Hi guys,
I have read Mises' book Socialism and I think I have a decent understanding of the Economic Calculation problem, but I am not an economist by trade. I am a computer geek learning economics. A friend (a Socialist) has posted a lengthy response to my request that he read Mises' paper. I can take his paper apart pretty easily, and I'll point out some things I've noticed The thing is, he has anarcho-socialist leanings (and very anti-Mises, thinking it's all propaganda), and I really want to show him where he has gone wrong and I can't explain it very well. Rather than send a half ass reply, I thought I would ask for help.
First, his review of Mises' paper:
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A major misconception by the free-market fundamentalists is that central planning is mathematically impossible. So they consider the Soviet example, and imagine that if only they look at Gosplan's "source code" hard enough, they will inevitably discover some bug. So they write esays like this (http://www.mises.org/pdf/econcalc.pdf), failing to point to any real bugs, but making general claims that the source code must be full of them. Theis basic argument is this: programming is hard, and they are trying to write programs, so their code must be buggy and therefore their system must crash. And when the system does crash, they are quick to claim victory, and the fact that the crash can actualy be attributed to a fire in the server room never bothers them.
However, if you look for bugs in the right place, you will quickly see that actually it is Mises's paper that needs debugging. Because in its current form, it just can't withstand any serious criticism. Let us see, for example, how Mises' analysis falls short already in the very beginning of his "proof".
In Part 1, Mises makes a series of pretty obvious observations, pointing out, correctly, the importance of money in a socialist economy. (It bears mentioning that, for some reason, many Americans imagine that a Soviet-like system rejects the use money - this is patently untrue, even if you listen to Mises). Here, however, Mises takes his first shot at finding some fatal error in Socialism. While grudgingly admitting the possibility of assigning value to consumption goods, he chooses to attack the idea of appraising the value of production goods. To quote Mises, "Money could never fill in a socialist state the role it fills in a competitive society in determining the value of production goods. Calculation in terms of money will here be impossible."
Let us pose here and think about this argument. On a first glance it looks that Mises actually has a point. If there is no free market for production goods, then how do you value, say, a tractor vs. a combine? In a capitalist economy companies will decide how much they are willing to pay for either item, but how will government bureauctats arrive at the correct valuation? Mission impossible, huh?
Well, not so simple. First of all, note that even under capitalism, there is no such thing as "objective valuation" of production goods. Upon a little thought we can immediately identify two possible prices for any piece of equipment. One price is determined by the labor theory of value: it is the number of man-hours required to produce the tractor or the combine. A capitalist would call it "self-cost" or "operating expence". Provided the market is highly competitive and there are no major production bottlenecks, the market price of the production good will approximate its self-cost. The other price is determined by the "marginal utility". For example, the extra amount of grain that can be harvested by the most efficient farmer if he purchases an extra tractor, will give you the tractor's marginal utility. If the market is monopolized by John Deere or if there are some production bottlenecks (e.g. shortage of iron), then the market price will approach the marginal utility of the production good. In a real economy the price will fluctuate between these two extremes.
The United States economy is a mixture of government-created monopolies and competing private businesses. As a result, the price of one and the same production good can vary enormously depending on the degree of government involvement. By and large, however, whenever the market is allowed to operate more or less freely, the price of a tractor is much closer to the self-cost than to the maximum price the highest bidder would pay. But this immediately destroys Mises' argument against socialism. For if the "correct" price of a tractor is equal to its self-cost plus a few percent profit, then a central planner who assigns prices based on the labor theory of value, will never be very far off the mark. Using different processes, the capitalist and the socialist have arrived to rougly the same valuation.
Mises's argument will still be valid if the productivity of labor in a given country is too low to produce the tractor as cheaply as John Deere does in America. Let's say, the country lacks automated production lines, and as a result each tractor produced locally costs a million dollars. This, presumably, is but a temporary condition. Eventually technological bottlenecks will be removed, but while resources are still limited, it is essential that the country makes the best use of what's currently available. So maybe we can say that Mises' objection is valid at least for undeveloped countries where every tractor is as valuable as gold?
Alas, here again Mises misses his target. Any honest Marxist would explain to Mises that the necessity of achieving high productivity of labor is recognized by Marxism as an essential prerequisite for Socialism. One cannot start building Socialism in a feudal economy. That's why Marx, who was well aware of this difficulty, has always insisted that capitalism must be allowed to run its course before one even begins to think of socializing production. The Marxist theory was intended for modern, technologically advanced economies; it is dishonest to critisize it for its failures outside its realm of applicability.
