Calculation and Socialism | Joseph T. Salerno

good morning everyone and welcome to the lecture on calculation and socialism the title might at first seem a little obscure but I hope to explain the importance of economic calculation by showing how its absence under socialism causes severe problems and actually the impossibility of socialism and this is particularly topical because we have people now calling for socialism openly in the u.s. once again lesson or a little bit more than two decades after the collapse of the Soviet Union and the Eastern European centralized central planning regimes so Bernie Sanders for example the woman I don't remember her name who was elected as an open socialist in the Bronx in New York last week or maybe she was nominated as a Democratic candidate which is tantamount in New York to getting being automatically elected okay I want what I want to do is I want to start what I consider to be the the greatest single economics article of the 20th century for a number of reasons and that was logan von Mises his economic calculation in the socialist commonwealth it was published in 1920 we've reprinted it we have a pamphlet reprint with an epilogue by a quite notable modern austrian economist so i urge you to to read it through make sure you read the epilogue okay so what it did was first of all it completely destroyed in one fell swoop the intellectual foundations of socialism but as we've discovered later on during the austrian revival it also really set out what exactly the nature and the function of the price system was in a capitalist economy it really showed the importance of the price system that lesson was not learned until of the the austrian revival on the second lesson so let me start with the early socialists who wrote in the early 1800s the early part of the 19th century there were three big danes if you've had youtube economic thought you've seen these names before there was a French the two French writers Sholes Fourier and honoree sauce Simone and a Scottish entrepreneur who set up of socialist experiments here in the United States Robert Owen as did as did for EA's followers talk about that they were called utopian socialists okay they had all these grand schemes that they would set out in my new detail about how people will live better if they just go along with with their ideas and their visions as well see Marx took a very different tack okay Marx was a brilliant strategist a brilliant tactician and he hated these guys and for good reason okay that's trough Fourier he's as crazy as he looks seriously okay well focus on him as the product as a stereotypical huto peon socialist he had an idea that there should be people should be organized into small communities of falen stairs which of the old military formation of the Greeks the Phalanx he said that there would be garden cities modeled after a Grand Hotel okay this way people would live there to be fifteen to sixteen hundred people in these nice cities and it was based on the Greek military formation everybody would be able to purchase accommodations according to his individual tastes and income so he wasn't a level or an income level or necessarily everybody be a stockholder in the city you'll be collective production now everyone would would produce the same things together okay they would all share the dirty work and share meals in the kitchen that doesn't look too crazy but then as you go on and you read more in Fourier you understand why Marx was so embarrassed as a socialist okay so you actually sketched out this is what it would look like these these crazy topia socialists had this mania for CIMMYT everything had to be symmetrical right you know the Fallon's was you know a square or a rectangle okay and he got when as far as to actually build a model of it okay I mean it doesn't really be speaks of mania okay now there's one near my home in New Jersey there was actually a fallen stair that was built and people lived in for a while in New Jersey and it's been long since abandoned okay looks wanted to me I don't go near okay now here here's some of his writings his ramblings so he wrote that nun said that 19th century France was in the fifth stage of advancement now how does he know this stuff okay I mean how does he know that it started with confusion the world and then went the savagery patriarchy ISM barbarity now and then he said at the point he was writing after passing through two more stages it would approach the upward slope of harmony now that's the final stage of utter bliss and that will last for 8,000 years okay 8,000 years he knows that okay at which point of course history would reverse itself and you go back through savagery to confusion okay so these people are what we call Gnostics they all have a secret source of knowledge within them that no one else shares so this is this is every cult is is based on what we call Gnosticism okay the greek word for knowledge meaning sort of a secret intuition that no one else shares Marx had the same thing other things he said would happen so when you reach the stage of harmony there'd be six new moons replace the one in existence a halo would surround the North Pole and it was showered do on the earth the seas would turn to kool-aid okay it's some kind of a juice I mean it's all I've looked at a few books they say kool-aid I don't think kool-aid existed back then unless he invented it and Jane James Jones right they're all fact way to kool-aid at Jonestown I don't know all violent or repulsive beats would be replaced by their opposites and be serviceable ante lines would offer themselves to humans to be ridden and roasted anti chickens with flying human mouths and the human lifespan in the harmonic stage was stretched 144 years I mean they think you know they had these exact figures how do they