uh... this is the uh... debate on the socialist calculation debate uh... social scapulation debate rage in England in the nineteen thirties and earlier in germany nineteen twenties and it was directed by what's the economists who debated the meaning of the debate uh...
itself during the nineteen nineties okay and that actually continues although i think of the two sides of grown closer i have the infamy of having sort of started the second debate okay debate on the debate though um... before my article appeared nineteen ninety years ago by israel kurzner in the late eighties on the social scapulation debate pointing out that all students could learn quite a bit still from that debate despite the fact that it had taken place in a few years earlier and uh... so it's in part mine was a response his article though his article was really controversial uh... first let's talk about what the calculation of things all about that i'll give you my take on it which is not a take of others but we've come in closer as i'll show you um...
basically the debate was started by a little bit on me is this day in the nineteen twenties uh... in his famous article economic calculation in the socialist commonwealth which is published in nineteen twenty and then was incorporated into a book that he wrote on socialism uh... nineteen twenty two uh... basically means achievement in this article i think this is one of the greatest articles of the twentieth century by the way was to uh...
destroy the intellectual foundations of the case for social central planning uh... but secondly revolutionary breakthrough economic theory demonstrating the nature necessity of the price of the here i do it is to occur uh... and thirdly uh... it was really the completion of the mangerian revolution what means is did uh...
in this article was to show house objective values were transformed into objective prices which could be used as cardinal not meaningful cardinal numbers economic calculation so uh... it was step in the direction of the complete of the mangerian debate uh... which uh... was fully completed as i said with his uh...
human action in which he could have been completely gave us complete theory of monetary calculation uh... in nineteen twenty he only gave us those parts of monetary calculation theory of monetary calculation that were necessary to uh... show the impossibility of social central planning uh... the word of possibility now has to be carefully a parts when we said that socialist calculation was impossible or he sometimes says that socialist economy is impossible he did not mean that you could have a group of people only all the factors of production and producing something what he meant was that they would not be able to determine if they were producing the optimum pattern of output even from their own point of view that is he was saying that they could not economically allocate resources to the highest valued uses even if they themselves determine the scale of value for society the reason is without a price system you could never find the costs of these various uh...
goods that would come from which you had output uh... right now some of these is this was as follows he said that the racial allocation of resources was impossible without monetary calculation and the reason why uh... reason why this was so was because without a price system there would be no way of of determining how much the production of any particular cost and without knowing the costs of various goods you can have determined the most profitable line of production and he pointed out there were three preconditions institutional preconditions okay real world preconditions for economic calculation the first he said was private property in all orders of goods okay both consumer goods had to be properly owned and traded as well as on capital goods and after resources secondly how do you feel to exchange if there's a system uh... that existed in which people were allowed to own property but could not exchange it and that's uh...
system has existed in history at times where for example in the middle ages land couldn't be alienated from from the families that owned it could only be passed on uh... without their freedom to exchange um... uh... rather the freedom to exchange was a second necessary uh...
was a second prerequisite let's say economic calculation and further had to be sound money because all prices in the real world market economy are money prices now we point out that socialism really about his all three it about his private property orders of goods because the capital goods are owned by the state it about the freedom to exchange because the state being the monopolist of these goods cannot trade with itself since there is no exchange possible in capital goods there can be no price of these goods and without prices of these goods there's no way to determine cost of production let me give you a simple example of this um... he's never denied that the uh... central planners could know their we might call their technical production function chad i'm getting a shadow it's a light okay so much for doing this is a production function from an automobile uh... not being very technically oriented i don't know how many tons of steel or an automobile maybe two or something but anyway let's assume that these the central planners no through the through their you know their their uh...
teams of engineers and so on exactly how many times of steel p tons of steel required for a product of automobile plus certain number of hours to number of hours of machine time plus certain number of hours of unskilled labor and of engineering labor plus a certain number of square feet of factories face and um... uh... kill a lot of hours of a lot of hours of electricity and uh... the hours of managerial labor they know if you combine all those things according to a technological recipe which they also know that you'll get one automobile the key is is it worth producing a little bit given that all those things are nonspecific inputs meaning that they can be used to produce many other goods in industrialized economy are you using those goods in the most valuable manner from their own point of view and that the answer forces no because of the unit which is good to specify our heterogeneous there's no way to add up kilowatts kilowatt hours with a square feet of factory space with hours of machine time okay uh...
with uh... tons of steel and come out of one unitary course figure there's no way to do that so that was the main objection now uh... we know there's a certain other problems arise once you can do that there are no um... objective prices for these things for example should the um...
production would be better to produce these automobiles uh... with let's say more capital intensive methods instead of just two hours of machine time would be better to have to plus a hours of machine time in other words why not have more machines operating may be a case of appearing of the factory or into um... run by a by a by mainly by robots okay and with one or two people just meaning the computers control robots okay and reducing amount of labor so reduce the amount of unskilled labor or minus b but they can't know even if they've decided somehow this was the best use that they want another automobile uh... they don't know that the cheapest way of producing that one will be should should they produce it more capital intensive fashion or less capital intensive fashion uh...