However, Mises still has one objection. If capital goods are not really in such short supply that they couldn't be efficiently distributed without the help of some marginal utility mechanism, then maybe some shortage of natural resources will still save the "proof"? Here is the way he puts it: "For, over and above the actual labor, the production of all economic goods entails also the cost of materials. An article in which more raw material is used can never be reckoned of equal value with one in which less is used."
This point merits a separate discussion. Above all, we must here must a clear distinction between an objective shortage and poor availability of row materials. Needless to say, to the ultra-capitalist Mises, it appears that the market price of a commodity is sacred and beyond dispute. But the reality is not very Mises-friendly. In most cases, what free-market fundamentalists describe as "scarcity" is just another word for a high self-cost. There is no physical shortage of oil on Earth. There is enough oil to last us a thousand years, but some of that oil will require many man-hours to extract. A $100 oil simply means it takes too many workers to assemble the rig and to drill the well. In these cases, the labor theory of value will work every bit as well as it works for any consumption good. Thus the iron ore that is needed to produce a tractor, and the oil that is needed to produce the iron ore will all be assigned a value in terms of man-hours, which will then appear in the socialist price of the tractor. Again, this method of valuation will work as well as any capitalist one.
If, on the other hand, the nature of the constraint is a physical one (a river that only has so much water, for instance), then a socialist planner will have to decide on its optimal use without the labor theory or the marginal utility theory to guide him. Actually, the latter point is not really true. A planner can still estimate the marginal utility by running a calculation along these lines: "if I give the resource to factory A, they can produce this quantity of consumption goods, and factory B could only produce half that much, but factory C could produce 20% more than factory A. So factory C gets the resource". No calculation is perfect. The planner will not find the best solution, but he can at least take a shot at finding the second-best one.
It looks like Mises has finally got something to chew on. Maybe if we zero in on this (admittedly unlikely) scenario, we can "prove" the inefficiency of socialism at least on that one count?
Alas, it will be like the pot calling the kettle black. When you ask a free-market fundamentalist how his beloved capitalism will handle this situation, you wind up with a solution that is much worse than any inefficiencies in the socialist model. Turns out that under capitalism, the water right will belong to a private monopoly which will then be selling its water to the highest bidder - here you got your marginal utility theory in action. Eventually one company will outbid every competitor and obtain the resource. The diference is that where a socialist company could use the resource right away, its successful capitalist counterpart has emerged from the bidding process totally exhaused and saddled with a huge debt which will then have to be passed to the consumers. The socialist company that won the contest may have been 5% less efficient; in contrast, under capitalism you've got a company that is fully efficient and is squezed dry by the private owner of the limited resource. What a sure way to outpace a centrally planned economy!
I couldn't take apart the whole essay, but I hope this already illustrates my point that one should always take it with a grain of salt when he hears that this or that essayist has "proved" some economic theory. More often than not it just means that the guy has tried to bring up some point or raise some objection to promote his chosen point of view. Then, under close scrutiny, it will all turn out to be very subjective...
First off, I've never heard of any Mises supporter citing Gosplan's source code as the problem. That's just stupid. I'm a programmer, and the simple reason complex models for Socialist programming don't work is because humans have to assemble the data. It's not the code or the act of inputting the data, it's the data itself that is the problem. Where does it come from? Who determines the parameters for the programs? Etc. Everything comes from the planning board, and where do they get the data? We are right back at the EC problem.
Next, he seems to be unaware of Lenin's attempts to destroy money through massive debasement in the first few years of Bolshevism. Anybody got a source for early USSR monetary policy?
When you get into the crux of the argument, he has the entire pricing system backward. He doesn't understand the role of the consumer in the pricing process or the role of the entrepreneur in the innovation process.
Much of the rest is just ramblings. However, I want to give him a fair and honest critique and present him with a couple of questions to get him thinking. Any help would be appreciated.
Thanks,
David
Fried Egg: I guess then that a socialist might content themselves with this form of market-socialism, accept the deficiencies of not having complete and free competition over the determination of the prices of the factors of production as a "price" worth paying in order to eliminate the evils they see as associated with the private ownership of the means of production (i.e. the exploitation of the working classes).
I guess then that a socialist might content themselves with this form of market-socialism, accept the deficiencies of not having complete and free competition over the determination of the prices of the factors of production as a "price" worth paying in order to eliminate the evils they see as associated with the private ownership of the means of production (i.e. the exploitation of the working classes).
Quite possibly but in terms of effeciency they have to admit defeat to the free market. Further we can use this as a universal theory to show the failure of all state intervention and it also brings a new angle on the natural monopoly debate.
The atoms tell the atoms so, for I never was or will but atoms forevermore be.
