This argument

[Incendiarism]

Suppose that I'm an entrepreneur in a capitalist economy, and that I own some land and have a factory. I'm after a profit, so let's say that my analysis of the market leads me to believe that producing a certain widget to be used by manufacturers would be the most profitable thing for me to do. After a year, let's say that I've invested $5000 and earned a profit of $1000. Clearly, I've made a monetary profit, but how do I know whether I am maximising profit? I can look around at the market after the fact, and evaluate the profit I would have made by using my various factors of production ($5000 of money, some land with a factory, and my own labour) in different ways.

If the average rate of interest for that year was 5%, I could have earned $250 by putting that $5000 in the bank. Next, if there was a job opportunity that paid, say, $500 a year, I could have earned $500 by using my labour that way. Finally, if I could have rented that land out for $400 per year, I could have earned $400 by using my land that way. In total, if I had used my factors of production in this way, I could have earned a profit of $1150 ($250 + $500 + $400). Thus, I have made an entrepreneurial loss of $150 over the year (if the potential profit was less than $1000, I would have made an entrepreneurial profit).

This, of course, is not an explicit monetary cost; I have, indeed, made $1000 profit over the year through the actions I have chosen. Rather, it is an opportunity cost, and shows me that had I used my factors of production in a different way, I could have made a greater profit. This knowledge (while it can never be 100% accurate) is vital to businesses and entrepreneurs because it shows them how efficient they are (ie. whether they are maximising output relative to input), and is the basis on which the free market directs resources.

Now, under socialism, communism, or non-market anarchism, while they all have their own peculiar variations, we can say that things would be different. Production would be planned, either by state boards, or by communes, worker's councils, etc. For the sake of argument, we'll assume that these planners have complete knowledge of what consumers want, and have complete technical knowledge of everything (e.g. they know how to make paper, how to build computers, etc.). This, of course, is not likely in the real world, but I'm trying to show that the "knowledge problem" is only a secondary one, to the ultimate problem of economic calculation.

Suppose, then, that in such a society we need to make some decision regarding how to use the factors of production that exist: land, labour, and capital. Suppose that consumers are demanding good x, and that to produce good x, widget z is required; how can the planners decide the most efficient way to produce this widget? They cannot look to another market and see what profit they would make by using the factors in a different way. How, then, can they know whether one combination of factors to produce widget z is better than another combination, or better than using the factors to produce another good?

They may be able to work out that using the production process they currently use yields 500 units of widget z, and that only 300 units of widget y could have been produced in a different production process. This is not enough, though. How do they know whether 500 units of widget z is better than 300 units of widget y? The shorter the production process, the easier this is, because the planner can relate them to consumer demands. However, in an economy that is going to produce anything beyond primitive goods, this is impossible.

A famous example is that of the pencil, as told by Leonard Read: "[m]y family tree begins with what in fact is a tree, a cedar of straight grain that grows in Northern California and Oregon. Now contemplate all the saws and trucks and rope and the countless other gear used in harvesting and carting the cedar logs to the railroad siding. Think of all the persons and the numberless skills that went into their fabrication: the mining of ore, the making of steel and its refinement into saws, axes, motors; the growing of hemp and bringing it through all the stages to heavy and strong rope; the logging camps with their beds and mess halls, the cookery and the raising of all the foods. Why, untold thousands of persons had a hand in every cup of coffee the loggers drink!

The logs are shipped to a mill in San Leandro, California. Can you imagine the individuals who make flat cars and rails and railroad engines and who construct and install the communication systems incidental thereto? These legions are among my antecedents.

