Is Calculation Dispensible?
In the latest Critical Review, (Vol.16, No.1), Bryan Caplan offers an original contribution to the socialist calculation argument.("Is Socialism Really Impossible?", pp.33-52) He thinks that Mises is right that it is impossible for a socialist system to calculate; but Mises then takes an unwarranted step. Mises concludes that socialism is itself impossible; but this, Caplan says, doesn't follow. Why can't an economic system get along without economic calculation? Caplan doesn't just have in mind simple economies, where only a few goods are produced, but he questions the absolute necessity of calculation in complex modern economies as well. An economic system without prices won't do as well as a system with calculation, but the extent to which it fails is "quantitative." Mises should thus not say that the lack of calculation results in chaos.
Isn't Caplan challenging the obvious? Perhaps Caplan will next deny the need for money. True, money has advantages over barter; but we should avoid the "extreme" claim that without money, the economy of a developed nation would collapse. For that matter, haven't the advantages of the division of labor been much exaggerated? I look forward with eager anticipation to future installments of Caplan's series.
Comments (18)
The first work that come to mind is Hayek's The Fatal Conceit: The Errors of Socialism. To say that the extent that socialism fails is quantitative is to take extremely lightly if not completely ignore the ever-changing millions and billions and trillions of inputs of subjectively valuing buying/selling inputs of individuals the world over across every conceivable thing that can be produced (and in addition yet unknown substitutes and new things). This contrasts with the extreme few who wish to be in control of forcefully imposing relatively stable "objective" valuations across that spectrum. You may as well start writing a string of zeros for a lifetime to come to some estimate of the quantitative factor to which socialism would fail in comparison to the free market.
Published: August 12, 2004 1:22 PM
How can resources be rationally allocated without monetary calculation? How can heterogeneous units of the factors of production be compared and appraised without the common denominator of money prices? Without the satisfactory solution of these problems, there can be no economy except at the primitive household or tribal level. I believe Caplan does not fully grasp Mises's demonstration of the indispensibility of economic (monetary) calcualtion to rational economy, to the rational appraisement and allocation of the factors of production. To paraphrase Mises, without the money prices established by a free market there is no way to rationally appraise and allocate the factors of production, there is only groping in the dark. There is no common denominator with which to compare the myriad of different production possibilities that exist under social cooperation based on the extensive division of labor. Without monetary calculation, only primitive household or tribal economies/societies could exist, period. Yes, the difference between the numbers 0.1 and 100 is "quantitative", but the magnitude of this difference is illustrative of the diferrence in output between a primitive household or tribal economy and an advanced modern economy.
Published: August 12, 2004 1:31 PM
Perhaps Caplan should read his own historical work on what happens when there is true socialism and attempts are made to abolish money, such as The Anarcho-Statists of Spain. It's hard to believe the same guy who wrote that thinks that we can't say for sure that socialism will -- whenver implemented -- be a huge failure.
Published: August 12, 2004 2:19 PM
I'd like to know his take on agencies like the Post Office whom benefit from their ability to emulate the infrastructure, business model and most importantly pricing of private firms such as FedEx and UPS.
Without knowing what to price a First-class letter, who knows what arbitrary rate the men in blue would charge.
Of course, don't take my word for it, this should be empirically tested again and again and again...
Published: August 12, 2004 11:55 PM
One problem, Tim - ONLY the US postal service delivers first-class mail. In fact, it's a monopoly set forth in law. So there is actually no market mechanism that says 37 cents; it's just their guess.
UPS, FedEx, DHL all deliver gotta-be-there and freight, but not first-class. The USPS has a codified monopoly on that, and nothing FedEx or UPS offer comes close to being as cheap as 37 cents.
Published: August 12, 2004 11:59 PM
What was that joke Walter Block said about anti-trust lawyers and monopolies?
Anyways, I was being a little tongue-in-cheek, and as you pointed out regarding First-class pricing, they just guess.
There is at least one reason why neither FedEx nor UPS offer rates "as cheap as 37 cents" -- it is simply not profitable -- the very heart of the economic calculation debate.