know this stuff and 5/6 of the time not 6/7 or 4/5 5/6 will be devoted to the unrestrained pursuit of sexual love free love is always a part of all these schemes ok all of which of course have been made up by men no it's true though to the left always says the capitalism mistreats women but but in all the schemes that the left has come up with those crazy schemes over the centuries you know you know you always have these sort of free love schemes ok so what were the response to the classical economists well they were able to smash this stuff a very easily they'd hit look who's going to take out the garbage on this utopian socialism okay there's gonna be still dirty work to do who's gonna go deep down into the mines who's who's going to do unhealthy jobs potentially date of dangerous jobs if everybody gets paid the same so they pointed obviously the price system provides a needed incentives and and and signals and through the profit and loss system which would induce the right amounts of goods to be supplied to to to to to society whereas you don't have that under any of these crazy socialist utopian socialist schemes but the socialist answer was there be a new socialist man and woman okay that is that they'd be seriously transformed and they'd all want to work for the community well if that argument went on for a while but and of course the classical economists who were smart people and brilliant people got the better of it however there was an underlying assumption that if it wasn't for the lack of incentives under socialism socialism could be just as productive as capitalism okay now that's as you'll see what Mises challenged okay that it was just incentives that the incentives weren't right unfortunately in today and today's modern economic mainstream people have sort of focused on incentives as a core of economics when in fact it's not as we'll see early calculation okay even if you know even if everyone has the right attitudes and if everyone sort of was a angel in their disposition and wanted to help Society you would still have socialism not being able to work okay so now Marx as I said was was a brilliant strategist and tactician and he saw how clearly the utopian socialists had been smashed by the classical economists so what he said was look you told me socialists aren't scientific don't listen to them anyone who tries to tell you they know what's going to feature is going to look or tries to devise a plan to implement in the future is is not scientific they're just crazy don't pay attention to them because according to Marx it's the laws of history that's going to drive Society because of what anybody thinks or wants it's gonna drive Society from the beginning in classical slavery through feudalism through capitalism through a stage of socialism and then ultimately to the Bliss of communism he said this is going to come about as inexorably as the laws of nature dictate that an apple if it falls from a tree will fall downward and not upward okay there's nothing that human beings can do about it there's no way that human beings can hasten the coming of socialism so forget about it if you if you say any if you try to describe what it's going to look like then you're not scientific okay so it's unscientific speculated about what a future social society would look like or to try to speed up its arrival even though later on in his career Marx was contradicting himself because Marx was someone who was an agitator and agitated for for socialist measures he was even against minimum wage laws he was against unions because he actually thought that those things would make the working class more amenable to capitalism he thought that he wanted things to get as bad as possible just through the working out of the laws of history and then we would just pass into socialism so he was and he actually marks as an anti interventionist in some of his writings so his writings weren't that what was his great work called was it call socialism okay was it cool communism was called capitalism Das Kapital he didn't write a word about socialism about the socialist future what it would look like okay he just spent all his time talking about the economic contradictions that would cause capitalism collapse with the inexorability of the laws of nature so this is this is where we stood one means his rope so what Mises focused on was not the incentives he focused on the function of the price system and what he what he said well this is his thesis we'll start with these thesis he came out and said socialism a socialist economy and I'll explain what I mean more by that but right now let's just say that when Mises uses the term socialism he means an economy in which a one collective the the gut let's say the government whether it's a dictatorship of the proletariat or not on the government owns all of the physical means of production that is all the factories all the natural resources all the machinery all the tools okay there can be consumer goods that were privately owned under socialism okay even some durable consumer goods okay though it's not clear about housing for example okay if that would be I'll be able to be privately owned but certainly all the factors of production or non human means of production labor would be free I mean Mises allowed that labor could could be free under socialism to choose different jobs and there could be a limited sort of money where the labors were paid vouchers which they could then turn into these stores that were all owned by the state for different kinds of goods so let so Mises um granted that okay we would have consump consumer choice given what was produced that people could choose between different things that were produced but the key is that every all the productive apparatus throughout the economy we would be owned by the