Yours sincerely,
Physiocrat
Fried Egg:I guess then that a socialist might content themselves with this form of market-socialism, accept the deficiencies of not having complete and free competition over the determination of the prices of the factors of production as a "price" worth paying in order to eliminate the evils they see as associated with the private ownership of the means of production (i.e. the exploitation of the working classes).
Is he talking about a situation where various industries would be completely vertically integrated? Meaning there would be a single automobile producer who mines the iron ore, turns it into steel, grows rubber, turns it into tires, and then finally produces the car? Or a situation where there would be a single iron company, a single steel company, and a single rubber company? His friend needs to be more specific. There's not much one can do with the information given. He should write a book, I'm sure he'd win a nobel prize.
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."
I just finished reading that article and what the author seems to stress above all else isn't that socialism fails because of economic calculation per se but because socialism abolishes private property rights altogether. To quote the article:
We tried to demonstrate in this article that the problem with socialism is not about numbers, price lists, calculation, gathered data, assimilated data, or any similar features. Socialism has to do with the property system on which it is based. As Mises brilliantly summarized: the establishing of socialism is a step that abolishes the whole economy, since the "intellectual division of labor" is impossible.
numbers, price lists, calculation, gathered data, assimilated data, or any similar
features. Socialism has to do with the property system on which it is based. As Mises
brilliantly summarized: the establishing of socialism is a step that abolishes the
whole economy, since the "intellectual division of labor" is impossible.
Lee: I just finished reading that article and what the author seems to stress above all else isn't that socialism fails because of economic calculation per se but because socialism abolishes private property rights altogether. To quote the article: We tried to demonstrate in this article that the problem with socialism is not about numbers, price lists, calculation, gathered data, assimilated data, or any similar features. Socialism has to do with the property system on which it is based. As Mises brilliantly summarized: the establishing of socialism is a step that abolishes the whole economy, since the "intellectual division of labor" is impossible.
That sounds right to me.
Has anyone read the article on the History of Economic Thought?
It pretty quickly dismisses Ludwig Von Mises' contribution to the debate and concludes by saying that there is no theoretical reason why a centrally planned economy could not function at least as well as a market economy. The problem is purely one of pragmatics.
But Mises's argument was erroneously construed - as H.D. Dickinson (1933) was quick to point out. After all, as Barone and Taylor had shown, if we see the world as a system of Walrasian equations which need "solutions", there is no issue about not being able to price internal products.
Additionally, why is necessary to have an "intellectual division of labour" among entrepeneurs if all the pertinent information can be coalated and processed by the central planner? The task of guiding the means of production only needs to be divided among competing entrepeneurs because of the practical problems of coalating and processing all that data centrally (which is essentially Hayek's argument), right?
Afterall, competing entrepeneurs are merely in disagreement about how best to serve the consuemers. And if how best to serve the consumers can be worked out emperically through trial and error, it should be deducible how the factors of production are to be distributed.
Fried Egg: Additionally, why is necessary to have an "intellectual division of labour" among entrepeneurs if all the pertinent information can be coalated and processed by the central planner? The task of guiding the means of production only needs to be divided among competing entrepeneurs because of the practical problems of coalating and processing all that data centrally (which is essentially Hayek's argument), right?
Herein lies the consequentialist line which stains Hayekian though. The information itself is generated by antecedent human valuations and actions and if there is no competition in that any information will be deficient. Also who decides what "pertinant" information is expect a human actor? Hayek seemed to be believe that prices reflected the given information in contrast to Mises who thought it was entrepeneurs expection of future events that determined prices.
Fried Egg: Afterall, competing entrepeneurs are merely in disagreement about how best to serve the consuemers. And if how best to serve the consumers can be worked out emperically through trial and error, it should be deducible how the factors of production are to be distributed.
But as Rothbard shows a monopolist will charge a higher price or have a less good quality product than a free market would produce.
Given that we're still working with your market socialist example would the competing assocaitions be able to put the others out of business so to speak? So is it possible for one association to come and control all the resources? And if so how do new assocaition come into existence?
Fried Egg: Has anyone read the article on the History of Economic Thought? It pretty quickly dismisses Ludwig Von Mises' contribution to the debate and concludes by saying that there is no theoretical reason why a centrally planned economy could not function at least as well as a market economy. The problem is purely one of pragmatics. But Mises's argument was erroneously construed - as H.D. Dickinson (1933) was quick to point out. After all, as Barone and Taylor had shown, if we see the world as a system of Walrasian equations which need "solutions", there is no issue about not being able to price internal products. Additionally, why is necessary to have an "intellectual division of labour" among entrepeneurs if all the pertinent information can be coalated and processed by the central planner? The task of guiding the means of production only needs to be divided among competing entrepeneurs because of the practical problems of coalating and processing all that data centrally (which is essentially Hayek's argument), right? Afterall, competing entrepeneurs are merely in disagreement about how best to serve the consuemers. And if how best to serve the consumers can be worked out emperically through trial and error, it should be deducible how the factors of production are to be distributed.