If either of them charged $.37 for the same service, they might not be in business much longer (especially since they don't have someone to bail them out during dire straits).
There is no real market competition in the First-class arena and ultimately the Postal Service simply implemented a perpetual trial-and-error system.
One more point, just because the Postal Service charges "competitive" rates with other services (like Parcel Post or Priority Mail) does not mean they are operating efficiently at that level. Regardless as to what the costs are associated with their services, they do not have to bear the long-term financial burden (loses) like an entrepreneur does; whom additionally has to pay taxes to the State to fund their competitor, the Post Office System -- a one-two punch in the pocket book and major reallocation of productive capital.
Published: August 13, 2004 12:45 AM
I don't see what is wrong with Caplan's claim as described (I don't have access to the original). A socialist system without prices is vastly less efficient than a free market. But we can still look at one system and say "It turns X resources into Y goods", and look at the other and say "It turns X resources into Z goods", and then compare Y and Z. It may be that the ratio of socialism to capitalism is 1:1000 - that is still a quantifiable difference.
The USSR had cars. It had cigarettes. It had vodka. It was an economy. A murderously inefficient economy, but one which succeeded in turning raw materials into a few goods. Is socialism inefficient? Of course. Is it likely to lead to horrid dictatorships? Sure! Would it ever work well? Unlikely. But "impossible"? That's going a bit far.
As an analogy, consider life without the wheel or water transport. It would be horrible. Transporting goods from place to place would be terribly labor-intensive (saddlebags?). As a result, the economy would be much simpler, as trade would be limited. But goods would still be produced, they'd still move around, and society would still get slowly wealthier as its knowledge increased (information can still spread). Such an economy would be simple, but it would still be an economy, it would not be "impossible".
As for your argument about money, wouldn't it be better to stick to criticizing Caplan for what he says than your caricature of what he hasn't?
Published: August 13, 2004 3:02 AM
The USSR had the rest of the world pricing things for them. In Gene Callahan's book _Economics for Real People_ there's a great quote:
Lew Rockwell once told a wonderful story about Mikhail Gorbachev's press secretary. Asked what his dream for mankind was, he replied that he wished to see all of the world embrace socialism, except for New Zealand. "Why not New Zealand?" he was asked. "Well," he responded, "we need someone to get the prices from."
Published: August 13, 2004 4:09 AM
Patri,
I think the flaw in your argument is that (contrary to popular belief) even the USSR came to increasingly allow for a limited market, as they realised the impossibility of total central planning.
In "Economics for Real People", Callahan reports that Lenin once said that his dream was that communism would spread to the entire world, except for New Zealand. When asked : "Why the exception?", Lenin replied : "Well, we need someone to get the prices from."
Published: August 13, 2004 4:30 AM
It seems my last comment is redundant as I posted it before reading Anonymous Coward's. I am sure his quote from Callahan's book is more accurate than mine - my memory sometimes plays tricks on me.
Published: August 13, 2004 4:40 AM
there is fallacy to use USSR as an example of the proof of the prossibility of socialism.
USSR wasn't a true socialist system. There was black market, small private land for peasant, soviet plannists use the prices of goods in US to allocate their own ressources, etc...
When Lenin get the power, he would like to collectivise everything, but even before this dream will become real, as more and more things became collectivised, the global system became unstable. So, it was a so huge collapse even before the state of total socialism that the communists must accept to "tolerate" some part of private property. So, the repression against black market became more moderate. peasants "received" the right to own a small part of land for their own consumption, etc ...
So, in fact, that was the small part of capitalism will permit to USSR to not collapse immediately.
Socialism is impossible outside a small group of personn like in a familly or maybe in a small town, but only if it's a non-coercitive socialism.
Published: August 13, 2004 4:56 AM
When Mises stated that a socialist economy is "impossible", I believe he meant that a modern industrial/commercial economy characterized by social cooperation under the extensive division of labor is impossible under socialism. This must be so due to socialism's lack of any method of economic calculation and, thus, rational resource appraisement and allocation. In his 1920 article, he never stated that a primitive household or tribal economy with its extremely limited division of labor (and output) could not exist under socialism. In fact, he apparently believed this is the type of economic organization society would degenerate into under true socialism.