also uh... let's assume that they're producing a run of automobiles and that uh... this fact that they have uh... can be allocated to producing twenty thousand automobiles or the factors to produce a hundred fifty thousand motorcycles or or five hundred houses once again without knowing costs uh...
without knowing um... because each of these things would take different proportions of these factors of these inputs they would not be able to determine the you know what the output should be again remember take the west economy okay and then hold up your mind uh... imagine all the different uses of steel is a certain amount of steel in the economy and there's only one optimal pattern for using that steel okay now entrepreneurs operating under market economy can easily figure out the best use of the whole stock of steel there's a certain demand is we'll see based on their forecast of future prices and they based on the forecast bid for the steel and let's say the steel is three hundred dollars a ton every use of steel that is expected to increase revenue in the different industries economy by at least three hundred dollars will um... absorb some of the steel anyone who has a uh...
perspective use of steel that has a marginal revenue product in addition to total revenue that is less than three hundred dollars will not get any of the steel and supply and demand uh... the market will clear what supply the man that equal in price and equal in quantity that's exactly equal to the available stock of steel how does the economy solve this problem of determining whether the market economy determining whether or not we should produce a sort of deal well on the market economy where the free preconditions of economic calculation are fulfilled with this project to meet the production every single unit of every single input of the hundreds of thousands of different types of labor and so on maybe millions has a market price every single one so that any conceivable and technically feasible production project or production of process can be the cost of that process can be determined so let's say that um... this is the uh... decision about producing the forward for us and the uh...
total cost or which is a sum of all of the prices of the inputs is eighteen thousand including the entry turned on the investment capital and the price of the automobile itself let's say is twenty one thousand now that's not car price that's expected price car price might be less but next year at the end of this process of assembling this course entrepreneurs will see it may expect that the price to go from seventeen thousand to twenty twenty one thousand but the future price that is important in any case then that is telling them that they are taking resources that have a lower value in all of the use of the economy at least a low perspective value and they are redistributing this entrepreneur to uh... more highly valued from the point of view of consumers on the other hand should the cost exceed expected price should the cost of maybe twenty two thousand per car for this bundle of resources that produce that is already that is needed to produce a car uh... then the law would would indicate that it's not rational to produce that good because you're misallocating resources you're taking resources that could produce goods worth about twenty two thousand market to consumers and uh... using the producer was only twenty one thousand now is that to say entrepreneurs in the calculation are valuable of course not uh...
in the first quarter of this year gm lost two billion dollars laying off twenty five thousand workers uh... doesn't mean that i'm a calculation doesn't work what that means is that in the past they've overestimated the demand for the products and therefore they anticipated a higher selling price but at least they know that they make mistakes at least they know that they have to restrict production of that of of these one deals which they are in fact doing they don't know if i said i've seen different twenty five thousand twenty thousand in the next uh... few years and they reduce their total capacity for producing vehicles from six million i read to five five million so it tells you when you when you're doing something wrong now my opponents in the debate is your personal perspective people with um... would say something like well you know uh...
there would be an issue of the uh... one of the things that this tells us that this market economies and error correct correction process or the corrective process no it's not correct the process because it doesn't mean that that things can't change that there's not continue changing going on that they can't simply follow the past losses and say uh... once and for all we need fewer cars and that's what we're going to do in fact think to turn around in ninety days or things to turn around in two quarters they have to forecast what is that this trend will continue in the future in order to make that decision the number of people if they believe that things with that that uh... with the gasoline prices would dramatically drop okay that's information that the case of that i guess we probably drop let's say in six months and the demand for the people sky rocket to leave that the model to their their firm they wouldn't blindly cut back you know to simply follow prices and they were losing money was two billion dollars the first quarter we're going to have workers back they might actually expand so it is not a corrective process it's a selective process meaning it selects those entrepreneurs that are continually making the right decisions in a world of uncertainty and change let me mention something else that means is uh...