Consider the millwork in San Leandro. The cedar logs are cut into small, pencil-length slats less than one-fourth of an inch in thickness. These are kiln dried and then tinted for the same reason women put rouge on their faces. People prefer that I look pretty, not a pallid white. The slats are waxed and kiln dried again. How many skills went into the making of the tint and the kilns, into supplying the heat, the light and power, the belts, motors, and all the other things a mill requires? Sweepers in the mill among my ancestors? Yes, and included are the men who poured the concrete for the dam of a Pacific Gas & Electric Company hydroplant which supplies the mill's power! "

Clearly, even for a good as simple as a pencil, the production process is highly complex. How can the planners know how best to utilise the multitude of factors of production? They can't. It's simply incalculable without a competitive market to use as a comparison, which would show the profits that could have been made at every stage of the production process by using the factors in different ways. Since a higher profit shows that supply in that market is more limited with respect to demand, the market allocates factors to their most efficient uses in servicing consumer wants. Socialism, communism, and non-market anarchism cannot do this.

How would you tackle this?

[BobKKKindle$]

This "article" is based on the assumption that markets are comprised of large numbers of small firms which compete with each other by trying to produce goods as efficiently as they can, and meeting the preferences of the consumer - in other words, this article assumes that markets are "free" and operate in accordance with the model of "perfect competition" which is such an important part of bourgeois economics. The problem with this assumption is that it bears no relation to empirical reality - a modern capitalist economy is based on powerful monopolies which control a large share of the markets in which they operate, prevent the entry of new firms, and encompass multiple sectors of the economy. Marx identifies that one of the processes which lies at the heart of capitalism is the transformation of competition into monopoly, as in any market the more successful firms will always attempt to merge with or purchase the assets of less successful firms in order to enhance their own market power and protect themselves against the threat of bankruptcy during periods of economic downturn, and that, once the number of firms in a given market has been sufficiently reduced by this process, the remaining firms will often group together and form a cartel which involves the firms making a collective decision on how much output they should produce, and the price at which their output should be sold, so as to maximize the exploitation of the consumer. The first chapter of Lenin's 'Imperialism' provides ample evidence to show that this is what happens, and later in the same text he explains in detail how this process happens, and how firms maintain their position once they have obtained an initial advantage.

How is this relevant to the article? The article argues that firms identify how they can use their available resources most efficiently by looking at the behavior of other firms and the level of profit they have been able to attain by organizing their production in a certain way. The fact, however, that there are no other firms, or at least no other firms which seek to compete, means that this must obviously be a fallacy and is not an accurate representation of what takes place under capitalism. Instead, capitalist firms organize their production through a process of careful analysis whereby they evaluate the different ways of producing a good on the basis of how much they would have to pay to produce a given level of output. This is no reason why a similar process could not take place under socialism especially when we consider the advances that have been made in computer technology, and the fact that enterprises have often been run more efficiently when they have been placed under democratic control in the past - the Barcelona transport system during the Spanish Civil War is a good example of this because transport is generally a natural monopoly which means there are no market forces involved.

What I've described above is actually far too idealistic - capitalism is much more inefficient than this in reality because the need to accumulate capital imposes additional pressures on firms at the expense of the consumer. Firms have to spend large amounts of money on advertising costs in the form of commercials and attractive packaging even when their products are almost exactly the same as those of other firms, which means that output is sold at a higher price so as to compensate for the additional costs and maintain a high rate of profit, and there is less money available for more productive areas such as research. In addition, firms also need to to guarantee a market in the future which gives rise to a strategy known as planned obsolescence, whereby firms will design their products in a way that makes the product non-functional or obsolete only a short time after purchase, thereby ensuring that the consumer has to buy a new copy of the same product, or a newer version. An example of this is the use of short-term warranties in the consumer electronics industry, such that if a product breaks, consumers are unable to get a free replacement or a repair, they are forced to buy a new copy of exactly the same product. Obviously there would be no need for this waste (both economic and ecological) under a system where goods are designed to be used, not sold as a source of profit.

That should cover it.