Published: August 13, 2004 7:01 AM
It's a mistake to "calculate" the efficiency/inefficiency of a socialist system by measuring the number of X resources it turns into Y goods. Why? Because it does not take into account the subjective preferences of individuals.
Take the Socialist Subterranean Construction Bureau. In order to maximize employment the day shift digs ditches. The night shift fills those ditches in. In the Bureau's Report to the Industrial Minister they report that 2 Trillion Tons of Dirt have been moved. That production report is entirely MEANINGLESS.
For every single individual who's ever changing subjective valuations are forced to accept the rulers objective valuations of what is ranked most important to least important for society you have huge comparative inefficiency. That cannot even be technically *QUANTIFIED*. As Mises showed, those preferences are ranked. Multiply some arbitrary mathematical representation of that innefficiency out for every single living human being. And then multiply that total by itself for every second in the future (as preferences are constantly changing) or whatever arbitrary time period you like--the number would still get exponentially huge quick).
Like I said at the top, you will be writing zeros for your entire life to come to some estimate of how badly "real" socialism would fail in comparison to a "real" free market!!!!! And it only exponentially more so the further out in time one "measures". It would be like comparing a single abacus to all the CPUs in the world to get some starting idea of the different information processing capabilities of the two "systems".
Published: August 13, 2004 9:16 AM
I believe it is instructive to note the context in which Mises's made his calculation critique of socialism. Socialists were arguing that an econmomy in which the state owns the factors of production (except labor) would be more efficient and provide a considerably higher material standard of living for the masses than the capitalist system that is based on the private ownership of the means of production. Eliminate (in the economic sense) the capitalist and the remuneration that he receives from his ownersip of the non-labor factors of production, and the prosperity of the masses would increase substantially. Mises argued that these assertions by the socialists are nonsense. As noted in other Blog comments above, Mises demonstrated that a modern industrial/commercial economy would be literally impossible under true socialism. Under socialism, standards of living would precipitously fall to the largely hand-to-mouth level of the primitive household or tribal economies that "society" would degenerate into.
Published: August 13, 2004 11:03 AM
I've just read the article (except for section 5).
There are some remarks, which are not quite correct in my opinion.
However, I think Caplan is quite Misesian on this position.
He agrees that under socialism economic calculation is impossible and nothing
can change that. There is no private property, ergo no prices, ergo no
calculation. That is why socialism would be a very very very very BAD system.
Caplan's however objects pointing out four things.
1. There are other reasons, why socialism is a bad system. Lack of
information, lack of incentives and so on.
But does it really weaken Mises' argument? No. Mises realized that there
are other problems, that cannot and will not be easily overthrown.
Mises' point was simply to show that EVEN IF everything went right under
socialism, still it would be a bad system. The strenght of Mises' argument is
to show that even if (a) government is runed by Mother Teresa, (b) we have
a "new socialist man" and everybody loves to work, and (c) there is no
information problem (government knows every technological way of producing
things), then still socialism would not work. Still we would end up destroying
civilization.
Now... We should not forget about (a), (b) and (c). Rothbard would teach You
that government is runed by bad people and is inherently bad, and that welfare
state has important sociological consequences (incentive problem). All this is
very important and
cannot be forgotten. Mises knew this well.
But his additional argument is so important, because it shows that if we rule
out "bad nature of man" (as socialists assumed), then still socialism will
lead do disaster.
The only thing Caplan has achieved is to show that there are other important
factors in collapse of communism.
As Rothbard would say - so what? Does anyone know any Austrian who said
otherwise? Then please write to me about him.
2. Socialism is "impossible". I will go in here maybe a little to far in
speculating.
In my opinion Mises' claim wasn't that nobody will try to impose socialism. Of
course not. That would be nonsense.
Instead Mises looked at socialist's plans. Their goal was to abandon
capitalism and introduce another, better system, under which production would
still be growing and thanks to redistributive policies would bring higher
living conditions than under capitalism.