makes clear that there is a difference between what we call economic calculation and valuation means is never denied that an individual or a small family living in isolation what we might look like on a household economy couldn't figure out the cost of production okay without money money's only needed complex industrial economy which you have heterogeneous capital goods which could be used in different uses where all capital good only had one use of every resource only had one use there will be no part of our calculation if it could be used anywhere else it would be only used to produce cars then all the resources that could be used to produce cars would produce cars because they can't use anywhere else they have no opportunity course in other words but what means is that in a household economy people can't figure out opportunity costs let's take a lot of the famous robs and cruso the value scale what do you mean to do that that's a value scale for allocating say twelve hours of of labor day as they see sleeps twelve hours a day uh... and he's going to do it for our units okay and that's a value scale that he prefers four coconuts high-size value so then two fish three pounds of mushrooms one sack of berries but only as twelve hours in each of those alternatives absorbs three hours the question that becomes what's the cold what what's the um... the cost of producing one sack of berries what's that's four times less well he can easily see this is only for you know the natural resources aren't really scarce for these labor that's scarce good here his labor in this situation at the cost the expected that expected utility of three pounds of mushrooms okay you'll only engage in production processes which have a higher value the utility of three pounds of mushrooms so what do you think somebody sees flying to this rabbit or rabbit i don't know if that's a quarrel but he finds that there are rabbits on the uh... on the island okay and he says to himself no wait a minute now can i afford to hunt that rabbit in order to hunt that rabbit i don't want to give up anything that's more valuable that i could do for those four hours so it's a matter of of of the value scale on the current cost of of of of of of labor is the expected utility from three pounds of mushrooms if he expects that rabbit will satisfy him more than the mushrooms that we do the benefit from from the rabbit is higher than the expected than the cost the cost being always the last the least most valuable use of the resource that is currently undertaken so what we will do that is to devote the resources the hunting the rabbit the cost the benefit of the rabbit is lower than the cost than he will not so he says that yes you can run up you know sort of a call to socialist economy within a small household or individual can't okay you can run it without calculation but you cannot run it in a system in which you have a multitude of heterogeneous goods capital goods inputs which have multiple specific which are are are are nonspecific which could be used in many different but not all production processes now i i i i i i think some people have been at the university for her the story uh...
i i have a friend in montana he's living in jersey and i grew up with her and any in any case she she actually married a real cowboy believe it or not from montana they go on ranch and one day she called me up and uh... we're talking to you know uh... i i i i i i i i i i got in house and i thought well so uh... you move off the ranch he says no no he says um...
we had the house shipped in he said well here in montana since labor is so scarce in montana and therefore has a much higher value you know herding capital to actually do they have cattle drives and everything uh... it's very scarce and expensive they don't know the house is on site in fact our house was built in in Nebraska and it and these huge trucks all the modular pieces of the house to the area where they're going to be built and they put them together so it's very capital intensive use a lot of capital capital is relatively cheaper then then labor whereas in the northeast of course where labor isn't scarce you know in the right mind we have to think of buying a house on where else and having shipped to where to where it's on going to be you know the residents now put a socialist plan to figure this out that you should build houses uh... hundreds of miles away and then have them shipped without economic calculation it's very unlikely i mean someone they might figure it out but it's extremely unlikely um... i know you just mention a few um conclusions that we get from these is analysis they tell us that a social economy is literally impossible because it cannot calculate the opportunity costs of production and investment positions which i've just shown you uh...
even a term socialist planning or socialist economy is an oxymoron now why the oxymoron it's an oxymoron because not only the socialist make mistakes but they can never know if they make mistakes they're in a desert without compass and they might want to get to a particular point but they don't know which direction to go in the same sense that robinson crucial rationally allocates his resources his labor to the most highly valued consumer goods the market economy with cordial prices generated entrepreneurial bidding and i'm going to forecast uh... can affect allocate goods to the highest value uses from the point of view of consumers so the market economy operates rationally in the same sense that robinson crucial operates rationally soviet union does not are or the force of union or any other simply planned uh... economy cannot do that so in that sense they don't economize the results of the social economy it's an oxymoron inconsistent words the reason being they don't know how to allocate all these different resource with multiple uses among the most valuable uses even if they they they themselves are going to turn as dictators most valuable uses they can never know the um... the trade-offs because think about it in our economy today resources but the second u.s economy the available stock of capital goods which you know produce millions and millions and millions of units of capital goods can be reallocated an infinite an infinite number of ways there's an infinitude of different economies that we could create out of existing resources there's a different number of different patterns of outputs that could be produced today how do we figure out the right one but we never know the uh...
there is a way of of of of forecasting the right one and that is through market prices and economic calculation uh... what happened in the in the um... so the union was that they uh... use a system called uh...
gross output planning okay and there was a the planning central planning borders which goes planned and they do what they did was that they would um... specify quantitative targets for output now it's very difficult to specify the exact quality of the types of output that you're giving the um... various firms socialist firms the targets for so um... basically they motivated the manager by the uh...
giving them bonuses for meeting or exceeding the targets and of uh... they got a trip to the gulag for not um... meeting the targets consistently uh... but was interesting that it turned into a system of mutual lying of course you want bonus but on the other hand if you exceed your target one year and get a big bonus what happens next year they raise a target they are this factory can you know give us has greater capacity so you so so that the manager will always lie and say that part way too high to try to get it down uh...
and to make sure he may be exceeded a little bit but not by much and and on the other hand they know the the the commissors of each industry know that he's lying and so they'll raise it so it you know the the information is completely distorted the incentive is that information is not um... accurate uh... one of the uh... interested funny um...