[ckaihatsu]

Suppose that I'm an entrepreneur in a capitalist economy, and that I own some land and have a factory. I'm after a profit, so let's say that my analysis of the market leads me to believe that producing a certain widget to be used by manufacturers would be the most profitable thing for me to do. After a year, let's say that I've invested $5000 and earned a profit of $1000. Clearly, I've made a monetary profit, but how do I know whether I am maximising profit? I can look around at the market after the fact, and evaluate the profit I would have made by using my various factors of production ($5000 of money, some land with a factory, and my own labour) in different ways.


This is a relative type of problem, so one can only come to some conclusion by comparing one outcome to other, possible outcomes. All qualitative factors, like your own labor, would have to be quantified as precisely as possible.



If the average rate of interest for that year was 5%, I could have earned $250 by putting that $5000 in the bank. Next, if there was a job opportunity that paid, say, $500 a year, I could have earned $500 by using my labour that way. Finally, if I could have rented that land out for $400 per year, I could have earned $400 by using my land that way. In total, if I had used my factors of production in this way, I could have earned a profit of $1150 ($250 + $500 + $400). Thus, I have made an entrepreneurial loss of $150 over the year (if the potential profit was less than $1000, I would have made an entrepreneurial profit).

This, of course, is not an explicit monetary cost; I have, indeed, made $1000 profit over the year through the actions I have chosen. Rather, it is an opportunity cost, and shows me that had I used my factors of production in a different way, I could have made a greater profit. This knowledge (while it can never be 100% accurate) is vital to businesses and entrepreneurs because it shows them how efficient they are (ie. whether they are maximising output relative to input), and is the basis on which the free market directs resources.


Others have made the good point that while this can be characterized as 'rational' behavior for the individual, we will see *irrational*, inhumane results at larger scales -- labor exploitation, institutional racism, pollution -- as a result of numbers of individuals engaging in this 'rational' behavior strictly for themselves.

It really begs the question of how we are to organize ourselves as social beings. Obviously we're in individual bodies, but our strength as a species, that is, in numbers, is a result of our being able to coordinate better than any other species on the planet. The hyper-individuation that occurs because of the private profit motive is *very* questionable on this basis alone -- is there perhaps a more-collective way of organizing ourselves that would mitigate these burgeoning social ills that have spread like cancer due to our walling-off approach to the economy and society?



Now, under socialism, communism, or non-market anarchism, while they all have their own peculiar variations, we can say that things would be different. Production would be planned, either by state boards, or by communes, worker's councils, etc. For the sake of argument, we'll assume that these planners have complete knowledge of what consumers want, and have complete technical knowledge of everything (e.g. they know how to make paper, how to build computers, etc.).


In a post-capitalist, post-private-property mode the entire wealth of the world's society would, by definition, be opened up to political debate -- this would be instead of private claims to this-or-that parcel of land, factory, business, or vault. While not everyone would decide to necessarily be actively political in this mode, not everyone would *have* to be. The *political* objective then, as now, would be paramount -- are all assets and resources accounted for and under public administration? In other words, think of it as Wikipedia for the outside world.

In a fairly short span of time every asset and resource *could* be catalogued and administered in common by those who feel most motivated to participate as such. In this way the world would indeed soon have *complete knowledge* of the material world, including what consumers want, because every person on earth could have their own Wikipedia-type page.

I maintain that every person on the planet would just need to provide an updated, linear list of what items they are currently requesting -- a *demand* list, as opposed to a "wishlist" -- that would be fulfilled by available supply according to workers' councils / planning boards.



This, of course, is not likely in the real world, but I'm trying to show that the "knowledge problem" is only a secondary one, to the ultimate problem of economic calculation.


We should not get muddle-headed in trying to *think* our way through the middle part -- there is only supply and demand, and we would have to find priorities on both sides -- assets, labor, and resources - to - individualized, prioritized lists of demands.

This does not require a *mathematical* solution, as many people tend to imagine it. It is *always* a material political issue, and should always be discussed as such. Given our current state of information technology the logistics for this are currently available.