governor okay so be collective ownership of the means of production that's how its ug phrase so what he said is that in a developed industrial economy with complicated production processes okay as we have here in the United States and we've had since the Industrial Revolution many different kinds of capital goods many proper production processes and many different kinds of capital goods the rational allocation of resources in is impossible without economic calculation using actual market prices a socialist economy is impossible because it cannot generate prices for capital goods and natural resources okay well let's parse Mises his argument Mises said step one socialism abolish is private property in capital goods and natural resources okay one will controls them it's either you know a single central planner or a group of economists or others that are technicians and so on that come up with the set of the central plan number two since the socialist state is the sole owner of the material factors of production they can no longer be exchanged right you can't exchange with yourself okay if there can be no exchange there could be no markets and no market prices so we know prices for the factors of production therefore the state without prices of the factors of production cannot calculate the cost of production to compare to the prices if there are if consumers are given free choice the prices that consumers are willing to pay for consumer goods so you would have no costs of production in the absence of economic calculation of profit and loss therefore socialist planners cannot know the valuable uses of scarce resources and therefore a socialist economy is strictly speaking impossible and Mises said it's like a man standing in the middle of a desert and you know he has equipment and so on and so forth to last him to get out of the desert but he doesn't know which way to go he has no compass there's no best way to go to get to get out of the desert okay there's many different ways to go different directions well that's what the socialist planner is like okay there's no calculation we'll go get this in more detail and very interestingly said the essential mark of so ilysm okay now he didn't say that essential is is compulsion or is the fact that you've abolished markets he pinpointed that there's one will alone acting if there's one will alone acting it means all the different values expectations tastes ideas about how to produce all those different things can come into play in markets can't be there can't be an interchange in markets of different values which then established prices of every single order of good okay going from mining iron ore and mining diamonds all the way down to consumer goods okay the stores that provide consumer goods so he says it is in material whose will it is so it could be the will of an angel could be the will of the of the best of a benign dictator someone who really wants to help decide the main thing is that the employment of all factors of production is directed by one agency only one will alone chooses decides directs acts gives orders the distinctive mark of socialism is the oneness and indivisibility of the will directly oil production activities within the whole social system ok it's not incentives there's not a word about incentives in there okay which which is is itself so much the central focus of economics today ok it's at this one will so what means asset is in order to have economic calculation you need private property not just in consumer goods but in all stages of goods including capital goods of every kind you need the freedom to exchange these goods you know in past history you had certain laws that allowed people to own property but they couldn't sell sell the property ok the family couldn't divide up and sell the property but you have to have freedom to it to exchange as well as private property and it sound money money whose value is independent of the will of politicians and their machinations so socialism of bosses all three of these preconditions and therefore nullifies economic calculation and as we'll see society itself so let's look at why calculation might be a problem let's say that we have a production function which is a fancy word that economists use for recipe if you look at Murray Rothbard he has no qualms about using the word recipe in man economy and state you know um he uses production function sometimes but this is simply a recipe every good has a has a numerous technical recipe each good can be produced in many different ways so let's say you have a car that requires P tonnes of Steel Q hours of machine time or hours one skilled laborer and so on entity engineering labour square feet of factory space kilowatt hours of electricity and paint and so on the socialist planners can know all this they can know all the recipes they can know all the technical production functions how to prove all goods but without prices and without costs we'll see that this is doesn't doesn't help them to produce the right quantities and kinds of goods of people the demand or that even if they themselves want people to have it's even a problem if they try to substitute their own values because they can't put prices on those things so how can the we calculate the cost of roots in this corn to socialism okay you can't add up kilowatts of hours tons of Steel gallons of paint it's not a common unit there's no single unit to express costs of production how do we do it on the market on the market okay all resources at every moment have a price because they're all privately owned and they're all continually exchanged so they have a price and so therefore you add up the prices of those quantities given by the production function of goods and inputs that you need to build the car and you come up with some kind of a