uh... one of the jokes that was often made uh... made um... about soviet union or one was when when uh...
was actually a cartoon and i could go here and what what was was there was a huge nail and the nail is being it's not on on a long train to be able to train here carrying the nail to where it's supposed to go you know it's you know a hundred on nail or something like that um... and then there's the commissor you know he's got that big before he had him yeah like that then there's a plant manager and he's saying well uh... uh... well comrad he says i've met my output target for this year which was a hundred thousand tons of nails he would always make the nails the easiest possible way that will permit them to meet his target so what does you know that that's an exaggeration but the truth is that many houses and structures in soviet union were unfinished even though they were they couldn't be used because they weren't they have roots or roots and the reason why they have roots was because the small roofing nails that you need were being produced because they were more costly to produce so you were in danger of not meeting your target you have these more resources to make the smaller and larger ones and there's stories about smaller sizes of women's clothing not being available everybody walking around you know huge clothes and and so on okay because if you make things as large as possible now on the other hand if they specify a number then you make a lot of small nails and the large nails will disappear uh...
and uh... the one story that was posed out about cruciav uh... who uh... during uh...
a um... speech to the public world uh... berated of all of all industries of chandelier producers producers because they were making huge heavy chandeliers that were crashing down killing some of the comrades in their dashes you know in a vacation home seriously there's been a lot of people talking about you know what was going on here pulling ceilings now uh... and of course a big joke the joke that went around the uh...
you know in nineteen seventies was that um... cruciav in the fifties at bang the shoe on the on the podium at the at the uh... united nations and he said you know we will bury you meaning economically we will we will bury you and so so the economists told their western counterparts will bury all of you except for hong kong if we need to know prices will allow one small island where there are prices you know and then it was true that the soviet union was um... using world prices at least electricity and and things that they created it and for steel and so on but they weren't that those prices were still efficient because they didn't exactly reflect their local conditions um...
now what about the existence of the soviet union um... people later on well you know this is obviously wrong here it is it's the nineteen thirties and and the soviet union hasn't collapsed yet well mrs uh... impossibility thesis was not undermined by the he pointed out this first article he said look he said um... real-world socialist economy such as the u.s.
or two is already in existence by nineteen point he said don't uh... are not inconsistent with my thesis he says because they exist in a world of capitalist prices he said it's just like the post office the post office as inefficient as it is here in the united states um... is not uh... can exist and can go on in a fashion by by using the prices that are generated around it but when it's on the other hand said that he want to turn the whole economy into a post office you turn the whole world into a post office then you have the problem of of economic calculation now it's not to say that using world prices that don't reflect scarcity in your area or in your economy will allow you to be very very productive and so you wasn't very productive okay despite cia cia statistics and then both and then and and and ball break uh...
along with cia you claim that the soviet union was catching us and that eventually it would be a convergence and they were able to eventually surpass us uh... and and and they'd be a bigger absolute economy than us most other nonsense uh... and also in the soviet union there were black markets and it was a system of bribes between social enterprises it was trading but was supposed to be if someone had access of nails and needed copper wiring they would trade and it would brokers who would buy and sell it would broke the deals and so these were a system of bribes called block blat um... also there was a uh...
other black markets uh... uh... you know the purchase of beel albums and jeans and so on soviet union and the um... because of what in hard currency there there was um...
the soviet authorities look the other way um... was there a true period of socialist economic planning yes there was war communism uh... socialism really existed from about nineteen seventeen to nineteen twenty one during the period of the of the uh... of the uh...
counter revolution in russia the fight the uh... of the war between the whites and and the reds there's also another group called the greens i don't get much play but there are an anarchist group that were fighting both the royalist zars and the uh... the communists uh... in any case everything started to break down when instead we are abolishing money we're abolishing all accounting and money prices and uh...
we're going to um... you know just have accounting in natural units how could you have that natural units you know as i showed tons of steel kilowatts hours of electricity there had a chance you can't get them up you can't get a single figure for course in any case what happened was that um... you had houses that the uh... the whole system began to break down okay very little produced people began to break up their furniture and then their houses of firewood people moved from the city's cities were emptying out by nineteen twenty one uh...
they're going uh... into the into the countryside and leading a nomadic existence that's what socialism leads to a complete breakdown of the social division of labor okay universal brigandage okay that is forging and stealing and you know these small household groups or small small bands fighting with one another for resources so you know socialism can exist after fashion it's impossible to run uh... the social division of labor at a high level without economic calculation uh... and by the way let him then reverse himself and institute the new economic policy by the way the same name that nixon took for his policy of way to price controls okay but let's let him move in the right direction it allows some exchange and so on okay um...
