I’ve been teaching the socialist calculation debate again this spring. Each time I return to these arguments, I think I see them more clearly. Here is my latest try at summing up the Austrian position and its implications for potential economic systems, capitalist or otherwise. The web is crawling with Austrophiles, so they can tell me whether I am walking in light or darkness.
1. The key concept is discovery: discovering what consumers need and want, and discovering the true costs of providing these things. Since they are subject to tacitly known and otherwise irreducibly qualitative determinants, values and costs cannot be ascertained apart from the actual processes of producing and marketing, so the technical problem of number crunching—devising algorithms to calculate equilibrium prices and quantities out of cost and demand information—is secondary. Any reasonably efficient economic system has to have processes of discovery, some for costs, others for the value of goods and services as determined by consumers. These processes need to be specified concretely.
2. Discovery requires trial and error. In an economy with a vast number of goods, and with complicated production and consumption relationships surrounding each good, it is inconceivable that trial and error can be sequential. Rather, there have to be many trials simultaneously, along with a process for determining which succeed or fail. That is the role of rivalry (competition) in a market economy, with the market test assessing success and failure. “Cost” is discovered by firms that succeed in being low-cost producers; “value” is discovered by those who succeed in marketing. This information is transmitted via prices to other firms, telling them whether they are producing at- or above-cost, and whether they are producing and selling at- or below-value. Any plausible economic system has to have a structure of multiple, simultaneous trials, a “hard” test that tells enterprises whether their trials are succeeding, and a vehicle for transmitting the results of these tests to all participants—in real time. On top of this, of course, there needs to be an incentive structure that causes those who failed the test to abandon the methods that were retrospectively unsuccessful.
16 comments:
The above ideas are not specifically Austrian, seems to me. They are ideas to which any advocate of free markets would endorse. For example I’m basically in favour of free markets, but there is not much in Austrian economics that appeals to me.
I wrote an article a few years back applying the socialist calculation argument to the internal workings of the corporation: "Economic Calculation in the Corporate Commonwealth."
http://www.thefreemanonline.org/featured/economic-calculation-in-the-corporate-commonwealth/
It formed the basis of one of the three sections of a chapter by the same name in my book Organization Theory:
http://members.tripod.com/kevin_carson/sitebuildercontent/sitebuilderfiles/Chapter7.pdf
Entrepreneurs cannot discover something that does not exist. Discovery is vastly over emphasized. Those who make discovery the core attribute of entrepreneurship have great difficulty dealing with novelty and creativity, and their disruptive side effects. The creation of new wants and needs, the creation of new markets, the creation of scarcity, the creation of waste are all the result of institutions that favor and promote the profit motive. In this context trial and error is not very useful because the system is not closed and stable.
The disruptions brought about by novelty and creativity make it very difficult for the market to self adjust. Israel Kirzner understand all of this. And since the self adjusting market is the alter of Kirzner and his followers, whatever interferes must be ignored or coopted. The calculation debate is a wasted distraction; both sides in the debate are wrong.
Interesting post. Of course, this vision of the capitalist process directly contradicts the vision of Walrasian equilibrium that drives mainstream economics. Does this bother people? A cynic wouldn't be surprised if people who say "We shouldn't regulate markets because people have complete knowledge" and people who say "We shouldn't regulate markets because people have incomplete knowledge" turn out to get along just fine...
In some contexts, local trial and error produces good results; in others, it produces disastrous results. The most important cause of disaster seems to be the existence of strategic complementarities. And omniscience on the part of a planner isn't required to realize that, e.g., equilibrium will feature coordination on a standard - where we have network effects - and to then think about how to make that standard the best one. For the Hayekian discovery process to go well, you need to rule out the same non-convexities that must be ruled out to give you the First Welfare Theorem.
How did the socialists develop the next generation of products? Where did competition come from?
I think the Austrian argument had two parts, one about incentives and one about information. The first part came from von Mises, who emphasized that without the profit motive, there would be insufficient incentives for firms to set or follow useful prices, as well as to engage in innovation of various sorts. It was Hayek who added the information arguement to this, saying that information is dispersed and tacit and thus only accurately transmitted through a decentralized market system of prices with the appropriate incentives. Something like that.