Fried Egg:Afterall, competing entrepeneurs are merely in disagreement about how best to serve the consuemers. And if how best to serve the consumers can be worked out emperically through trial and error, it should be deducible how the factors of production are to be distributed.
That makes the erroneous assumption that consumer preferences will never change.
faber est suae quisque fortunae
Physiocrat:Herein lies the consequentialist line which stains Hayekian though. The information itself is generated by antecedent human valuations and actions and if there is no competition in that any information will be deficient. Also who decides what "pertinant" information is expect a human actor? Hayek seemed to be believe that prices reflected the given information in contrast to Mises who thought it was entrepeneurs expection of future events that determined prices.
In my humble opinion, the Hayekian, and Misean views that you are discussing here are not mutually exclusive, and are merely explaining the scenario through different perspective. With the Hayekian perspective, there is an emphasis on the utilization of knowledge in society while in the Misean one it is from the pespective of action, and its well-spring: valuation. To dismiss the Hayekian view because it does not focus on action itself would be a tragic squandering of the ability of the Austrian schoo to explain knowledge in human society.
Abstract liberty, like other mere abstractions, is not to be found.
- Edmund Burke
laminustacitus: In my humble opinion, the Hayekian, and Misean views that you are discussing here are not mutually exclusive, and are merely explaining the scenario through different perspective. With the Hayekian perspective, there is an emphasis on the utilization of knowledge in society while in the Misean one it is from the pespective of action, and its well-spring: valuation. To dismiss the Hayekian view because it does not focus on action itself would be a tragic squandering of the ability of the Austrian schoo to explain knowledge in human society.
I never said the Hayekian view was moribund but without a Misesian style grounding it doesn't land a lethal blow on socialism.
What if we don't care about what the consumers want. If the state simply decides what the consumers "need", that it evaluates only the ends the state wants to achieve and the people are just to be given the basics for what they need to survive without any regard for what they think, is the calculation problem applicable?
In other words, does it matter that there is only one planner if it is only the ends of the state that are strived towards? If the state isn't trying to satisfy the many, disperate ends of the consumers, is a market necessary?
Not sure why Taylor is mentioned over and over since Misesians have dealt with his contentions, and yes, the fact that we don't live in a world of "Walrasian" equations is a strong theoretical case against socialism, and it still doesn't address the fact that capital goods themselves need to be can be allocated in multifarious ways - without ownership in them Mises argues any valuation assigned will be utterly arbitrary and fail to put them to their optimal uses. Walrasian equations only address the consumer end of the problem...
What if we don't care about what the consumers want. If the state simply decides what the consumers "need",
When economic calculation is spoken of it is with reference to consumer wants. Socialists engaging in the debate don't challenge this, because it'd be tantamount to admitting that socialism must remould consumers in order for it to meet their needs, and that it can only do so by steamrolling them out. Not much of a case for all but its most dictatorial forms...
Freedom of markets is positively correlated with the degree of evolution in any society...
Actually, many socialists do argue precisely that. If the central planner is only concerned with the consumer's "needs" and that the central planner dictates what those needs are, then it does not need to care about the consumer's subjective evaluation of the end result.
Jon Irenicus: When economic calculation is spoken of it is with reference to consumer wants. Socialists engaging in the debate don't challenge this, because it'd be tantamount to admitting that socialism must remould consumers in order for it to meet their needs, and that it can only do so by steamrolling them out. Not much of a case for all but its most dictatorial forms...
Socialists don't challenge this because they usually stick to the LTV. If an objective value of goods really existed, socialism would provide consumer with the most valuable goods. When Mises tried to refute socialism, he said that they couldn't plan the economic production without market signals. Then, socialists replied with market socialism, about which Mises said that now they can calculate, but they are still ignoring other issues, like entrepreneurship and sound market signals for capital goods. I think he was close to the point; the real idea behind the impossibility of socialism lies in the idea of the lack of private property. Socialism is like a huge monopolistic enterprise, without any incentives and feedback signals or responses from the market. It's guided by an individual (or a group of individuals, but it's the same), so everyone act according to the guide will; everything that happens inside (for example, internal trade, purchases, sales) it's more like a game, without any economic value, as the actions of managers are not constrained by the other "market" actors.