course of production so let's say the cost of the car is $30,000 right now you don't know for sure what consumers will be willing to pay for the price that's an entrepreneur pay for the item that's entrepreneurial judgment you have to look to the future for that entrepreneurs can make mistakes but when they make mistakes unlike the soldiers plans they know they make mistakes because of profit and loss so if they project the price of thirty four thousand dollars let's say this car is just being planned in the u.s. it takes about five to seven years to get a car from the drawing board onto the dealers floor okay so you're looking five years in the future you produce a car you're thinking you're gonna get thirty four thousand for it it's cost you thirty thousand to produce and yet by the time you get that car in the market do some good competing cars that people might prefer so you're only able to sell them for twenty eight thousand y'all interpreters make mistakes that was a waste of resources because they use resources worth $30,000 in other lines of production remember other entrepreneurs are bidding for the steel the paint and so on labor hours and they're willing to pay up to thirty thousand dollars because they can produce goods and services worth about $30,000 to consumers well this guy believed that he could make a better package of the $30,000 and turn it into thirty four thousand all he was wrong that's fine that's that's not that devastating to running an economy okay if he continues to make those mistakes if she continues to make those mistakes as an entrepreneur they drop out okay they lose your capital so there was a woman a number of years ago back in the 1990s who came up with something called um a top Topsy tail and what that was was simply a hoop a knitting hoop and a needle a plastic hoop and a long needle that she put together in a way that women could easily braid their hair if they had long hair because she had long hair and she was all worried about doing this that cost her about a dollar she quit IBM took her five thousand dollars of savings and started to advertise but virtually went on TV on QVC and um she was selling it for fifteen dollars and at the end of making them perfect for 25 or 30 cents okay so that bat she calculated that look I can make it for less than a dollar and yet I can I project I can sell for ten or fifteen dollars and she became a millionairess and um her subsequent endeavors fail but but in any case so so calculation made her come up with this item that no one else had thought of using inputs that were worth only twenty five cents to make something that was worth ten $10 or $15 now what about Ken Ken socialist planners do this type of thing no because they don't know the cost of production they don't know what anything costs they never know if they're using resources that are more valuable than the goods that they're there they're producing okay so um also do you use a titanium bumper on a car or steel bumper on a car or do you use a fiberglass bumper on the car well titanium is thrown in steel but it's lighter than steel but we don't use titanium bumpers because it's calculated that the cost of the titanium bumper which would prevent denting of the bumper at much higher speed accidents that that cost is too high people will not pay the extra amount to avoid you know the paying for the accidents paying for the accidents or the reduction accidents okay but and in fact we've gone from steel to a fiberglass bumper that's kind of counterintuitive why have we done that well because the this is repairing a fiberglass bumper isn't as costly as as the extra weight of the steel bumper that reduces your gas mileage and so all of these things are done through calculation socialistic a planner could never figure this stuff out okay now there's a story behind that house I have a friend who I grew up with and she married a cowboy a real cowboy who actually had a ranch with cattle and stuff on it and they actually had cattle drives so she moved to Montana and one day she called me and she said though we get we have a new house I said oh you moved no no she says oh we just had the old house she moved and we replaced it with a new house I said what do you mean ship well yeah it's a seven-bedroom house this isn't actually her house this is a modular house so I said will you replace it with you know you bought in another house in Montana cause it's like 18 people in Montana so there's hardly any labor labor it's extremely scarce so people don't come to it's very expensive to get people to come to the site and build the house they don't do that what they do is they have the house built in Omaha well actually in Nebraska somewhere and I have to look at Google it today and there's a number of house building firms all throughout Nebraska so they had it shipped about 700 miles to their house and shipped it on trucks and then they put it together there okay they only had to spend a few days putting it together so you know scarce labor was economize on what a socialist planner ever figure that out that a house should be built 700 miles away how does it figured out here by prices by notice by saying hey the cost of actually building this thing 700 miles away with a lot of machinery and few laborers in a factory is less than having a lot of laborers come and you know stay for four months five months and build here in Montana okay and there literally was less than 20 people in that town of biddle where she lived they her family was the postmaster they ran a store I I never visited I just couldn't bring myself to go there okay all right so now couple things that Mises didn't did not say Mises didn't say that if you had a small economy one person or a small household living in isolation that they couldn't run a rational economy so