Suppose, then, that in such a society we need to make some decision regarding how to use the factors of production that exist: land, labour, and capital. Suppose that consumers are demanding good x, and that to produce good x, widget z is required; how can the planners decide the most efficient way to produce this widget? They cannot look to another market and see what profit they would make by using the factors in a different way. How, then, can they know whether one combination of factors to produce widget z is better than another combination, or better than using the factors to produce another good?

They may be able to work out that using the production process they currently use yields 500 units of widget z, and that only 300 units of widget y could have been produced in a different production process. This is not enough, though. How do they know whether 500 units of widget z is better than 300 units of widget y? The shorter the production process, the easier this is, because the planner can relate them to consumer demands. However, in an economy that is going to produce anything beyond primitive goods, this is impossible.


This organizational issue was recently resolved (as far as I'm concerned) by mikelepore, rather deftly:



You don't have to start out producing millions of units. You make a few thousand prototypes and measure how rapidly consumers take them from the store. Whether the individuals whose job is to develop new products (chemical engineers, mechanical engineers, etc.) can decide on their own to submit the requision to the manufacturing line, or whether some degree of management signoff is also needed, will be society's policy choice.

From that point on, it shouldn't be the workers' choice whether or not they want to make them. It should be part of their job requirements to make the quantity needed to keep the orders filled. You can choose your career, but, within each career, you have to do the job that was socially planned. If you don't, you get no credit for showing up at work and you have no income.

You can't have the problem of investing in a new product. If all socially owned industries are subdepartments of one organization, resources would come from interdepartment transfers, not investment. The number of people needed in each department would fluctuate when something new is invented, but then the problem becomes one of how to attract more people to work in the sectors where they are needed most, not a problem of investments.


Chris




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[Drace]

Whats up with the use of widgets in every argument involving such an argument :-$

[ckaihatsu]

In a fairly short span of time every asset and resource *could* be catalogued and administered in common by those who feel most motivated to participate as such. In this way the world would indeed soon have *complete knowledge* of the material world, including what consumers want, because every person on earth could have their own [Amazon.com customer-type page, showing a prioritized ranking of needed items, from most-needed to least desired.]

I maintain that every person on the planet would just need to provide an updated, linear list of what items they are currently requesting -- a *demand* list, as opposed to a "wishlist" -- that would be fulfilled by available supply according to workers' councils / planning boards.



In a fairly short span of time every asset and resource *could* be catalogued and administered in common by those who feel most motivated to participate as such. In this way the world would indeed soon have *complete knowledge* of the material world, including what consumers want, because every person on earth could have their own Wikipedia-type page.

I maintain that every person on the planet would just need to provide an updated, linear list of what items they are currently requesting -- a *demand* list, as opposed to a "wishlist" -- that would be fulfilled by available supply according to workers' councils / planning boards.

[broken_promise]

Kijunna is at it again...

Here is the response of the guy that made the post Kijunna/the OP posted.


Just skimming over their objections, they have entirely missed the point. The first response, for example, says that I'm assuming perfect competition, which is patently false; it's implicit that I am simply assuming that there is more than one firm in the market, so that there is something on which to compare a firm's allocation of factors. He then goes off on a tangent about Marx saying that capitalism inevitably forms monopolies, which is begging the question, because my original "article" (their words) disproves the idea of a total monopoly.

Then, he basically states the entire idea I was disproving with no reasoning to support his statement: "capitalist firms organize their production through a process of careful analysis whereby they evaluate the different ways of producing a good on the basis of how much they would have to pay to produce a given level of output. This is no reason why a similar process could not take place under socialism". No, socialism couldn't do that, because it doesn't have a way to calculate whether factors of production are being used efficiently! That was what my article was about, but he seems to have ignored it.

