When Does Economic Calculation Become Necessary
Many people have said that the collapse of the Soviet Union proved that Mises was correct. But if its survival for seventy years did not prove him wrong, then it is hard to see how its eventual demise could have proved him right. New research into the origins of writing provide clues that allows us to formulate Mises's argument concerning calculation more precisely. [Full Article]
Comments (18)
Gene writes that:
"A culture first develops the art of writing, as a necessary complement to economic calculation. Finally, it is the growing need to track and tally economic activities [that]is the chief impetus in the development of writing."
How, then, did all those avowedly non-literate Celts manage to participate in widespread oceanic and transcontinental trade - and produce the artistic and technological evidence of a well-formed division of labour - without ever scribbling things down?
How did they become so rich that Caesar plundered them of enough gold that he could later shower 200 coins for every common solder, 400 for every centurion, and 800 for every tribune on his lackeys?
This may be the reason the Babylonians developed writing, but the unconscious focus on the Oxbridge Classicist(rather Neo-con)view of history as Civilized (us) and Barbarian (them)suggests the generalization is far too sweeping.
Published: November 12, 2004 8:12 AM
Bryan Caplan's objection is fundamentally flawed. There is no such thing as one man socialism. Socialism is using force to order people to produce and "trade"/take-by-force what they would not voluntarily do. It does not take into account every individual's ever changing subjective ranked preferences. Socialism (and all degrees of economic intervention) get ever more inefficient with the more people it effects and the period of time which elapses between command order changes. The inefficiency, however, is just as true for two people as it is for 2 billion people.
When Robinson Crusoe and Friday voluntarily trade they both increase their subjective wealth with every transaction. When Robinson Crusoe orders Friday to produce and accept Crusoe's socialist (necessarily violently coercive) dictates there is no voluntary trade and price to the extent production and trade is non-voluntary.
This is easily shown by taking how Menger shows the increase in wealth that comes about from trade to both parties of a transaction and mutliplying by the number of people that trade and the number of transactions they do in a modern economy. As socialism necessarily prevents voluntary trade, the inefficiency is a subtraction of all the wealth increasing voluntary exchanges that are no longer *allowed* to occur. Given the time it takes for subjective preferences to change (they are ever changing) and the number of transactions every individual in a modern economy undertakes daily and given the number of people existing in a modern economy the calculation innefficiency gets *exponentially* larger when coercive socialist force controls actions in a modern economy.
That assumption by Mises is no more "quantitative" then the supply and demand assumption that given an increase in demand with supply the same prices will increase.
Published: November 12, 2004 9:00 AM
If memory serves, the Celts had a very highly developed verbal culture, e.g. with long memorized ballads, etc. Maybe it resembled the culture of the Iroquoians, who it is said could memorize and repeat verbatim very long speeches. Is it possible that for the Celts, their highly developed memories (and perhaps a highly developed sense of honor) were sufficient for completing complex and long-distance transactions?
In Mesopotamia, perhaps there were language problems among all the people migrating to the region (the famous 'babble' of Babylon), or else the people who moved there had less highly developed skills and attitudes for trade. So in that place and time, a simple written code may have been a necessary invention for people whose memories and honor were not up to the task at hand.
Published: November 12, 2004 9:14 AM
And most importantly, under pure socialism, which never has existed and never could exist, there are *zero* voluntary transactions and therefore *no* prices whatsoever. Even so, there is much exchange that occurs that has no price component whatsoever such as the marriage between two individuals. To the extent that people are free to choose their mates is an equivalent extent to which the economy is *not* socialist. There are many such exceptions, including all black market activity, that excepted the USSR from being a pure socialist economy. However, all degrees to which the actions undertook were socialistically directed (coercively enforced) is the degree to which it was inefficient, is the degree to which prices did not exist for certain things, is the degree to which economic calculation was not possible. 100% socialism = 0% pricing information.
Published: November 12, 2004 10:33 AM
Boundry areas are maybe the most interesting subjects that can be studied but they only exist in theory. A system seems to flip flop from one side to the other. No such thing as a semi-simple or a semi-complex economic system
Published: November 12, 2004 12:54 PM
Getting a bit beyond the complex-vs-simple-economy question implied by Mises's calculation theorem, I have seen it represented (e.g., in an article in last month's Freeman "The Most Elusive Proposition") that LANGUAGE ITSELF arose from the need to communicate in economic cooperation and trade and further that SOCIETY ITSELF (non-predatory cooperation) arose from the same source. Against these ideas, the idea that writing arose from economic activity actually seems comparatively modest.
Published: November 12, 2004 2:15 PM
"It is around that time that clay tokens, their shape reflecting the goods being traded, first make their appearance."
What exact function did these "tokens" serve? From the article I assume some sort of accounting procedure.
Published: November 12, 2004 6:25 PM
"What exact function did these "tokens" serve? "
Futures options!
Published: November 12, 2004 10:25 PM
I think that the answer is much simpler than all of the proposals. In fact, it's a matter of interpreting Mises correctly.
