WorldSys: Austrian Home Study Course, Week 31

READINGS: “Economic Calculation in the Socialist Commonwealth”, Ludwig Von Mises; Chapter 10 of “Economics for Real People”, by Gene Callahan; Chapters 2 and 3 of Thomas Taylor’s “An Introduction to Austrian Economics”.

1) For Mises, what is the defining characteristic of socialism?

Community ownership of the means of production, that is: factories, capital goods, etc. Of course some special body will have to be set up to exercise the will of the people.

2) Is it possible to have money in a socialist commonwealth?

Yes — even if consumer goods are allotted by awarding individual comrades with coupons those goods will likely be exchanged (a teetotaler could trade his alcohol allotment for tickets to the movies, and so on). To the extent that this is possible money can evolve and play the same role it does anywhere else. But where public ownership prevails this cannot be the case.

3) Does the “calculation problem” involve the difficulty of discovering technological recipes for production?

No. Mises illustrates the difference between ‘recipe for production’ calculations and economic calculations with an example of a bridge. Successfully performing all the calculations required for building a bridge won’t tell us whether, all things considered, the bridge should be built. This latter kind of calculation is the kind that becomes impossible with public ownership of the means of production.

4) Does the calculation problem involve the possibility that the central planners might be selfish and ignore the desires of their subjects?

That is always a possibility, but it’s orthogonal to the calculation problem itself. Even if central planners were every bit as wise, intelligent, and benevolent as they believe themselves to be it wouldn’t blunt the force of the calculation argument; communal ownership of the means of production would still make rational economic calculation impossible.

5) Why doesn’t the capitalist society suffer from the calculation problem?

Because the free market is able to utilize many individuals who are independently doing economic calculations with information which may not be written down anywhere. Prices on capital and consumer goods can respond to these people making value judgements, bidding for resources, taking action in the face of uncertainty, and succeeding or failing. Ultimately this means prices are able to better perform their information-theoretic function, making all calculation efforts more effective.

6) Would Robinson Crusoe be able to “centrally plan” his “economy”?

Crusoe would be able to plan his own behavior and undertake ever more complicated actions to satisfy ever more complicated desires. But, crucially, he wouldn’t be able to foresee all possible production choices in advance. Even when alone Crusoe is still engaged in a kind of exchange, insofar as he trades finite time for this or that good. There is no way he can imagine all that he will desire in the future, nor all the ways in which those desires can be fulfilled, nor the ways in which his preferences will evolve, nor the plenitude of ways in which higher-order goods are to be evaluated one against the other in the service of satisfying his wants.

7) Can’t central planners rely on mainstream economic theory (such as the rule that price should equal marginal cost) to guide them?

No. Quite a lot of mainstream theory relies on assumptions which render their models totally unrealistic. The concept of perfect competition, for example, imagines that all market participants possess perfect knowledge — of the relevant economic data, of each other’s motives, etc. But this sidesteps what Hayek and others considered to be the central problem of economics: resource allocation in the context of imperfect knowledge. Hayek’s great contribution to the Austrian tradition was puzzling out the implications of this fact for the market order. Stipulating perfect knowledge, therefore, begs the question and renders us unable to provide anything like a realistic treatment of actual people’s actual behaviors in actual markets. Centrally planning an economy is therefore even more difficult.

8) Perhaps Mises’s essay contained relevant points when it was first penned, but don’t modern computers offer a way to solve the calculation problem?

The calculation problem remains a problem even with the power of computers, supercomputers, and quantum computers. There is no way to outcompete the market in the absence of prices for capital goods, and no way to establish such prices without a market.

I will say that I have a hard time putting limits on what an artificial superintelligence can do; can I really be certain that the kind of minds existing on a computer the size of Jupiter couldn’t plan a simple economy, even in principle? Perhaps not, but I am comfortable saying that no human, group of humans, or group of humans aided by foreseeable technology will be able to do so.

9) What is “market socialism”?

There doesn’t seem to be much consensus on what exactly market socialism entails, but it appears to be cooperative ownership of the means of production embedded in a framework which still uses a market in capital goods. How exactly this is supposed to work varies enormously from one model to the next.

10) How might the Soviet Union have benefited from world prices established in foreign, capitalist countries?

The heart of the calculation argument is that common ownership of the means of production either distorts or destroys prices altogether, making any semblance of economic calculation in capital goods markets impossible. But a country surrounded by market economies on all sides can still undertake to perform a blunted, ham-handed version of calculation by examining prices in those countries. In the months before starvation a Soviet farmer might’ve been able to approximate the cost of a new piece of equipment by looking at what similar equipment costs in Hungary.

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