he said you don't when people are acting in isolation or their small groups acting and you don't have very complicated production processes and a lot of producers goods many different capital goods you can use valuation you can simply just value things directly what you can't do under socialism an industrial economy so let's say you have somebody who has works 12 hours a day and this is their value scale is how they value the different things that they could produce okay and let's say that's what they produce every day two fish three pounds of wild mushrooms and so on and all together it absorbs at 12 hours let's say now they find rabbits on the island this is this household or Robinson Crusoe what's the cost of producing a rabbit that requires six hours to hunt and catch they can figure that out pretty easily because it's just just a few people there and they can say well you know what it'll cost us the satisfaction from the eight coconuts and one sack of berries so with the six hours that we use to catch a rabbit we value the rabbit directly more than the eight coconuts one sack of berries mean so Mises didn't deny that you always needed calculation or didn't deny that that that sometimes you you you you you could have a situation where your calculation wasn't wasn't as important but he even said in that case he said Crusoe would not think and act like a man who could calculate okay he would even miss some opportunities because he couldn't calculate but you could you could have a sort of a rational economy okay because you could direct these you could directly know your opportunity costs but in a complicated economy with with very very complicated technological processes and many many different kinds of capital goods that can be used in many many different ways there's literally an infinite way if you take United States today and you were put in charge okay as a central planner you would be very difficult for you to even absorb all of the different types of cap of goods that you had at your disposal to produce to serve people's wants you could know what you would like to have people produce consume you could also know the lists of all the all the capital goods and factories and reefs and natural resources but you you there's no way you could use prices you couldn't figure out your cost of production of producing any one thing should I produce let's say a thousand more bicycles or one more car or a lot take ten more cars you you couldn't you wouldn't know there's no way to rationally make the decision okay how did they do in the former Soviet Union there was the central planning agency called ghost plan they use a gross output planning I'll just give you some examples of how this went awry what goes playing did was to set targets for each particular industry and then the manager in charge of the whole industry the director of the industry himself would then allocate targets to each of the different firms or factories that constituted that industry okay but it was very difficult if you give people a target you have to give it in terms of homogeneous units so if you tell people to produce tons of nails what happened in Soviet Union they produce these huge nails okay and and as a result in any buildings that were done didn't have roofs because roof roofing nails are very very small so it was easiest to fulfill the plan by and of course you wanted to fulfill the plan because the incentives were there incentives didn't lack if you if you if you fill them fulfill the plan and went a little bit above it which is what everybody tried to do you got him thanks bonus if you fell short of the plan a few years in a row you've got a nice trip to Siberia to the gulag so they were incentives they set up the incentives and so a by it was mutual lying of course well the manager would say the director of the whole entry would say well okay you have to do X tons of nails and he knew that they couldn't possibly produce that amount because he knew they were gonna lie back to him and he know we can only do 1/4 X amount of nails when we can't produce that much we don't have that capacity and they would bargain like that they'd lie to one another and they come out with some figure which the dog which the the manager the fact he hoped he could just succeed and get a nice bonus and not go to Siberia ok well I had problems with women's clothing we're all oversized ok there was a huge market for American jeans blue jeans because they fit everybody ok they could you know fit any body shape there were so many different kinds of sizes and the actual the Soviet government looked the other way ok there were children's clothing was in short supply building nails in short supply well one once Khrushchev was giving a a public speech and suddenly a to the Westerners who were listening to the speech they were surprised he started bashing the chandelier industry turns out that chandeliers which were produced for the the the Dasha's the the vacation homes of the comrades were so heavy because they were the the plan was in terms of tons that they were full and killing the comrades that they were pulling the ceilings down okay here's a very interesting joke that's the Soviet planner telling the Soviet manager telling the director I fulfilled my my target for the year okay that huge nail because we specify in terms of tons there was a joke that was often told about when Soviet economists met American economists at international conferences they would say well just to go back for a moment when Khrushchev at one point in the 1950s Khrushchev the Soviet dictator at that point Bank took his shoe off in a UN medium banged it on on the table and said we will bury you meaning economically we will bury you so the so later on the Soviet economist would say the American economy you but we're gonna