The other guy is totally obscurantist; e.g. "[t]his is a relative type of problem, so one can only come to some conclusion by comparing one outcome to other, possible outcomes. All qualitative factors, like your own labor, would have to be quantified as precisely as possible." Read what he was responding to when he wrote that, and explain to me how it relates to it in any way.

He also misses the point, by agreeing with some other fellow who states: "You don't have to start out producing millions of units. You make a few thousand prototypes and measure how rapidly consumers take them from the store." What on earth does that have to do with what I wrote? I don't know. My argument was that because there is no market in which to compare alternative uses of factors of production, there is no way to rationally allocate resources. I'm sure that there would be no problem meeting consumer demand if it was possible to instigate this production process; the point is that the production process is impossible, so the point is moot.

[ckaihatsu]

Kijunna is at it again...

Here is the response of the guy that made the post Kijunna/the OP posted.


broken_promise,

Since the content of your post contains a reference and response to my writing I'm following up on that response here.

Here is the critique of my writing:



The other guy is totally obscurantist; e.g. "[t]his is a relative type of problem, so one can only come to some conclusion by comparing one outcome to other, possible outcomes. All qualitative factors, like your own labor, would have to be quantified as precisely as possible." Read what he was responding to when he wrote that, and explain to me how it relates to it in any way.


This is the writing I was responding to when I wrote the part just quoted:



Suppose that I'm an entrepreneur in a capitalist economy, and that I own some land and have a factory. I'm after a profit, so let's say that my analysis of the market leads me to believe that producing a certain widget to be used by manufacturers would be the most profitable thing for me to do. After a year, let's say that I've invested $5000 and earned a profit of $1000. Clearly, I've made a monetary profit, but how do I know whether I am maximising profit? I can look around at the market after the fact, and evaluate the profit I would have made by using my various factors of production ($5000 of money, some land with a factory, and my own labour) in different ways.


Again, this was my response, as quoted:



This is a relative type of problem, so one can only come to some conclusion by comparing one outcome to other, possible outcomes. All qualitative factors, like your own labor, would have to be quantified as precisely as possible.


My response is characterized as "obscurantist", which is an inaccurate characterization. I don't have anything further to add except to reiterate that economics, whether under a market system or a worker-administered, socialist economy, is all about creating human-made, quantitative values for goods and services that are considered to have value.

The hypothetical situation introduced, quoted above, *does* deal with an economic scenario that would have alternative, tangential scenarios that would need to be quantified. A number of variables in the larger economic environment would have to be taken into account, and quantified. The actual doing of this will depend on the person doing it and the reality of the actual situation. Since we're talking about a general, hypothetical situation there's nothing more I can say about this exercise.

You also include this comment that references my writing:



He also misses the point, by agreeing with some other fellow who states: "You don't have to start out producing millions of units. You make a few thousand prototypes and measure how rapidly consumers take them from the store." What on earth does that have to do with what I wrote? I don't know.


I don't know what you're referencing when you say, "What on earth does that have to do with what I wrote?" If you're referring to the initial hypothetical scenario then I would say that the response I used is relevant to a possible system of socialist planning. That quote is here:



You don't have to start out producing millions of units. You make a few thousand prototypes and measure how rapidly consumers take them from the store.


The strength of this approach is that it acknowledges the reality of the passing of time. Many discussions involving politics or economics contain models and/or depictions of reality that are described as being in a static, freeze-frame sort of existence. Constructions that fail to take the passage of time into account are flawed formulations and inevitably lead to more flawed assumptions and conclusions.

In a worker-controlled economy patterns of consumer consumption and consumer preferences could be easily tracked, enabling a composite, ongoing data set of real-world consumer activity and future needs / desires.

This would be the information that would inform collective worker-based decision-making over collectivized mass production to provide supply. Many variables would have to be taken into account and quantified, just as in any economic situation.



My argument was that because there is no market in which to compare alternative uses of factors of production, there is no way to rationally allocate resources.


