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Source link: http://archive.mises.org/3700/a-recommendation-for-the-dehomogenization-debate/

A Recommendation for the Dehomogenization Debate

June 10, 2005 by

Yesterday Joe Salerno gave an interesting talk on “The Debate on the Socialist Calculation Debate” (audio or video). I completely agree with Salerno et al. that there is an important difference between the Hayekian knowledge problem and the Misesian calculation problem, but in the journal battles over this, something never quite sat right with me. During Joe’s talk yesterday, I finally put my finger on it…Specifically, I don’t understand why Salerno (and Kinsella and perhaps others too on their side of this) think it so crucial to hammer home the point that market prices don’t convey knowledge. (E.g. Salerno criticized Hayek’s popular example of a tin mine collapsing and the spike in tin prices telling others to cut back on their consumption even though they don’t know the particular reasons this is necessary.) Their argument runs something like this: Actual market prices are at best a record of what happened in the past, and as such provide no true guide to entrepreneurs, who must use their judgment to forecast future consumer demand.

Okay, fair enough. RESPONSE #1: But by the same token (and this is what I was trying to say in the Q&A, though I probably rushed it) I could “prove” that the written word conveys no true knowledge. For example, someone might claim that a cookbook contains knowledge of how to bake a cake, but that’s not true at all! At best all it does is show what formulas worked in the past; if I try to cook on the moon, or if my oven is unplugged, or if the charge on an electron should suddenly change, then the recipe in the book is useless. It is simply not true that acquisition of a cookbook is all one needs to bake a cake; one also needs individual judgment and has to forecast the future, to know that a countertop will in fact be available for the finished cake, to know that the dinner guests won’t be allergic, etc.

RESPONSE #2: Especially since Hayek’s problem is named the knowledge problem, in contrast to Mises’ calculation problem, then I really don’t see why it matters whether or not prices convey “knowledge” (versus “information” or whatever). Why don’t Salerno et al. just say the following?

“You’re right Friedrich, the price system does indeed facilitate the transmission of information or knowledge. In that respect it saves humans from having to use supercomputers etc. to do the same thing, and thus frees up scarce resources. But guess what? Mises concedes that the planners could have all of the ‘dispersed knowledge’ concentrated into their heads. So you’re just going off on an interesting tangent when you talk about the role prices play in transmitting knowledge to actors. You’re still completley overlooking the more fundamental calculation problem.”

{ 3 comments }

Michael June 10, 2005 at 9:49 am

Market prices don’t have to convey information, specific or otherwise, to entrepreneurs in order to act as a guide to entrepreneurs — they simply have to exist. Prices don’t transmit knowledge so much as they influence incentive structures.

Andy D. June 10, 2005 at 11:12 am

I thought the calculation problem with socialism was not that they couldn’t gain the information from prices, but that prices would eventually become so skewed from governmet intervention, that it would be impossible to have economic calculation. So is Mises saying that prices do convey information, but not knowledge?

Paul Edwards June 10, 2005 at 8:43 pm

Hi Robert: From “Economic Calculation in the Socialist Commonwealth”, “Postscript: Why a Socialist Economy is “Impossible” by Joseph T. Salerno”
http://mises.org/econcalc/POST.asp
it seems you and Salerno are not so far apart.

For instance he uses the phrase “Knowledge of past market prices”, which should confirm that knowledge of past market prices is indeed knowledge. He also says “Whether or not one prefers to characterize entrepreneurial forecasting and appraisement as a procedure for “discovery” of knowledge, as Hayek does, what is important is that for Mises it is the indispensable starting point of the competitive process and not its social culminant”, which I think is what you are also driving at.

Does it seem that, according to Salerno, the knowledge of present prices is only necessary but not sufficient to obtain a non-chaotic market. The other key ingredient is the entrepreneur, who by owning the means of production is willing and able to use the knowledge of current prices to calculate; that critical market activity unavailable to the planner. It seems you all agree that regardless of how much even accurate knowledge a socialist planner could acquire and perhaps he could acquire a lot, without the entrepreneur, no necessary calculation can follow.

The paragraph from which I am quoting is this:

“For Mises, the starting point for entrepreneurial planning of production in a market economy is the experience of the present (actually immediately past) price structure of the market as well as of the underlying economic data. Knowledge of past market prices by the entrepreneur does not substitute for qualitative information about the economy, as Hayek seems to argue, but is necessarily complementary to it. The reason, for Mises, is that it is price structures as they emerge at future moments of time that are relevant to unavoidably time-consuming and therefore future-oriented production plans. But entrepreneurs can never know future prices directly; they are only able to appraise them in light of their “experience” of past prices and of their “understanding” of what transformations will take place in the present configuration of the qualitative economic data. Whether or not one prefers to characterize entrepreneurial forecasting and appraisement as a procedure for “discovery” of knowledge, as Hayek does, what is important is that for Mises it is the indispensable starting point of the competitive process and not its social culminant.”

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