leave Hong Kong so we can see some prices so so we have date so so so and we'll get to that in a moment okay now people have criticized don't forget that people like criticize Mises for on the following basis they said look Mises said socialism was impossible yet Social acid in the Soviet Union for 75 years okay well Mises never denied that you could carry on production it just wouldn't be rational production and it eventually would break down so what Mises and what he pointed out was ad citizens first article okay he said the Soviet Union is not a truly socialist nation and the reason is it's like the post office in the middle of a regular free market economy okay post office is owned by the government is extremely inefficient okay and there used to be long lines and it was terrible to deal with okay now that now has some competition but it still could roughly calculate because it could use a price of the things around it it knew basically what costs were okay and he said this of unions the same way it's a socialist island in the middle of a world of market prices so they so the Soviets did use prices they did they did use Western prices for steel and and they traded their electricity to Eastern Europe and there were there were prices there was also bribery between the factories some factories had a surplus of certain things that they didn't need and on the other hand there were factories that needed that and had other things and and that was called blot and so those things were traded so there were prices and and they sort of used them and that's what kept it going for a while but so so um one other quick tell you oh yes was there was it to socialism ever a Mises said yeah there was from about 1918 to 1921 which is the period of war communism when there was the White Russians fighting the the Communists the supporters of the the czar at that point they tried to let him try to abolish all prices okay get rid of any reference to it to a money price and they did that and what happened was that shortage of shortages of everything just emerged and of people at the end people were beginning to burn their household furniture just to stay warm and then their parts of their houses and then they just left them went to the countryside and just foraged for you know food and and and shelter and so on so socialism yes it can work among nomadic tribes among households as we pointed out okay but that means the starvation of you know most of the population okay so let me just talk a little bit let me skip over this okay what I just want to mention something there's something called the social appraisement process that's really the market operating to both have generate costs and prices so the entrepreneur and Peter Klein will talk about the entrepreneur I think maybe later today or tomorrow the entrepreneur is at the center of this whole process that generates prices and makes production rational so what the entrepreneur does is look to the future okay sees what consumers are buying now and he fixed to himself how this will change he makes a judgment about a year from now or two years from now will people like tablet computers for example Steve Jobs iPhones and so on and so you make a judgment based on what consumers are buying say believe the mind the problem the UM the product might not be in existence today okay but yet you need the resources to begin building the product today so based on what you believe for prices to be of consumer goods in the future the entrepreneurs then bid against one another okay because they're all looking to reduce different things for the resources today and so that determines the structure of prices so if you want to produce anything if any of you or would-be entrepreneurs you can always freely use the existing price system to know what it's going to cost you you can always know the cost of something you want to produce you may make a mistake because you misjudge the future prices but you can always know the cost and that's extremely important that's what is lacking under socialism so what Mises talked about was the intellectual division of labor he said everyone is involved in generating the price structure consumers capitalist entrepreneurs and laborers okay they meet on markets and on markets they exchange and underlying those exchanges are everyone's valuations choices and which leads to those exchanges and those are what generate prices so prices are a social phenomenon okay or a social phenomenon okay one mind cannot generate prices that's the failure of socialism okay everyone all of us contributes a little bit to the formation of the whole price structure but no one human will can ever come up with a price structure on his or you know his or his or her own okay so it allows everyone to compute money cost of any conceivable production process okay I want to just talk a little bit about the socialist response you've had these nitwits in the night 20s one guy of fanatical Marxist named Noah said what we can just calculate in kind what to stay it up the tons of steel and the gallons of paint and so on okay Mises Mises just smashed that argument right from the beginning okay others said let's calculate with labor hours that is a homogeneous unit well as you saw with Roger Garrison's talk the other day it's not a homogeneous unit okay is the labor hour of someone who does heart surgery the same worth the same as a labor hour of someone that runs a backhoe and for a construction company I think not is even in the same industry is a labor hour of LeBron James the same as the Gorky guy 12th man sitting on the bench no of course not so they're not really homogeneous okay just by saying the word it applies to a variety of different types of hours in different qualities and finally that leaves out machines and natural resources so