Economic calculation problem

[CCCPneubauten]

:ph34r: http://en.wikipedia.org/wiki/Economic_calculation_debate
:o

The six points made are interesting, yet I don't know how to counter them.

1.The basic economic problem is to produce the "right quantity" of all goods and services, including any capital goods required to produce the finished goods or services. (Assume for this argument that "goods" refers to both goods and services.)

2.Since the factors of production are finite, producing more of one good means producing less of some other good. Therefore the basic economic problem can be restated thus: given a fixed quantity of the factors of production, how should they be allocated to produce the "right" set of final goods?

3.In a free market, where prices are free to rise and fall without restriction, the price of a good rises when demand increases, and falls when supply increases. If supply is insufficient to meet demand, the price increases, and producers are motivated to make more of that good. If demand is insufficient to purchase the available goods, then prices fall, and less of the good is produced. This is what it means when an economist of the Austrian school says that prices are the mechanism that matches supply with demand.

4.Under socialism, prices are not free to rise and fall. Instead, prices are set by central planners. Put differently, because there is no private property in the means of production, individuals have no power to set prices in response to supply and demand.

(Okay, maybe this one is easy to blow over)

5.Due to these price controls, there is no reliable source of information about demand, and hence no way to decide how much of a good to produce. This is the economic calculation problem.

6.Since producing too much of one good implies producing too little of another, the result of the calculation problem is that there will be acute shortages of one good or another. Inherent in the calculation problem is the conclusion that it is impossible to predict which goods will experience shortage, since if that could be predicted, production could be adjusted to eliminate the shortage, and the calculation problem would in fact be solvable. The assertion of Mises is that the calculation problem is inherently unsolvable.


It would do me good to know how to counter such points. :ph34r:

[ComradeRed]

I'm extremely exhausted (the heat keeps me up :(), so I apologize if this is a rambling post.

The fundamental premise the vulgar economists have is that everything is always scarce, so we can't produce the right quantity (though we can somehow overproduce, by the magic of capitalism :rolleyes: ).

This argument is unrealistic since it presupposes some omniscient third party observer which doesn't exist. We don't really know how much resources exist, though it usually appears to be plentiful.



2.Since the factors of production are finite, producing more of one good means producing less of some other good. Therefore the basic economic problem can be restated thus: given a fixed quantity of the factors of production, how should they be allocated to produce the "right" set of final goods? This is a loaded question since:

1. The "factors" of production is complete bullocks; the (circular flow) model is that households "make" capital (or "the factors of production") but this is nonsense. I don't know 'bout you, but I don't make machines in my own house.

If they mean financial flows by capital, you can't make a commodity from money alone, you need the physical means to do it (then there would be another sector that's left out in the model -- even then it doesn't work).

2. Changing the production of capital goods affects the sector that produces capital goods (it isn't made out of nothing). This is not taken into account. If we make more capital goods, that affects the non capital goods production.

3. The economy is too generalized into two commodities (capital and non-capital). This loses character mathemtically, as was pressed in the Cambridge Capital Contraversy.



3.In a free market, where prices are free to rise and fall without restriction, the price of a good rises when demand increases, and falls when supply increases. If supply is insufficient to meet demand, the price increases, and producers are motivated to make more of that good. If demand is insufficient to purchase the available goods, then prices fall, and less of the good is produced. This is what it means when an economist of the Austrian school says that prices are the mechanism that matches supply with demand. But the problem is dynamics. In an environment where animals don't reproduce, the quantity of animals approaches zero.

An economy is essentially an environment whose animals are "firms". Firms do not, to my knowledge anyways, reproduce.

This is one of Marx's big points too. The number of firms approaches zero, though the size of the firm approaches infinity. Thus there is absolutely nothing from stopping a monopolistic (or oligopolistic) firm from creating an artificial supply shortage.

They can crush competition as competitors haven't yet achieved the size, fame, or "absolute" productivity as the monopolistic firm.

The mechanism is broken.



5.Due to these price controls, there is no reliable source of information about demand, and hence no way to decide how much of a good to produce. This is the economic calculation problem. Mathematical fallacy, switching the dependent and independent variables. The market doesn't magically and instantaneosuly revolve around the buyer, it's the other way round (if I walk in to 7-11 and try to haggle for a drink for $.05, they ain't gonna change their price).

This point is moot.



6.Since producing too much of one good implies producing too little of another, the result of the calculation problem is that there will be acute shortages of one good or another. Inherent in the calculation problem is the conclusion that it is impossible to predict which goods will experience shortage, since if that could be predicted, production could be adjusted to eliminate the shortage, and the calculation problem would in fact be solvable. The assertion of Mises is that the calculation problem is inherently unsolvable. Mises can suck a bible, because there are unique solutions to an economy as a system of equations.

Again, see the above points, and for details on an economy as a system of equations see the neo-Ricardians ("Sraffians"). Though they are kinda wacky...

[CCCPneubauten]

Wonderful! And by the way, I am really enjoying your LEAN MARXIST ECONOMICS, you are a wizz at this, thanks for sharing the information. Helps me a lot.

As a CC member you'd think I'd know this kinda stuff. But still, it's a good review and gives me something to think about.

[Trent Steele]

Another thing to consider is that shortages and surpluses in capitalism aren't instantaneously corrected (as this argument seems to think so), but it takes time for a firm to change their production, especially if this involves increasing their capacity.

A large firm suffers from the same problem as Mises claims a socialist state suffers from; the people in charge (who set the prices) have no real way of knowing what is going on (beyond what is being fed ot them by their underlings) and so cannot change thier prices and production accordingly.

[ComradeRed]

Another thing to consider is that shortages and surpluses in capitalism aren't instantaneously corrected (as this argument seems to think so), but it takes time for a firm to change their production, especially if this involves increasing their capacity. But often the supply shortages aren't solved at all. Afterall, why bother when you'd get no profits?

You are correct, though, in your criticism: vulgar economists have no concept of time.

The reason why it appears that capitalism is this "perfect system" is because the math economists used is largely stolen from the Newtonian system. The conservation of angular and linear momentum turns into the reason why capitalism is "uber effecient"; however, this goes against reality.

But I've rambled on enough :)