As with any problem everything depends on the information that one has access to. As long as one has sufficient information about the markets then one can make informed decisions about rationally allocating resources. In a post-capitalist, non-market environment the same technicalities would apply, except that instead of *market* information the worker collectives would need real-world data on available, feasible supplies of resources, including information about any and all *related* resources that would pertain to the logistics of sourcing those needed resources. Again alternative scenarios would have to be considered, including factors of distances to the resources, efficiencies in sourcing them from one location versus a different location, and so on.

More discussion on this topic has taken place at this thread:


"Understanding the economic calculation debate"

http://www.revleft.com/vb/understanding-economic-calculation-t92043/index.html



I'm sure that there would be no problem meeting consumer demand if it was possible to instigate this production process; the point is that the production process is impossible, so the point is moot.


Yes, you're correct in that we don't *currently* have the capitalist class overthrown and at the feet of labor. There's no reason to not make plans, though -- it's not within your power to say that such a future is "impossible", or that a worker-decided production process would forever be a moot point.

A large part of living life involves understanding the world as it currently exists, coming to terms with that reality, and making plans for a desired future -- this is true at all levels, from the personal upward. It's irresponsible to make summary, blanket judgments about people's plans for the future -- saying they're "impossible" -- when in fact they may very well be plausible. Only time will tell...!

[MarxSchmarx]

Suppose that I'm an entrepreneur in a capitalist economy, and that I own some land and have a factory. I'm after a profit, so let's say that my analysis of the market leads me to believe that producing a certain widget to be used by manufacturers would be the most profitable thing for me to do. After a year, let's say that I've invested $5000 and earned a profit of $1000. Clearly, I've made a monetary profit, but how do I know whether I am maximising profit? I can look around at the market after the fact, and evaluate the profit I would have made by using my various factors of production ($5000 of money, some land with a factory, and my own labour) in different ways.

If the average rate of interest for that year was 5%, I could have earned $250 by putting that $5000 in the bank. Next, if there was a job opportunity that paid, say, $500 a year, I could have earned $500 by using my labour that way. Finally, if I could have rented that land out for $400 per year, I could have earned $400 by using my land that way. In total, if I had used my factors of production in this way, I could have earned a profit of $1150 ($250 + $500 + $400). Thus, I have made an entrepreneurial loss of $150 over the year (if the potential profit was less than $1000, I would have made an entrepreneurial profit).

This, of course, is not an explicit monetary cost; I have, indeed, made $1000 profit over the year through the actions I have chosen. Rather, it is an opportunity cost, and shows me that had I used my factors of production in a different way, I could have made a greater profit. This knowledge (while it can never be 100% accurate) is vital to businesses and entrepreneurs because it shows them how efficient they are (ie. whether they are maximising output relative to input), and is the basis on which the free market directs resources.

Now, under socialism, communism, or non-market anarchism, while they all have their own peculiar variations, we can say that things would be different. Production would be planned, either by state boards, or by communes, worker's councils, etc. For the sake of argument, we'll assume that these planners have complete knowledge of what consumers want, and have complete technical knowledge of everything (e.g. they know how to make paper, how to build computers, etc.). This, of course, is not likely in the real world, but I'm trying to show that the "knowledge problem" is only a secondary one, to the ultimate problem of economic calculation.

Suppose, then, that in such a society we need to make some decision regarding how to use the factors of production that exist: land, labour, and capital. Suppose that consumers are demanding good x, and that to produce good x, widget z is required; how can the planners decide the most efficient way to produce this widget? They cannot look to another market and see what profit they would make by using the factors in a different way. How, then, can they know whether one combination of factors to produce widget z is better than another combination, or better than using the factors to produce another good?

They may be able to work out that using the production process they currently use yields 500 units of widget z, and that only 300 units of widget y could have been produced in a different production process. This is not enough, though. How do they know whether 500 units of widget z is better than 300 units of widget y? The shorter the production process, the easier this is, because the planner can relate them to consumer demands. However, in an economy that is going to produce anything beyond primitive goods, this is impossible.

