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R48G: calculation debate

May 10th, 2017 · No Comments

Here’s an important essay on calculation debate….
Debunking the Economic Calculation Myth
September 12, 2013 at 9:52am

Posted by Adam Watson on Thursday, September 12, 2013

[First revision: Thanks to Brad-Lee Greasy Nichols and Keith Elliott Peterson for their contributions]

If you advocate any kind of socialist economics, you are sure to have heard the “economic calculation problem” argument from advocates of the “Austrian school” of economics.

In the 1920 article “Economic Calculation in the Socialist Commonwealth”, the former economic advisor of the Austrofascist Engelbert Dolfuss, Ludwig von Mises, argued that without private ownership of the means of production and without a competitive market for capital goods, it would be impossible to determine the value and “rational price” of those capital goods as they would not be “objects of exchange” but rather internal transfers. While Mises originally applied his “calculation argument” to centrally planned “command economies” in which the government owned the means of production, some Austrian economists have tended to overuse and exaggerate this claim – believing it to be applicable to all schools of socialist economics. They often do this regardless of how libertarian the socialist economic model, and while neglecting the central planning within capitalist firms and countries – whether in the form of an executive board of directors or the Economic Stabilization Act of 1970.

The principle defense against Mises’s argument at the time came from Fred Taylor and Oskar Lange. Although they were considered to have “won” the debate, they were put on the defensive and mistakenly assumed, as Mises did, central planning and neo-classical theory. Rather than completely dispelling the underlying myths of the “economic calculation problem”, they went on to demonstrate that socialist planning could mimic capitalist markets and produce results which were efficient from a capitalist’s point of view.

In light of the work by Fred Taylor and Oskar Lange, Frederick von Hayek shifted the calculation problem from its theoretical impossibility to whether the theoretical solution could be approximated in practice. However, the “calculation problem” in all of its formulations has been definitively solved since the 1990’s by the SFEcon algorithm which fulfills all of the criteria set out in Hayek’s 1945 paper. The SFEcon solution demonstrates a general input/output structure’s progress from a chaotic state to general optimum by linking prices, physical quanta, and money.

In “Why I Am Not an Austrian Economist”, the self-proclaimed anarcho-capitalist Bryan Caplan admits that “Austrians have overused the economic calculation argument” and goes on to state that “current events do nothing to show that economic calculation was the insuperable difficulty of socialist economies. There is no natural experiment of a socialist economy that suffered solely from its lack of economic calculation.” There has never been any empirical evidence that economic calculation was ever a difficulty for socialist economies – let alone a defining challenge rendering them impossible. Granted, a socialist economy could suffer without the possibility of economic calculation, but there is no historical socialist economy which ever collapsed solely due to it despite what some pro-capitalists would have us believe.

Mises himself once stated that, regarding his economic praxeology, “Its statements and propositions are not derived from experience. They are, like those of logic and mathematics, a priori. They are not subject to verification or falsification on the ground of experience and facts.” Rejecting the scientific method, Mises is essentially stating that he made it all up and that his so-called “theories” are unfalsifiable on the ground of experience and facts. How any sane person can take such “theories” even slightly seriously is beyond my scope of understanding.

Despite all of this, many anarcho-capitalists and Austrian economists still contend that the economic calculation problem is a devastating challenge and apply it to all forms of socialist economic models – even completely libertarian ones. For example, despite not being centrally planned or involving government ownership of the means of production and distribution, some Austrian economists have contended that anarcho-communists would not have the ability to efficiently distribute resources without a market and price mechanism, because prices could not be obtained rationally – i.e. avoiding waste and inefficiency. In short, a socialist economy without money could not make rational production decisions. However, are rational prices within a market even reached with a price mechanism? How efficient is a price mechanism, and how accurate are prices within capitalism?

Joe is the CEO of a large corporation, and calculates the price of his corporation’s capital goods based upon the cost of resources used in production – including employee remuneration and overhead costs. He determines the use of resources in production through monetary calculation based on market prices. Since profit is sought after in capitalism and Joe doesn’t want to break even, he charges a price above and beyond the costs involved in production.

Mises assumed that without monetary prices to facilitate comparisons, decisions regarding the use of resources would be largely arbitrary because, supposedly, no information could be passed between producers beyond the final outcome of production. He believed that the final product is all that matters when evaluating use. It is true that without sufficient information it is difficult to determine the use-value of a specific good and allocate resources. That is, in order to determine utility one must know cost. However, price signaling can not measure social costs or the externalities involved in producing a good, leaving out or hiding information such as labor, ecological impact, etc. For one example, if the market price of A is $3 and B is $4, it’s safe to assume that most people would choose A. However, what is hidden by the price is the high pollution cost of A whereas B is much more sustainable. Due to its cheaper quality and the poor working conditions involved in the production of A, it is more likely to fall apart relative to the more durable B. The question here is that if one knows this additional information which is not conveyed through the pricing mechanism, would they be willing to spend the extra dollar?

Therefore market price is not only ultimately driven by the profit motive, but it can only measure individual preferences among available options rather than values collectively enjoyed by everybody, let alone the actual costs involved in production. Since the price mechanism is based solely upon what is to be sold on an individual basis – solely upon the short-term preferences of consumers, it permits the production of goods regardless of any social or ecological cost and long term implications are not considered when a consumer makes a purchase.

Therefore, it can certainly be argued that all of the information necessary for rational decision-making in production and consumption of resources is available outside of the reductionist factor of price. So how can the information required to make rational decisions regarding the use and allocation of resources be made? The use-value of any good or service can only be determined by those directly using it – that is, the utility to users of the end product is actually where value comes from, meaning that it can only be determined by many people dispersed throughout society. This “information problem” was a main argument against central planning, but it is obvious why anarchist-communism does not have this problem since it is inherently decentralized. The generation and conveyance of such information could be done through the decentralized, participatory planning of horizontal, cybernated networks of workers’ and consumers’ councils.

Rather than utilizing price signaling, signals could be passed through various nodes of exchange. For example, consumers’ councils could record inputs such as what is demanded and pass this signal along to producers’/workers’ councils, and these signals would be used to evaluate costs and increase efficiency by allowing different options and resources to be compared to each other. Thus economic decision-making is entirely possible without monetary calculation, even within a competitive market economy.

A contemporary example could be found within modern open source development. In some distributions of Linux such as Ubuntu, for every donation to the project a person also has a vote in the development of new features, categories which may be lacking, etc. With the Linux kernel, we all have options in which distribution or software to use, as well as the ability to develop our own. These options and abilities allow for greater participation within the decision-making and development processes.

While it is entirely feasible that such recording and signaling could be done by hand, it is probably obvious to anyone that modern innovations in technology and communication have made this process even more efficient. Back in the 1970s, the Chilean Salvador Allende’s socialist government implemented what was known as Project Cybersyn. It was basically a primitive version of the internet which made projections based on incoming data. Unfortunately, it was eventually shut down by the capitalist-backed, fascist dictator Augusto Pinochet. However, before there was even an internet, it proved the vital role that the internet can play in the future of both economics and politics. In fact, the same Oskar Lange that “won” the economic calculation debate so many years ago has also been known to argue that the computer is even more efficient than markets at solving the multitude of simultaneous equations required for allocating economic inputs efficiently (either in terms of physical quantities or monetary prices).

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