now let's talk about the intellectual division of labor and uh... what i think is one of my contributions here i mean it's all it's really in these is but i think i brought it out a little bit more and this is the social appraisal process how is it that we actually go about transforming subjective values for goods and entrepreneurs qualitative knowledge about consumer values and their expectations about what more conditions will be in the future how all of that information and knowledge translated into objective cardinal numbers that can be used meaningfully economic calculation though i call the social appraisal process uses the word appraisement into different senses and here's what we have you have the entrepreneur and let me use this you have the entrepreneur at the center here the entrepreneur wants to earn pure profit he wants to buy resources at a price that is lower than the expected output prices of of whatever production process he is engaged in so what the entrepreneur's office doing is the following okay he has experience of what present prices are the prices that exist right this moment have now become past prices the price of just paid uh... for a bottle of wine over crows just now uh... is now we might call it a present price but it's a past price and entrepreneurs have experience of of of immediately past prices which means it's called present prices and experience of of present market conditions they they have experience of what goods consumers are are are are are demanding or that are in heavy demand by consumers are being demanded that is they have experience of profits and losses that are currently occurring now that has no direct relevance and here's where i think he's in and i differ as no direct relevance present prices and profit and losses to what decisions entrepreneurs are going to make in in product producing today why because production today is always for a future market uh...
in uh... produce an american car used to take from the drawing board to dealers showroom seven years so you when you decide to to begin to build equipment and invest in producing uh... a line of one of the old that's seven years before the fact you're interested in what the price of the of the world is today you're interested in it as a starting point and that you have to do is to forecast and these were understanding based on your speech you apply your understanding or forecast of how to reduce resources and technology will change over the course of the production period but that's the quality we still have prices well given that you're starting from a present price you can say all right i think the man's gonna go up for these automobile so that it's seven years uh... they're not going to be worth eighteen thousand or twenty two thousand dollars so even if it's a particular automobile or type of work is losing money today you may very well decide to go on with production of it and that says prices are present prices are not a guy actions that are in for the future and uh...
here's i think we're the uh... biggest one of the biggest taking point in the debate current debate over the debate now based on their appraisements and i want to put it means to put a cardinal number of price based on qualitative information on uh... a good so individual entrepreneurs all begin to quality on to appraise the price of the goods that they're going to produce in the future so for example it could be but it doesn't exist uh... steven i don't think it's a job's or jobs i don't know how to do this the founder of apple he's sitting in his his garage or so story goes uh...
i'd be m has developed late seventies early eighties the technology for pc president by the end of the time praises the future very warmly says that he sees will only be household toys to play games on never be have a widespread use in in the uh... in the business world so i think it's what's at the time goes on with production decisions to continue to produce huge mainframe for computers steven jobs appraises prices of personal computers differently he believes in fact they will be using business will be more than just gadgets for kids to play a video games on whatever and he was on the production now based on all that the entrepreneurs based on their conflicting um... or or competing uh... visions of what you'd like to be go to the resource market and they did prices for those resources and being based on on their expectations of future prices of goods is at that point that we get a whole structure of resource prices and that is social appraisement okay no one mind determines what those resource wise will be it's a hundred of thousands of entrepreneurs bidding on the basis of their individual visions of what future market conditions will be of what future prices will be who determine given the supplies of the various resources and the city's made by resource owners that though that didn't determine the prices of resource so now every single resource right now every kind of steel anything put into any process has a price and so it allows the entrepreneurs beginning against one another to determine their production project is profitable or expect to be profitable or if it's not so the existing resources go to the most highly valued uses as anticipated by entrepreneurs they don't know for sure anticipated and this changes not just from year to year but from day to day this continual change continual revision of decisions so now unlike a high-income person who claim that present prices give us knowledge no present prices don't give us any knowledge in fact you have to know the famous ten example by high he says look he says no one has to know of the conditions in the ten market let's say that there's a strike in um...
in Bolivia uh... and uh... it's impending in a month or two unions are threatening to go on strike fly a ten is going to decrease prices are going to go up and therefore uh... builders here in the united states are going to have to work or use a ten united states to have to substitute other materials such as plastic and copper and so on well according to high up when it when that occurs prices change and the user of of of of of ten here in the united states automatically then substitute something cheaper plastic demand for plastic goes up price of plastic goes up well the user of plastic don't have to know why that happens they have to compromise so they produce fewer skateboards with savings and they're made of plastic or they substitute other uh...
compulsive materials for plastic and then that the so that the demand for something else goes up and it's ripples to the economy and it is nice the way all his knowledge is spread to the economy to be by prices people have to know anything else well if you're an entrepreneur and you forecast market conditions you have qualitative knowledge you're using a halo what ten is going to go up in front in price and you read the trade journals you know you have an idea that there's going to be some sort of uh... you were speculators though uh... that is going to be some kind of uh... destruction of the tin supply you jump in as an entrepreneur uh...