A famous example is that of the pencil, as told by Leonard Read: "[m]y family tree begins with what in fact is a tree, a cedar of straight grain that grows in Northern California and Oregon. Now contemplate all the saws and trucks and rope and the countless other gear used in harvesting and carting the cedar logs to the railroad siding. Think of all the persons and the numberless skills that went into their fabrication: the mining of ore, the making of steel and its refinement into saws, axes, motors; the growing of hemp and bringing it through all the stages to heavy and strong rope; the logging camps with their beds and mess halls, the cookery and the raising of all the foods. Why, untold thousands of persons had a hand in every cup of coffee the loggers drink!

The logs are shipped to a mill in San Leandro, California. Can you imagine the individuals who make flat cars and rails and railroad engines and who construct and install the communication systems incidental thereto? These legions are among my antecedents.

Consider the millwork in San Leandro. The cedar logs are cut into small, pencil-length slats less than one-fourth of an inch in thickness. These are kiln dried and then tinted for the same reason women put rouge on their faces. People prefer that I look pretty, not a pallid white. The slats are waxed and kiln dried again. How many skills went into the making of the tint and the kilns, into supplying the heat, the light and power, the belts, motors, and all the other things a mill requires? Sweepers in the mill among my ancestors? Yes, and included are the men who poured the concrete for the dam of a Pacific Gas & Electric Company hydroplant which supplies the mill's power! "

Clearly, even for a good as simple as a pencil, the production process is highly complex. How can the planners know how best to utilise the multitude of factors of production? They can't. It's simply incalculable without a competitive market to use as a comparison, which would show the profits that could have been made at every stage of the production process by using the factors in different ways. Since a higher profit shows that supply in that market is more limited with respect to demand, the market allocates factors to their most efficient uses in servicing consumer wants. Socialism, communism, and non-market anarchism cannot do this.


How would you tackle this?

Behold, the marvel of a computer built since circa 1977!

[TheCagedLion]

This smells an awful lot like austrian-school...

The market allocates factors to their most efficient uses in servicing consumer wants

But is this even true?

Doesn't the market allocate factors to maximize the profit of the producer?

[Kwisatz Haderach]

To find the answer to any question of the type "How would socialism handle X?", first ask "How does capitalism handle X?" and then ask "Why can't a socialist planning board use the same principles used by capitalist companies?"


Suppose that I'm an entrepreneur in a capitalist economy, and that I own some land and have a factory. I'm after a profit, so let's say that my analysis of the market leads me to believe that producing a certain widget to be used by manufacturers would be the most profitable thing for me to do. After a year, let's say that I've invested $5000 and earned a profit of $1000. Clearly, I've made a monetary profit, but how do I know whether I am maximising profit? I can look around at the market after the fact, and evaluate the profit I would have made by using my various factors of production ($5000 of money, some land with a factory, and my own labour) in different ways.

If the average rate of interest for that year was 5%, I could have earned $250 by putting that $5000 in the bank. Next, if there was a job opportunity that paid, say, $500 a year, I could have earned $500 by using my labour that way. Finally, if I could have rented that land out for $400 per year, I could have earned $400 by using my land that way. In total, if I had used my factors of production in this way, I could have earned a profit of $1150 ($250 + $500 + $400). Thus, I have made an entrepreneurial loss of $150 over the year (if the potential profit was less than $1000, I would have made an entrepreneurial profit).

This, of course, is not an explicit monetary cost; I have, indeed, made $1000 profit over the year through the actions I have chosen. Rather, it is an opportunity cost, and shows me that had I used my factors of production in a different way, I could have made a greater profit. This knowledge (while it can never be 100% accurate) is vital to businesses and entrepreneurs because it shows them how efficient they are (ie. whether they are maximising output relative to input), and is the basis on which the free market directs resources.
Yes, but that one vital fact that gets brushed aside - the fact that this knowledge is never fully accurate - is the key to the whole argument.