Tom Slee has a nice post quite germane to this topic on his Whimsley blog. It is review of Tim Harford's *Adapt*
"Any reasonably efficient economic system has to have processes of discovery, some for costs, others for the value of goods and services as determined by consumers. ...AND
"Any plausible economic system has to have a structure of multiple, simultaneous trials, a “hard” test that tells enterprises whether their trials are succeeding, and a vehicle for transmitting the results of these tests to all participants..."
I can't help but wonder how an an indigenous aboriginal man or woman would view such economic concepts. The assumption in the above two statements is that goods are produced for a market of consumers [such an economy being valued as 'efficient' and 'plausible'].
Well, sing out there if you think I'm wrong! ;-) I see great economic and political flaws in the act of whole post WWII generations of people - billions of individuals at once taking on the identity of 'consumer'; abandoning any notion of themselves as producers of real capital, food, clothing directly for themselves.
Judgement is not the knowledge of fundamental laws; it is knowing how to apply a knowledge of them. Charles Gow
Brenda, when did you get to be a fan of old J.B. Say?
Not JB Say. I'm more in sympathy with Ghandi's economic philosophy.
Not 'supply creates its own demand' but rather, the act of 'supplying' tends to make a truly rational person less inclined to 'demand' anything more than her/his needs....and to kill nothing but time.
I know from my experience, that mature fruit and nut trees, will provide far more than you could demand of them. And they are simply beautiful.
"God forbid that India should ever take to industrialism after the manner of the west... keeping the world in chains. If [our nation] took to similar economic exploitation, it would strip the world bare like locusts.
~Mahatma Gandhi
Brenda @ 9:46: I don't think it's an either/or thing. As a fan of Ralph Borsodi, I believe a major share of our consumption needs could be met more efficiently in the informal or household economy, and that another major share could be met most efficiently through demand-pull micromanufacturing at the local level.
But once the economy reaches a level of complexity where even a significant minority of needs are met through production for larger market areas, and a considerable share of primary inputs are met on the cash nexus, some form of market pricing is necessary, directly or indirectly, for rational factor allocation.
Even making a cost-effectivness decision on make-or-buy issues, whether to grow your own food and make your own bread (which is clearly more efficient in unit costs) assumes some sort of implicit pricing.
I make my living by my hands and it has certainly brought me to oppose the creation of a mental class of "consumers".
From what I know of the classical model however, even I am engaging in monetary-assisted barter with other suppliers.
I wonder that you seek to divide yourself from this point of view rather than find common ground.
Kevin C, thanks for the Ralph Borsodi lead. (I live in fear that the meaning I convey in each sentence of my writing has already been said a thousand times by a thousand different economists already). Borsodi certainly seems to nail many or most of my concerns in his book:
http://www.schoolofliving.org/Borsodi/This_Ugly_Civilization.pdf
You wrote: "Even making a cost-effectivness decision on make-or-buy issues, whether to grow your own food and make your own bread (which is clearly more efficient in unit costs) assumes some sort of implicit pricing..."
Yes. I doubt, however, that such mental calculations could be expressed adequately in formula or even in some 'rational' verbal formulation. Why do I prefer to wear clothes in shades of red and pink? When I begin to produce clothes for myself, why do I care that red sells more than yellow. Such a question/probability is irrelevant.
Wellbasically, you wrote: "I wonder that you seek to divide yourself from this point of view rather than find common ground."
No, that is not my wish. What you're 'hearing' is the frustration of one living quite literally inside the modern woodchip factory. Objecting vociferously to having our drinking water and habitat contamination by pesticide industrial inputs...being subjected (indeed) to an inceasing series of industrial assaults on body, soul, and dwelling.
http://tasmaniantimes.com/index.php/weblog/comments/aerial-spraying-regulation-farce-linzo-jimbo/
Brenda, I share your revulsion at such things as groundwater contamination by pesticides, but I think the root cause of it gets back to calculational chaos. The problem is that large corporations are privileged under our state capitalist system: the state subsidizes their inputs, protects them against competition through regulatory cartels, preempts common law liability for tortious behavior, etc., so that economic actors do not experience the full cost of the negative externalities they impose on others.
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