These are notes from the sixth lecture given at the Mises University. Any errors are mine, feel free to point them out so that I can correct them.
This lecture was given by Prof. Salerno.
Classical Critique of Socialist Utopians
- Who will take out the trash? Incentive problem.
- Response: New socialist man will emerge and the problem will go away.
- Marx: Anyone who even discusses what Socialism will look like is ipso facto unscienific; it is simply historical law.
Mises’ Critique of Socialism
- Points:
- Why price system is necessary
- Why money prices are needed
- Why Socialism can’t calculate
- Why price system is necessary
- Rational allocation of resources under Socialism is impossible because it abolishes the essential pre-conditions:
- Money
- Markets
- etc.
- Money still exists, maybe, but that’s not enough
- Money
- The individual does not need prices to rationally allocate resources — simply compares costs and benefits, input materials vs. output materials. Non calculable action.
- Why can’t a planner make said rational decisions in such a way, using either his own value or “everyones’”?
- Need economic calculation.
- Need to know costs and benefits in a monetary amount.
- Infitnie number of combinations.
- It isn’t a question of knowledge; it’s a question of volition: will.
- Allocation problem: How do you know what to produce?
- Production problem: What’s the best way to produce the product? You do not know the opportunity cost of any given action.
- Need economic calculation.
- Free market solution: relies on prices to determine where to allocate scarce resources, and determine how to produce; know opportunity cost.
- Not only is a socialist economy not possible, it is a contradiction in terms. It is impossible in the sense that you can’t economize on resources: gross misallocations of labor.
- The Soviets tried replace markets with the Gross Output Plan:
- Quotas on how much each section should produce.
- Incentive problem.
- Quotas on how much each section should produce.
- The Soviet Union only lasted so long because it wasn’t a real Socialist State; it had free-market references. When they tried real Socialism — no price, no market — society broke down and reverted to primitivism, and went back to the household economic (1917-1921, “War Communism”.
- Intellectual division of labor (Mises):
- Consumers.
- Entrepreneurs.
- Resource-producers
Consumers determine prices and entrepreneurs determine resource-prices; together, they determine profit and loss.
- Consumers.
- Markets are a social appraisements process: entrepreneurs bidding for resources summarily appraise prices, which, as a market, works to appraise. Cardinal number with price.
- Entrepreneurs can make mistakes, and do so all the time:
- Entrepreneurs can see when they err, by losses, and fix that
situation.
- That process isn’t available to Socialists, as The State owns all
property, and can’t tell profits or losses.
- Entrepreneurs can see when they err, by losses, and fix that
Socialist responses (simplistic)
- 1920s: Add up apples and oranges.
- 1920s: Add up labor hours. Idiotic, because you can’t compare
different workers labor hours, and this doesn’t account for land/capital.
- 1920s: Tell managers to just do what they’re doing right now — only works if the world is static.
More complex Socialist reponses
- Mathematical solution: compute prices. This is not practical, as there are an enormous number of factors, and mind-boggling number of possible combinations.
- Trial and error method (market Socialism):
- Central Planning Board provides prices, and managers accept
them.
- parametric function of prices.
- Tell the firm to minimize average costs using the given prices.
- Where do the prices come from? Arbitrary. If find surplus, lower price; if shortage, increase price.
- Central Planning Board provides prices, and managers accept
- Hayek’s / Robbins’ response to the mathematical problem:
- Data scattered, hard to collect.
- Even if you do collect all the data, the sysetm of equations is too large to solve.
- Even if you could, by the time all of that was done, the data would be obsolete.
However, note that Hayek and Robbins made a major concession to the Socialists — that it is possible.
- Data scattered, hard to collect.
- Mises’ response to the mathematical problem:
- Central Planning Board still owns all resources.
- capitalism is not only managerial, but also entrepreneurial.
- You need a stock market, so you can dissolve bad firms and reduce the size of those that are junk, or institute new management.
- You must have the threat of profits, losses, and bankruptcy.
- Mises called this “playing market”, which would produce market prices just as as much little girls “play house”.
- Central Planning Board still owns all resources.
{ 4 comments }
I have some questions about Prof. Salerno’s
position (assuming accurate transcription):
1. He rejects the Hayekian position that
socialism’s failures are attributable
to “knowledge problems,” yet he speaks throughout
of the planners’ inability to “know” how to
rationally allocate resources (means) to
particular ends. Would not a Hayekian respond
that this is precisely the kind of thing Hayek
was referring to? If so, how is the Misesian
position really different from the Hayekian one?
2. He claims that an individual would be able to
forgo calculation because he can compare “costs
and benefits,” but supposedly this avenue is
unavailable to a planner. Why?
More importantly, he here seems to concede the
viability of a value calculus, but argues that a
monetary calculus is superior. Is this not the
Wieserian/Hayekian position? In the introduction
Epistemological Problems of Economics, Huelsmann
claims that Mises rejected the possibility of a
value calulus (value being a [n ordinal] relation
and not a thing, subjective or otherwise), and
that monetary calculation was not simply a
superior substitute and was actually something
completely different, without which (rational)
choice of means was impossible. Does Prof.
Salerno agree with this potrayal of the issue?
I think that Salerno is unfair to Hayek here, and I don’t think there is much need to differentiate Hayek and Mises on this issue, as Dan points out.
To my knowledge (no pun intended), Hayek argued that it would not be merely difficult to collect the necessary data, but impossible.
Dan, on your #2, I think you can argue that planners can only be aware of their own subjective costs and benefits, which obviously is not appropriate for planning anything but your own choices.
But I’m a little unclear on why Prof. Salerno would say that individuals don’t need prices to allocate resources, unless you’re talking about a very simplistic economy (or a particular simplistic choice). We probably shouldn’t be attributing any arguments based on these notes, but they could be useful for sparking debate. (By the way, nice work David)
On the calculation problem and its relationship to the knowledge problem, a vast literature exists. In particular, see this piece by Salerno.
At the risk of being too brief, maybe these comments will help. Individuals can only ordinally rank their preferences; an individual can not assign a cardinal value, i.e., a number or price, to his preferences. Hence, an individual is unable to quantitatively campare using a common denominator the relative efficiency of the myriad of possibilities to combine the factors of production to produce consumers goods. Only when there exists private ownwership of the means of production and catallactic competition for these factors can prices be established, and without such a competitively established price structure for the factors of production there can be no rationality in their alloccation. I believe Mises stated in Human Action that attempting to allocate resources without a market price system would literally be groping in the dark. While the Hayek “knowledge problem” certaintly points out another significant shortcoming of socialism, socialism’s most fundamental problem, as Mises agued, is its inherent inability to establish the prices necessary for the rational allocation of the factors of production. If anything, the economics profession, including some Austrian School economists, have been unfair to Mises in their evaluation of his argument.
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