And exactly THIS socialism is "impossible". It is impossible to have high
living standard without private property.
Socialism inevitably results in a disaster. Socialism equals misery. Period.
"Socialism with high living standard" is a "squared circle". It's simply
IMPOSSIBLE just as "the ball cannot be red and nonred all over at the same
time".
And that was Mises' point. He just took for granted that nobody would argue in
favor of socialism by saying "we want socialism, because we want annihilation
of the human race".
3. Caplan says that Mises' argument is a quantitative. However at one point he
sees his own mistake. "One might be tempted to claim that the distinction
between the Crusoe economy and the modern economy is a qualitative one. The
modern economy uses "higher order goods," whereas the Crusoe economy involves
only consumption goods. But this will not do. Misesian correctly describes
Crusoe's productive processes as "relatively short." So even Crusoe's
techniques are roundabout to a certain extent. They do not differ in kind
from more advanced techniques.".
So certainly the question is NOT how much, but WHETHER.
Wheter there should or should not be a capital market.
That problem is certainly a qualitative one.
4. Socialism could work without economic calculation. Government could alocate
resources effectively without price system. It might happen.
Well... of course. It might happen that on my chair I could swim the Atlantic
ocean. It might happen that when I throw my coin it will neither show "heads"
nor "tails". It might happen that when you increase money supply by
100000000000%, prices will decline. It might happen that when you jump from
500 metres you will survive. It might happen that you win one hundred and ten
lotteries in a row. And of course it might happen that under socialism
planners will organize an economic system as effectively as under capitalism
it would be.
However the question remains: how this could be achieved?
And Mises shows that without economic calculation, without prices, planners
would be completely blind (even with "new socialist man", full knowledge and
good government). And they would need an eeeeeenormous luck to successfully
copy market economy. Remembering about heterogenous capital goods, about many
higher order goods, about the need for sound money, this task seems even more
diffucult than winning 110 lotteries in a row or swimming the ocean on my
chair.
matt
Published: August 13, 2004 11:41 AM
I have not read this article, but judging from what Caplan has said elsewhere, I think his point is correct and relevant.
Elsewhere Caplan has argued that Misesian a priorism can not show that a socialist economy is impossible. If an economy can not calculate prices, this means that when there are alternate ways to engage in a process of production, there is no way to choose the alternative which will lead to the greatest amount of total production.
Mises thought that this inability would make a socialist economy so poor that it could not be maintained. The importance of this is that it would allow socialism to be dismissed no matter what value judgments you espoused. Even if your morality still regarded socialism as superior, you can't advocate it because it could never be established.
If you show that Mises makes an unqualified quantitative judgment, you show that he hasn't made a value-free case against socialism.
That is just my summary of what Caplan has argued on the subject elsewhere, but I think its correct.
Published: August 13, 2004 4:40 PM
I suppose the question is, "What does von Mises mean by chaos"? If by chaos one means the underutilization and misallocation of resources destined to impoverish a group which is economically attached, then von Mises is correct. See Hayek and the idea of asymmetry of information. No value judgements needed.
However, if you want to impose a value judgement and say that John or Suzie or Stalin or Fidel or Satan should direct the economics based upon the positions of stars, the greatest good for the greatest number, selfishness, altruism, etc. then indeed a "stable state" could exist something like the USSR or Hussein lead Iraq or pick an African country, etc.
Published: August 15, 2004 10:04 AM
In his original 1920 article, Mises does acknowledge that a household or tribal economy is possible under socialism. An individual economic agent would likely be able to grasp, without the aid of money prices, the extremely limited productive scope that characterizes the household or tribal economy. Again, Mises's argument was that a modern industrial/commercial economy characterized by social cooperation under the extensive division of labor is impossible under socialism. This is the logical result of the socialist economy's lack of the common denominator of money prices in the non-labor factors of production, and the rational calculation, and hence appraisement and utilization, that money prices make possible. The myriad of production possibilities that characterize the modern industrial/commercial economy requires some method to compare heterogeneous units, which is achieved by money prices and monetary calculation in the free market economy.
Published: August 16, 2004 7:37 AM