous acts of exchange.

A SEQ is a set of all the acts of exchange, such as between a worker and a firm or between a firm and its customers.

Anyway, observe that Mises is saying "will never be attained" not "can never be attained." Why won't it? Because "New disturbing factors will emerge before it will be realized." I am saying exactly the same thing. "Every later new instant cancreate new facts altering this final state of rest." It can, though it does not have to. The ERE is non-actual, though possible.

I don't see how you're using a different definition of "evenly rotating economy" from Mises' definition. What you seem to be missing are the logical implications of the Misesian concept of the evenly rotating economy. So I suggest re-reading chapter 14, section 5 of Human Action.

You're really stretching the semantics of Mises' statements to try to make them support your point. From what I understand, where Mises says "will never be attained" he means "it's impossible for it to be attained". That's the typical reading of "will never", in fact. For example, saying that Earth will never rotate clockwise is the same as saying it's impossible for Earth to rotate clockwise.

To my knowledge, Mises is definitely saying that the evenly rotating economy is impossible. This is clearly implied when he calls it an "imaginary construction". He likewise goes on to call the stationary economy, the progressing economy, and the retrogressing economy "imaginary constructions". In so doing, he attributes the opposite of possibility to them.

Notice that Mises states point-black that the evenly rotating economy is an economy where there is no action whatsoever. Given his understanding of human nature, this alone tells him that the evenly rotating economy cannot exist.

dchernik:
The quote about the consumer demand being known is from Human Action, pp 698, 700.

Thanks, I'll look into that.

dchernik:
Multiple ways of producing many/most things do not "lead" to a central planner's ability to make single marginal improvements. The planner is able to make those sequential improvements despite the fact that there are numerous methods of production for every item.

I still don't see how this follows. Can you please explain in more detail?

Re: Socialist Calculation

dchernik — Mon, 29 Aug 2011 18:18:59 GMT

In my book, I actually reverse the definitions of ERE, FSR = final state of rest, and SEQ = state of equilibrium. For ERE connotes motion ("rotation") and therefore, time and money as a store of value. The SEQ and FSR, on the other hand, suggest static motionless snapshots: SEQ = all the exchanges made within one period of rotation abstracting from time, and FSR = all the time periods without exchanges.

Consider a Crusoe-Friday economy, in which Crusoe exchanges his fish for Friday’s berries. Every morning both men go to work, procure the goods, and exchange them in the evening. The equilibrium price, at which they exchange, is that price, at which quantity supplied equals quantity demanded. The act of exchange at the equilibrium price constitutes a SEQ. The SEQ prevails only at the moment of exchange; it is the state of neither before the exchange nor after it.

Crusoe and Friday then consume everything and go to sleep. Upon waking up, they start producing anew the next day. Every night, the economy enters the FSR which continues until the exchange of fish for berries in the evening of the next day.

But the next day, the exact same activities repeat. This interminable series of cycles is an ERE. An ERE is an established routine of production and consumption. I will, therefore, define the foregoing terms as follows:

An ERE is a sequence of identical cycles of production and consumption.

An FSR is a single cycle minus the instantaneous acts of exchange.

A SEQ is a set of all the acts of exchange, such as between a worker and a firm or between a firm and its customers.

Anyway, observe that Mises is saying "will never be attained" not "can never be attained." Why won't it? Because "New disturbing factors will emerge before it will be realized." I am saying exactly the same thing. "Every later new instant can create new facts altering this final state of rest." It can, though it does not have to. The ERE is non-actual, though possible.

The quote about the consumer demand being known is from Human Action, pp 698, 700.

Multiple ways of producing many/most things do not "lead" to a central planner's ability to make single marginal improvements. The planner is able to make those sequential improvements despite the fact that there are numerous methods of production for every item.

Re: Socialist Calculation

Autolykos — Mon, 29 Aug 2011 16:58:35 GMT

dchernik:
The ERE is not impossible only unrealistic. Monetary profits can be 0 for every firm, as long as psychic profits from exchanges within the ERE are positive. An ERE is unrealistic, because of entrepreneurial actions that keep disturbing it. But under socialism, there is only one entrepreneur, Smith. Hence, an ERE is a natural state of a socialist economy.

Quoting Mises in Human Action (p. 246-247):

Ludwig von Mises:
The imaginary construction of the final state of rest is marked by paying full regard to change in the temporal succession of events. In this respect it differs from the imaginary construction of the evenly [p. 247] rotating economy which is characterized by the elimination of change in the data and of the time element. [Emphasis added.]

Based on this quote alone, it seems clear to me that Mises certainly thought that the ERE was indeed impossible.