what a speculator you buy up the tin now and you sell it later or if you're a producer you immediately start buying plastic at the lower price today because you don't have to shift to it rather than on the news of ten so and you are in profits so even kind of ten example uh... there is uh... a mistake i believe you have that somehow present prices are all that is needed uh... roger garrison has disagreed with me and say well you know prices are guys are marching orders of the high-tech somewhere high does say that but if you realize works very closely he keeps lapsing back into this this terminology that that somehow prices since it's a point out that the in a market economy prices do their job because they're always very close to equilibrium which according to me is of course they're nice the prices that are relevant for today don't even exist yet and the resource prices they're no guys with a surprise themselves are determined by prices that people expect to emerge in the future of consumers so it's expectations of the future that that the term of prices of uh...
present prices resources which are relevant to entrepreneurial decisions but the point is entrepreneurs have a lot of other information besides prices to make their uh... forecast of the future so present prices depend on on information not the way around that you don't need information knowledge because prices prices give them to you but rather it's that you need the knowledge and so on as an entrepreneur forecast the future in order to make reasonable bids for for resources so now as i show you the moment on that the state of the debate has been to become back in the open to that now there's been a closing of the gap before it's in an article in history of the economy has made some significant missions though i don't want to say that he agrees with me on he said he said a few the following uh... first of all uh... the article called monetary calculation means is that there are two important locations of this order of this argument first given the later part that later participants in the calculation debate including high up downplayed means is an emphasis on monetary calculation and ignored its relationship with the use of functions of money and monetary institutions or re-emphasis of the monetary roots of the means is pretty enables us to do the calculation of a refresh lens means always always focus on money prices that's another reason why the general equilibrium criticisms of my means is later on the whole water uh...
i'll talk about the social systems in a few minutes but it didn't hold water because it wasn't talking about general equilibrium you don't have many prices in general equilibrium have only water prices uh... few of the things that were with sense is a means is elaboration of this point centered around the use of money prices okay and and again high up doesn't stress money prices like mises does but now steve is is is doing that uh... other statements he makes he says as accurate as these arguments were and these are the arguments from the use of knowledge and society will apply for famous articles and other very famous articles economics and knowledge so he says as accurate as these arguments were as much as they were crucial to the recent revival of all three economics they largely get neglected the original monetary themes that pervaded mises nineteen twenty article and he also said it was the process of actual exchanges against money that competing entrepreneurs endowed prices with their own appraisals of existing expected market conditions the prices on something that are automatically there telling entrepreneurs what to do it's the entrepreneurs themselves who like all the social appraisement process okay by the way um... mises says that the problem of of of socialism is a problem knowledge he says it's a problem of one will acting okay very very stark statement what does that mean the problem one will act what it means is if you would set up the entrepreneur there if you have one monopolist who owns all this the the factors of production he owns all those things but there's no big process then there's no way of of generating prices so where there's one will and more often by the way expand that to say you could have one big cartel in a market economy that was everything but the same reason immediately break down become chaotic it would lose and uh...
money and it would produce the wrong things and break down because it's the same problem socialism so one last point that um... is made by by steve forlitz he says monetary calculation is in is intricately linked with the mises conception of the entrepreneur um... so learn all has rightly called attention to mises is very important discussion of valuation and appraisement um... what entrepreneurship is for mises is a formulation of an expectation of the future constellation of prices as i show here and the attempt to see opportunities within that vision that others do not currently notice so steve jobs of steve jobs uh...
no sees uh... something that others did not notice that in fact you know pcs will be widely demanded in the future by businesses and he was correct i'd be on the other hand loses um... thirteen billion dollars in nineteen ninety ninety one because of the decision they make in the early nineteen eighties continuing to produce um... mainframe so that the largest loss in industrial history uh...
i think gm's loss of two billion dollars the last quarter is something like a third largest loss or something like that because they have made mistakes so this is what mises calls the intellectual division of labor has nothing to do with this version of knowledge high-quality division of knowledge mises was the intellectual division of labor what does that mean it means this that every one of us are involved in the social process as consumers bidding for consumer goods against existing stocks which gives consumer prices to the entrepreneurs and as owners of labor and other resources who are reacting to bid by the entrepreneurs and of course entrepreneurs themselves every human being in a market society is involved in the social appraisal process and that's what uh... what uh... means is that it's a little bit of labor i stress that point because on others of claim well he's talking about the vision of knowledge and uh... you know he really is not okay um...
we have a few more minutes i'll talk a little bit about what the social response to me this was what mises response to the socialist war a response to the socialist war and what um... hi-ax later responses to the socialist war uh... what mises when he first wrote the article in german and it was german socialist german marxis basically that right to respond to him the dumbest response came from uh... auto noirat who was in um...