"These people performed only very simple processes of production. For them no calculation was needed, as they could directly compare input and output. If they wanted shirts, they grew hemp, they spun, wove, and sewed. They could, without any calculation, easily make up their minds whether or not the toil and trouble expended were compensated by the product.
What he's telling us is that economic calculation is unnecessary in this case because only one individual is involved. Considering price, however expressed, as a mode of communication, it becomes necessary when an external producer/consumer becomes involved within the production-consumption system. Calculation is a translation of what is internally understood into a form that is externally understood: price. Economic calculation becomes necessary to convey information to the external producer/consumer that has been interposed. The requirement of price, therefore, is in the case that the production and consumption of a good or service is not entirely limited to one person.
What depends on these requirements? Are they required for production to occur? No. They are required to produce intended quantities. Goods and services can still be produced. It's just that they will be produced in strange amounts that do not bear any apparent relation to demand. This is the chaos that Mises speaks of.
Because quantities are determined chaotically, according to incidental, uncoordinated actions of people within the system, there can be no remote { centrally planned } method of determining the survival duration of the participants. The only reason that we can sensibly analyze market economies remotely (macroeconomics) is because they provide systematic data consolidated in the language of price. It's an externalization of information that allows us to coordinate actions to an end.
The problem with Mises' concept is more of relevence than accuracy. All empirical socialisms have not really excepted price. It seems that systematic calculation is complicated to the greatest possible extent by abolishing currency and mathematical respresentations. Instead, price is more stealthily implied by other methods. Successful stealth allows the conceptual pretense to sustain.
Published: November 13, 2004 5:39 AM
economic calculation only becomes necessary when one takes into consideration political profit, viz, how much material wealth is needed to coerce and compulse. the costs of coercion is reduced with propaganda( oftentimes masquerading as education).and the if the state is allowed to execute political prisoners, then the population is lowered and the resultant loss of wealth becomes less problematic. Instances of economic calculation needed by the state are, for example, interfering with the quality of goods produced, which cuts into profits, and in mediaevel fashion cuts into supply. (herbert spencer cogently noted this). When it is no longer profitable to produce, the state has to intervene somewhere and produce and calculation is needed, and the paradox that Schumpeter described occurs. Incidentally, the idea of one man socialism is false, we do not know when man appeared on the earth, but it is highly questionable whether anyone at all could live without the division of labor.
Published: November 13, 2004 6:19 AM
Some clarification/information:
1.The clay 'tokens' were indeed used for book-keeping purposes. Histories of mathematics, book-keeping & accounting - all begin with Mesopotamia. Denise Schmandt-Besserat, the historian who first systematically examined these tokens, saw that they moved *in parallel with economic activity*, from'simple' to 'complex'. 'Simple' tokens denoted such things as jars of oil, baskets of barley & the like. 'Complex' tokens indicated, inter alia,types of sheep, bread, measures of honey, wool,rope,varieties of cloth,kinds of clothing, mats, tools, metal, different types of stone & pottery utensils, bracelets, perfume, etc. Tens of thousands of clay tablets, with cuneiform writing, have survived from later periods. The bulk are records & accounts of temple estates & workshops, & merchants. They indicate an even more complex exchange order,immensely greater varieties of products, & a trade network from eastern Anatolia to the Indus Valley.
2. Archaeologists & historians have been recently re-examining & re-thinking the archaeological & lingiustic materials available on the peoples & cultures that flourished north of the Alps in the late pre-Roman Iron Age. This specification is necessary precisely because of this re-examination & re-thinking. For the best most recent summary, see John Collis, The Celts (Tempus 2003.)
Published: November 13, 2004 8:27 AM
Everyone seems to be missing what Mises was actually describing in pointing to the socialist flaw--the lack of economic calculation. It is not necessary (though it may be interesting) to know the specific history of counting, writing, media of exchange, division of labor, trade, etc. These do not bear directly on the problem Mises described and which must continuously confound all attempts to create a socialist economy (and which even, to a great extent, render government expenditures impossible of "results-oriented" analysis of the type routine in commerce).,
The problem which is solved by economic calculation is that of best possible utilization of available resources: in the first place, to ascertain that output product is greater than input resources; and, in the second, that no alternate arrangement of those inputs would be capable of yielding the same (or more) output with lesser (or the same) input. And, although it is true that the market prices of the diverse products are part of the information leading to the desired knowledge, there is another, even more significant constellation of price data: that of prices of the factors of production (including not only raw materials, machinery, etc. but, as well, representation in share prices of the concerned enterprises). While it is possible for comparison of simple revenues minus expenses to satisfy the first (above) requirement, the answer to the even more important (for determintion of future action) is more dependent on the second.
A market economy (of which an essential component is the free market in goods of higher orders--including media of exchange and assets denominated in them) is an exquisite arrangement in which the most up-to-date information is constantly conveyed to those most in need by experts with respect to each of the products concerned, all the way from the specialized enterprise to the specialized consumer (as each of us is at the moment of purchase).