capital goods and natural resources are used the more they're used the more productive labor is okay so a guy digging a ditch with a spade and and and and a shovel is not the same as a guy or can't produce as much as a guy who's running a backhoe alright labor hour is very very different in productivity also assume a stationary economy this is a favorite of these naive guys what they said was you know what on the last day of capitalism we'll just keep the managers and the foremen on and we'll just tell them on the next day the first day of soldiers just do the same thing come to work at the same time and so on well of course if every if nothing ever changes if people's tastes never change if technology never improves if you never find more natural resources or if natural resources aren't depleted you can do the same thing over and over again but that's not the real world the real world the real economic world is dynamic it's continually changing okay and in order to know what to do in the real world you need to have profits and losses okay look before there was an iPhone I mean you would have an iPhone here right you would have any new technology coming in right in a socialist world there were sophisticated responses in the 1930s in the 1920s those naive responses that I was talking about to Mises they were mainly by German economists but then when Hayek went to Great Britain from Austria he he brought with him some of the ideas of the socialist calculation debate that Mises had had developed and he developed them on his own and published the book of writings on on socialism by himself and Mises and and and others and so the neoclassical economists in Great Britain became interested and in the u.s. became interested in this question so one of the things they said was take the mathematical solution what we can do is we'll just collect all the information about resources all different types of resources the amounts and so on quantities and qualities and we'll collect the information about people's the amount of labors we have in the labor potential labor hours that can be used and about the capital goods and then we'll put them in simultaneous supply and demand equations and then we'll solve those equations and we'll get the right quantities and the right prices for all these goods okay okay and there's a real problem with that which I'll get to I just want to talk about the market socialist before I get to the problem market socialist said that what we can do is tell the managers of the factories that they should minimize their costs okay and I'd set their prices at their average cost so they won't on earn profits but they'll be covering their cost and they'll be selling producing goods just up to the point where the cost equals the price now who's gonna set the price the prices were going to be set by the planners themselves through a trial and error method so they would set the price of steel at a certain level let's say six hundred dollars a tonne if there was a surplus of steel well that meant steel was just too much too much the price is too high they'll lower it to 200 and then it might be shorter and eventually through trial and error you'll find the right price okay that's what they claimed all right so what were the responses Hayek and Robbins who was a British economist they said well this is impractical okay by the time you collect all that knowledge that's necessary to solve all these equations and by the way in the 1930s there were no computers it would it would take months and months if not years to solve one set of equations by that time things would have changed already and that knowledge is absolutely obsolete and those prices and quantities would be optically okay so there was a really it was Impractical to change prices in a timely manner and also you wouldn't be able to get all of the information that people had in their heads about how to produce different things okay because it would all had to be centralized and what Mises said is that first of all the socialist market or market socialism is playing with numbers okay it's just playing but we call the playing markets like children trading back and forth okay because the things the decisions the children make are really made by their parents their parents have bought them certain things certain toys their parents have decided you know what they can play with and how much time they have to play with it so when they're trading that's just determined ultimately by the old with the decision maker so what Mises says is that look the market economy is not a managerial economy we can't just have managers making these these these low level decisions and say that's the market in fact you want people who's going to make the decisions about liquidating certain firms destroying them and creating new firms who's going to do that Mises says in the market economy that's done by entrepreneurs it's done on the stock market and bond mark and commodity markets and it would be under market socialism there would be no stock market okay because the government would own everything so the prices would not be real prices they're not real market Isis just by setting up the firms as they do and hiring the managers that they do and telling the produced certain amounts or or setting the firm's up a certain size they are determining the outcome and they're determining it without knowing any prices okay so there really is no way around if you want a rational economy and rational allocation of resources there's no way around having a lays a fair economy I'll stop there thank you [Applause]

Channel: misesmedia

Views: 9,192

Rating: 4.8764043 out of 5

Keywords: Socialism, Calculation, Economics, Austrian School, Salerno, Mises

Id: 5IWDDw8TIdY

Length: 45min 14sec (2714 seconds)

Published: Fri Jul 20 2018