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Source link: http://archive.mises.org/7996/valuation-without-calculation/

Valuation Without Calculation

April 4, 2008 by

The issue of economic calculation is one of the central themes of the entire book, and Mises breaks up the discussion over several chapters. In this chapter he focuses on what economic calculation is not — that is, he shows how there are quantitative relationships (in the natural sciences and in our technological know-how) that intersect “economic life,” but that these pieces of information alone do not suffice to solve the central problem of economic calculation.

The socialists, Institutionalists and Historical School attack the economists’ attention to the problems of the isolated individual, commonly referred to as “Crusoe economics.” Although it is necessary to first understand autarkic exchange before proceeding to interpersonal exchange, nonetheless there is some validity in the charge. Ironically, the Crusoe approach is inadequate because it cannot illustrate economic calculation, which is what vitiates the entire program of the socialists and other critics of the economists. FULL ARTICLE

{ 8 comments }

N. Joseph Potts April 5, 2008 at 2:34 pm

The Great Man errs badly on a matter of admittedly little importance to the bulk of us today. He describes in this excerpt the decisions of autarkic (hence, subsistence) farmers and hunter-gatherers between productive activities (say, raising food) and activities attendant to more-roundabout production of such things as, in this case, flaxen shirts. The activities mentioned are sowing flax, reaping it, spinning it, weaving it, and sewing the cloth. He correctly dismisses such activities as having little to tell us about economic calculation as it is aided by money. But he incorrectly calls such decisions “simple,” perhaps misled by the technological crudity of the processes.
Such decisions are not only not simple (What technique to use? What experiments to conduct in search of better or more-reliable outcome? How to cut and stitch the ultimate garment from the resultant cloth?) for those who carry out the processes not daily, but only very occasionally, and with little to no equipment, but they are fraught with the very gravest of risks at every turn. If I give over a quarter of the acreage I can sow over to flax, will the remaining barley be sufficient to feed us over the winter? Depends, among other things, on the weather. Can I neglect threshing of food crops long enough to weave and sew the shirt before winter? These risks arise primarily from the hand-to-mouth existence that invariably accompanies economic autarkism.
And their magnitude, I should think, would make any entrepreneur’s hair stand on end.

Person April 5, 2008 at 4:55 pm

How does an entrepreneur appropriately value “finding a cure for cancer”, compared to the value of the inputs needed to find that cure? What market signals reach him, and do these properly reflect the preference orderings of others?

(See if you can answer this without defining away the problem.)

P.M.Lawrence April 5, 2008 at 7:06 pm

No, he wasn’t talking about flaxen shirts but hempen ones. It takes a lot more to make flax, e.g. retting, and it all has to fit within the right stages of the agricultural year, so it’s really only practical – that is, cost effective – where the general pattern of activity is mixed so that synergies allow it conveniently. Even so, hemp fibre production itself is something like this (though not as elaborate), so Mises has struck on categories of activity that do not get well modelled and handled by putting them into a cash economy framework with individual transactions prioritised according to price signals.

And now the blog “improvements” have stopped preview from working (see earlier feedback for details of my platform)!

newson April 6, 2008 at 7:57 am

q:”How does an entrepreneur appropriately value “finding a cure for cancer”, compared to the value of the inputs needed to find that cure?

a: uses the entrepreneur’s secret weapon – the back of the envelope.

now here’s one for you: do you think the wright brothers did a cost/benefit analysis before turning the prop?

Michael A. Clem April 6, 2008 at 8:06 pm

How does an entrepreneur appropriately value “finding a cure for cancer”, compared to the value of the inputs needed to find that cure? What market signals reach him, and do these properly reflect the preference orderings of others?
He guesses. If he guesses right, he wins! If he guesses wrong, he loses. Okay, he uses educated guesses. He does his homework in the industry or field first, and THEN he guesses.
now here’s one for you: do you think the wright brothers did a cost/benefit analysis before turning the prop?
Were the Wright brothers really entrepreneurs? Sure, they probably realized that if they could make a successful heavier-than-air plane fly, they could make a lot of money with it. But I think they were probably more motivated by the technological challenge of making the plane, and not so much by the rewards they could earn by doing so.

newson April 7, 2008 at 10:33 am

“now here’s one for you: do you think the wright brothers did a cost/benefit analysis before turning the prop?”

actually i was being facetious for person’s benefit. i’m sure all those whose adhere to the austrian view of subjective valuation recognize the multiplicity of motives driving behaviour. who knows whether our cancer conqueror is driven by scientific curiosity, desire for riches or acclaim by public or colleagues?
all idle speculation.

Person April 7, 2008 at 11:24 am

Okay, little misunderstanding here: My question wasn’t how he “does the calculation”, but from where he gets the information that he would feed into his calculation.

That is, he imagines one day, having a cure. He’s going to figure how much revenue that would bring in. He already has an estimate for the cost of developing it. But why on earth *would* it bring in revenue once he has it?

See where this is leading? Does his calculation depend on whether there are INTELLECTUAL PROPERTY RIGHTS enrshined in law, within the current environment he lives in?

If there aren’t any, do his estimates about the future revenue stream (given that, you know, people can copy him and pay him nothing) accurately incorporate the high ranking people assign to the existence of a cure?

Hm … tough question. Any serious answers?

newson April 8, 2008 at 4:32 am

person says:
“See where this is leading? Does his calculation depend on whether there are INTELLECTUAL PROPERTY RIGHTS enrshined in law, within the current environment he lives in?

If there aren’t any, do his estimates about the future revenue stream (given that, you know, people can copy him and pay him nothing)”

you assume too much, person. were there no ip laws, i’d be extremely careful about the access i granted to my clinical demonstrations. i’d be taking clients’ rats, giving them one of my cancerbuster shots, and inviting them back for the contract-signing in one month’s time. or else, i’d buy a ute and sell the stuff off the back. travelling from town to town. maybe i’d even make a video of the tour like paris hilton and the richie girl.

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