Sure, a capitalist can look around and see a few obvious things that he could be doing with his money, other than what he's doing right now. But in order to maximize efficiency, he would need to know EVERY single thing that he could possibly be doing with his money. You can only choose the best course of action among those you know.

Once you realize this fact, you'll see that the whole argument is based on the notion that socialist planners are ordinary human beings while capitalist owners are omniscient gods. If capitalist owners are in fact normal human beings, then there's no reason why they should be aware of a greater number of possible choices than those known by the socialist planners; and then there's no reason to expect their decisions to be more efficient than those of the planners.


Now, under socialism, communism, or non-market anarchism, while they all have their own peculiar variations, we can say that things would be different. Production would be planned, either by state boards, or by communes, worker's councils, etc. For the sake of argument, we'll assume that these planners have complete knowledge of what consumers want, and have complete technical knowledge of everything (e.g. they know how to make paper, how to build computers, etc.). This, of course, is not likely in the real world, but I'm trying to show that the "knowledge problem" is only a secondary one, to the ultimate problem of economic calculation.

Suppose, then, that in such a society we need to make some decision regarding how to use the factors of production that exist: land, labour, and capital. Suppose that consumers are demanding good x, and that to produce good x, widget z is required; how can the planners decide the most efficient way to produce this widget? They cannot look to another market and see what profit they would make by using the factors in a different way. How, then, can they know whether one combination of factors to produce widget z is better than another combination, or better than using the factors to produce another good?
Trial and error. Same as in a capitalist market. After all, when a capitalist looks at another market to see what profit he would make by using his resources in a different way, what is going on is trial and error. That other market is the trial.

If the planners have "complete technical knowledge of everything," then they should know every possible way of allocating resources. It's then a simple matter of trying out various allocations until you find the best one. With a powerful computer, you could just input all the relevant technical information and run millions of trials in minutes. So, in fact, finding the best allocation of resources is the EASY part of planning. The HARD part is getting all that technical knowledge you need.


Clearly, even for a good as simple as a pencil, the production process is highly complex. How can the planners know how best to utilise the multitude of factors of production? They can't. It's simply incalculable without a competitive market to use as a comparison, which would show the profits that could have been made at every stage of the production process by using the factors in different ways.
This argument assumes that a competitive market includes companies doing every single thing that could possibly be done, which is absurd. It's basically saying "in a market economy, people will try everything that could possibly be tried, and this will allow them to pick the most efficient course of action."

That is simply not true. Not even in a perfect market economy, with perfect competition between thousands of small firms. How do you know that you've tried everything? How do you know that there isn't something better you could be doing with your money, some allocation of resources that is more efficient but simply hasn't been tried by anyone yet? Obviously, you don't. The market doesn't let you choose between all possible allocations of resources, it only lets you choose between those allocations of resources that you've tried or learned about.

And that, of course, is exactly the same thing that a planned economy can do. The planners won't know about every possible allocation of resources - no one ever does - but they will be able to choose the most efficient one among all the allocations they've tried or learned about.

[ckaihatsu]

This smells an awful lot like austrian-school...

The market allocates factors to their most efficient uses in servicing consumer wants

But is this even true?

Doesn't the market allocate factors to maximize the profit of the producer?


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The price of Oil is mostly decided in unison by the OPEC contries as far as I'm aware.

The free market almost always produces cartels and monopoly on it's own.


* In January 2005 our last independent grocery store got taken over by Norgesgruppen (http://www.dagbladet.no/tekstarkiv/artikkel.php?id=5001050034211&tag=item&words=siste%3Bmatvarebutikk)


OPEC is openly known as an Oil cartel.



The Independent (http://www.independent.co.uk/news/business/news/opec-raises-production-to-calm-oil-prices-402098.html)