bobber of seminar interestingly enough with mises and which from pater and with other other famous economists he said what's the problem you know what it is talking about his other socials about money and we'll have what he called in the churra calculation that is will count we'll have a county in kind of course this this misses the whole idea that you can't get apples and oranges which we all learn first grade uh... uh... that the heterogeneity of goods we have a very good there is no common denominator paid to add up the these units of goods you can add up that tons of steel labor and so he's already disposed of that criticism in the original article um... secondly uh...
other marks of the value of calculation of labor hours labor is someone who is a number of labor out of it takes the produce goods and that tells our costs but that will be at least no of the relative cost of different things and then the uh... then the plan is to make a decision based on on their on their own value scales well first of all of course labor itself is ever genius me to said and a different uh... quality uh... you know for example watch the um...
the uh... nva championship game tonight okay between the spurs of this is you'll see the role basketball players are open for the same amount of time but their skills are tremendously different even the same industry labor is not homogeneous let alone between industries how do you compare the uh... our labor of of the ditch digger to an hour of labor of um... the brain surgeon and so on okay so he immediately um...
he had a response to that uh... secondly that answer leaves out of account the fact that you have to take into account or account for the value of capital goods obviously we have more capital goods producing a good the hours of labor that is going to be lower so you're not going to get a true accounting of course when you leave out account capital goods which are energy so which you can't get up in terms of hours of labor uh... so capital goods are scarce they must be colonized uh... third answer is a little bit more uh...
uh... say sophisticated but a little little more clever uh... the associates wait a minute you claim capitalism works well that that under capitalism there's a tendency to produce the correct goods that are made by consumers and use the correct technical methods uh... what we'll do is um...
we'll allow um... simply will kill managers just keep doing what you're doing just keep doing the same good use the same methods we don't need we don't need accounting prices of course what's wrong with that the market economy's dynamic is a continuous change in in technology in consumer demand in resources some resources are becoming completely depleted where resources are being opened up so make a long story short um... that only applies that argument to us to a static or stationary economy where there is no change in in general equilibrium in a static economy no one would need to know prices keep doing the same things over and over again that's what he's called the evenly rotating economy do the same things every year okay there's no need to change because people there is no exogenous change no one changes their their preferences of technology remains that and so on okay it's precisely in a dynamic economy where every minute things are changing and you want to make sure that there's a way of continually re-shuffling resources that you're producing the most highly valued and not producing something that has a lower value than something that you're not producing it's only in that situation where economic calculation is important so that was a little bit of responses to the more naive marxist replies to his original article right now in the nineteen thirties then this uh... socialist debate breaks out in great written in the united states and there's a number of neoclassically-trained economists in the classical sense very good economists that respond to me is it's okay ospa langa eventually went back to Poland and became a uh...
aporacic in Poland but who was praying to the rest of Chicago abba learner who was praying that the one school of economics um... some of their responses went as follows one response was well we'll just use a system of simultaneous equations uh... which uh... embody the data that the consumer value scales production functions and resources abilities and we saw the system of equations we will get the equilibrium prices and equal quantities okay uh...
including the equilibrium input and output combinations though as well as all the data that are needed to uh... insert into our equations we will get the optimal pattern of output and the optimal prices but in fact baron and pareto uh... to general equilibrium theorists baron with brados student who wrote before mises pointed out that even a very small economy would take thousands and thousands of equations you know could not be solved this is the era before uh... computers uh...
then all right but that's not mises critique uh... second second socialist response to mises is a trial and error method is the langa learner solution also an american economist named fred m tailor advances sort of solution here you tell the uh... central planning board direction managers and firms of industries to follow some very simple rules they say one make sure input and output decisions are based on prices and we the central planning board are going to set these prices okay so you simply take the prices as they use the word parametric they have parameters you question these prices this is a good prices and these uh... input prices you simply take the parametric and then in each firm you minimize the average cost of producing any particular good you don't try to maximize properties of the minimize cost uh...
and in the industry you tell the the the commissor of the industry that uh... he is to allocate output okay produced up to the point where the left unit of output produced has a has a marginal cost equal to price okay so you allocate the output among the various industries or various firms in your industry that price equals marginal cost which they claims what happens in in uh... uh... perfect competition as does the minimization of low average cost finally price of all the two of its markets and will produce markets would be set by the central planning board using trial and error that was well trial and error method what does that mean that means that if they set a price of steel say four hundred dollars and at that price there's a surplus of steel then what they're going to do in the next period is lower price until the surplus is wiped out and they'll find the equilibrium price in that fashion they'll find the right price and eventually competitive equilibrium will be established so this would ensure that the that the uh...
price and quantities of competitive equilibrium uh... emerge in a social economy and the fact that it would be superior to the real market economy because like night and others they believe that the real market economy is a full of monopoly so we will have enough we will have these producers setting their their prices equal on average cost and make sure that price on the industry levels equal to marginal cost all right now i can robin's with the first answer this uh... uh... they they answered this with these criticisms with articles written in the nineteen thirties and basically they focused on the dispersion of knowledge in the economy so in response to mathematical solution uh...