Here's some clarification from Mises, again in Human Action (p. 245)

Ludwig von Mises:

In dealing with the plain state of rest we look only at what is going on right now. We restrict our attention to what has happened momentarily and disregard what will happen later, in the next instant or tomorrow or later. We are dealing only with prices really paid in sales, i.e., with the prices of the immediate past. We do not ask whether or not future prices will equal these prices.

But now we go a step further. We pay attention to factors which are bound to bring about a tendency toward price changes. We try to find out to what goal this tendency must lead before all its driving force is exhausted and a new state of rest emerges. The price corresponding to this future state of rest was called the natural price by older economists; nowadays the term static price is often used. In order to avoid misleading associations it is more expedient to call it the final price and accordingly to speak of the final state of rest. This final state of rest is an imaginary construction, not a description of reality. For the final state of rest will never be attained. New disturbing factors will emerge before it will be realized. What makes it necessary to take recourse to this imaginary construction is the fact that the market at every instant is moving toward a final state of rest. Every later new instant can create new facts altering this final state of rest. But the market is always disquieted by a striving after a definite final state of rest. [Emphasis added.]

Furthermore, an economy doesn't only concern entrepreneurs. Entrepreneurs aren't the only people who are buying and selling things in the market. This is true even in a purely socialist economy, unless there is no exchange taking place whatsoever. (In every description of a socialist economy that I've read about, and that was written by an actual socialist, people exchange their labor for goods and/or services produced collectively by the society. Note that this isn't too far removed from how economics actually works.)

dchernik:
As for knowledge of consumer demand, Mises makes this assumption, too: "We may for the sake of argument at first disregard the dilemmas involved in the choice of consumers’ goods to be produced. We may assume that this problem is settled. ... We do not deal with the problem of whether or not the director will be able to anticipate future conditions." In other words, we assume that Smith does not make entrepreneurial errors.

Could you please provide a source citation for this quote? It sounds like it's probably from Socialism, but I could be wrong.

Otherwise, I'll note that Mises uses the phrase "at first" in the above quote. Without knowing the context of the quote, it's difficult to determine the reason why he'd add that qualification - but it seems like an important one to me.

dchernik:
It's true that there are multiple ways of producing anything; that's why I am allowing Smith to make single marginal improvements to the economy. It is obvious that he can't reconstruct the entire production structure.

I have no idea what this is supposed to mean, sorry. To me it does not follow in the least that multiple ways of producing many/most things leads to a central planner's ability to "make single marginal improvements to the economy".

Re: Socialist Calculation

dchernik — Sat, 27 Aug 2011 19:15:56 GMT

@hashem: The reason for this assumption is to focus on different aspects of the problem. The market secures the greatest happiness for the greatest number in the process of operating. It is true that the market is not a person and does not consciously aim at this end. But a socialist central planner is a person. Let us assume, therefore, in order to give the socialist the strongest possible argument, that Smith the planner also is intensely interested in the good of the whole society.

Now as a matter of fact, the planner is not so interested. The assumption is false. Here's Mises: "The real Fuhrer, however, turns out to be a mortal man who first of all aims at the perpetuation of his own supremacy and that of his kin, his friends, and his party. As far as he may resort to unpopular measures, he does so for the sake of these objectives. He does not invest and accumulate capital. He constructs fortresses and equips armies."

But the case against socialism does not end here but spans several issues. We assume the planner's omnibenevolence in order to zero in on the other problems of socialism.

That socialism is sequential, while capitalism is parallel, is as much a distinction as that socialism is disinterested in the common good, while the market is interested in it. In other words, under capitalism, people's search for private profits redounds to the common good. Under socialism, Smith the planner's pursuit of his own happiness does not do that. Again, this is a very important point. But it is not the only one.

Re: Socialist Calculation

hashem — Sat, 27 Aug 2011 18:49:11 GMT

I read pretty much the whole thread, which is interesting. Then I came to this quote:

It is assumed that the socialist government's aim, exactly like that of a laissez-faire society

Why do we have to assume so much? It is not enough to assume the ERE and admit the equations were only applicable to a tiny minimum of situations, but now we have to assume the absurd? That a (perfect!) all powerful omniscient socialist government's aim is going to be identical to that determined spontaneously by billions of people on a free market?!

I politely disagree. But it's worse: If the government's aim was our aim all along, then we wouldn't need/have needed it.

Re: Socialist Calculation

TANSTAAFL — Fri, 26 Aug 2011 17:15:47 GMT

dchernik,

Have you read Human Action? It appears you have not. Mises makes it clear that in the ERE there is no profit. There would be no need for money as every worker would continue to go to work and consume the exact same goods, revenue would cease to have meaning.

All that aside, even if you were correct and your equations actually did work you are still faced with the complexity. It is impossible to know all the factors. Each change will ripple through everything else. The planner would need to be omnipotent for your scenario to work.