It is useless to wonder or quibble about whether or not a socialist entity is possible or to speculate on just how such a contrivance might be arranged. The directors would not only need all of the knowledge and skills which, in the market society, are distributed among the many entrepreneurs and managers but also some method for knowing (and predicting changes daily) in the habits and preferences of the consumers. But few socialists have ever made such representations. Rather, they insist, that those arrangements which they shall choose shall be "best," the proof of which will be shown in that those on the receiving end will be in no position to disagree.
Published: November 13, 2004 8:48 AM
To Caley McKibbin:
Your suggestion doesn't work. Let's take two premises from Mises:
1) Economic calculation relies on money prices; and
2) Money only arises through a long historical process of exchange, as a result of which one commodity comes to be the commonly accepted medium of exchange.
Now we add your third premises:
3) Economic calculation is only unneccesary for a one-person economy.
We reach the absurd conclusion that only a one-person economy is possible!
What he's telling us is that economic calculation is unnecessary in this case because only one individual is involved.
Published: November 14, 2004 7:42 AM
Perhaps I am s simpleton, but without market pricing how do you measure oppotunity cost. Without opportunity cost, how do you msot efficiently allocate resources. The Soviet Union, China, etc. have to copy what the free economies are doing. That is why they spend so much time spying on the U.S. and purchasing access to U.S. technology which they other- wise would not be able to produce.
Perhaps a good research study would be to study the varied and unique ways they buy, beg, and steal what they need.
Published: November 14, 2004 3:56 PM
I appreciated Dr. Callahan's article for several reasons, but primarily for raising the issue of when economic calculation becomes necessary.
I submit that part of this issue is a-priori (as is the method of Austrian economics). If an economic activity is so elementary that calculation is not needed, there is no need for calculation; if it is too complex to be managed without calculation, then calculation is necessary for conducting the activity. This statement is analytic, and cannot be refuted by empirical evidence. It says: something is necessary or it is not; when it is necessary it is needed; when it is not necessary, it is not needed.
Perhaps a subtle issue is that it is analytic a-priori, whereas Austrian economics relies on the synthetic a-priori. However, although some are concerned about this difference, von Mises didn't appear to find that it mattered.
Published: November 15, 2004 6:58 AM
I would stay away from Kantian distinctions. The Kantian philosophy has been refuted by several philosophers including Nietzsche (see preface to Daybreak). Mises' a prori reasoning does not rest on Kant. However, your point about a priori theorizing seems valid to me. Archeology per se can't answer the question. We should have to say - a priori - what basically separates simple vs. complex economies. Mises was saying that the emergence of money is precisely what separates them.
The Caplanian objection stems from a misunderstanding of Mises' argument. Caplan sees it as resting on a tipping point at which an economy becomes modern. He clearly sees this as a quantitative problem - i.e. that Mises implicitly thought 100, 1,000 or 1 million would do the trick.
As stated above however, Mises states the problem clearly: it is the institution of money that separates modern vs. isolated or simple economies. The question of money prices is not a matter of constant ratios but rather a matter of ever changing ratios used by economic actors to fashion and execute plans.
Socalism outlaws private property and thereby money prices. Without this no profit and loss or other economic test (monetary) is possible. Economic (as opposed to quantitative or technological) calculation is then no longer possible. Irrational "guessing" takes over and the modern economy ceases.
Published: November 15, 2004 6:21 PM
I would stay away from Kantian distinctions. The Kantian philosophy has been refuted by several philosophers including Nietzsche (see preface to Daybreak). Mises' a prori reasoning does not rest on Kant. However, your point about a priori theorizing seems valid to me. Archeology per se can't answer the question. We should have to say - a priori - what basically separates simple vs. complex economies. Mises was saying that the emergence of money is precisely what separates them.
The Caplanian objection stems from a misunderstanding of Mises' argument. Caplan sees it as resting on a tipping point at which an economy becomes modern. He clearly sees this as a quantitative problem - i.e. that Mises implicitly thought 100, 1,000 or 1 million would do the trick.
As stated above however, Mises states the problem clearly: it is the institution of money that separates modern vs. isolated or simple economies. The question of money prices is not a matter of constant ratios but rather a matter of ever changing ratios used by economic actors to fashion and execute plans.
Socalism outlaws private property and thereby money prices. Without this no profit and loss or other economic test (monetary) is possible. Economic (as opposed to quantitative or technological) calculation is then no longer possible. Irrational "guessing" takes over and the modern economy ceases.
Published: November 15, 2004 6:22 PM
Re: the Celts.
1) My article is not positing a historical law, for one thing because historical laws don't exist. Instead, I am suggesting an ideal type to which real situations will more or less conform.
2) In any case, one thing we can say for sure about the Celts (as they are described above): Their economy did not become so complex that they had to use accounting, did it?
Published: November 16, 2004 5:54 AM