hi i said well socialism is possible in some sense but it's highly impractical he admitted being a student of these are that theoretically had all the data uh... you could solve the calculation problem but it's practically impossible because first of all the economic data are widely scattered okay and their subject of nature will be very difficult to get the data to those people that are going to insert them into the equations and solve and solve for um... equilibrium quantities and prices and secondly as i pointed out even if the data were collected the system of equations would be much too large to solve in this in this in this era before computers and finally high point out even if the system of equations could be solved once the data are clearly changing we live in a changing world so in a dynamic economy we have repeatedly collect new data and and we saw the equations so it would not permit uh... a very good solution of the economic calculation problem secondly in response to the uh...
the trial and error method okay which was so it came to be called market socialism and by the way these nineteen thirty responses especially the trial and error method is conceiving me at this point the fact that you do need prices whether generated you know mathematically or generated by some sort of a what we call competitive solution market socialism you need prices so they were ready agreeing that you have to have economic calculation so what what i think is pretty insightful of the uh... market socialism and trial and error method uh... he's all right you know that again does it disperse a knowledge about society um... which is one of many problems facing the central planning board and um...
this would lead to great inefficiency and following for the following reasons number one the central planning board could not change prices rapidly as the market how how long to take the price of steel the market can change the price of steel you know from a moment a moment commodities markets change prices of commodities you know second second but we take time to change all prices from the center you can change prices but they would be always you know on a monthly basis or quarterly basis whatever would be much slower than it would be in the market economy secondly um... high point out since you couldn't get all the local information to the central planning board the price changes would not embody all the information that they do on the market economy where the entrepreneur knows the local conditions that can change immediately so basically high-cost argument stressed a lack of means of communication for knowledge and it's included that that socialism was very very efficient and uh... but not impossible all right so if it would calculate a day late or you know or a month later two months late but there will be some sort of calculation um... now what about the critique of of the means is means is said even if the director knew all the information so he immediately puts aside high-cost problems let's assume they know all the information so he doesn't deny that right saying that they wouldn't let's assume they do he would still not be able to use mathematical uh...
equations to find the competitive equilibrium competitive prices and quantities because today's capital today's machinery and factories and so on are not the right ones they embody all errors that have been made by entrepreneurs in in forecast in the future so they have to be continually changed okay so these are not true data you have to continually change even if it even if you knew the future was going to be certain okay it was a change of the three or four years whatever it was you still have to change the capital stock over time from day to day as certain machines where out you have to change them and adapt to new technology as developed in the past uh... as means point out for example would we have built the railroads uh... which will have lost money since you know the um... world war one would be built a railroad as they were built if they knew that the airline industry was going to develop so you have as railroads where out you don't replace with the same thing which is what a general equilibrium solution would do you don't replace with the same thing you need new and different and better capital goods and you can only the only to do this the only to know how to change your inputs and make new inputs different but it's a profit and losses everyday profit and losses uh...
an equilibrium mathematical solution there are a profit losses everybody gets a much of a product everything's completely just that there are a profit and losses so you could not ever reach the equilibrium state at the second point that this is makes is let's assume you know everything about the equilibrium state now let's exist today but you know exactly what capital should look like you know exactly which goods uh... you know how many airplanes should have how many railroads you should have in the future uh... where they should go how many highways should be built where laborers uh... you know how the patterns where how that should be changed or where they will be in the future but you know that the ten years and everything should be this way so you know the equilibrium these points out but in that case you're here you're down here without this equilibrium stock of everything how do you change it in a way that uses the goods that exist today in their best uses without profit and losses once again you can't do it and if you don't have a market you don't have profit and losses so you'll never get to that that equilibrium and these points out that's assuming that you know all this stuff in a real market economy within the changing every day the equilibrium that you're at that you're aiming at changes every moment is a different it is a new equilibrium at the market economies of aiming at rockwater uses the um...
an hour metaphor of a rabbit chasing a uh... uh... i'm sorry uh... in the door grays the dog chasing a capital rabbit okay they never catch it but uh...
so so so so the equilibrium position is changing moment to moment even if you knew it um... you still need profit and losses it's changing so you always want to make the best possible use of your resources today and you need profit and losses an equilibrium solution never gives you profit and losses doesn't tell you today you have too much of this and too little of that uh... finally now that it means this particular of competitive socialism or i'm sorry of market socialism and for the trial and error method is completely different from high x he says that um... the state of market socialism is the oneness and indivisibility of the will directing all production activities now keep that in mind no matter how you try to play market means it says all they're doing is like children playing a game trying to play market okay let's say you have all of these different um...
you've given the rules for the managers of the firms and the heads of the industries and you tell them to to go about uh... minimizing costs and and and producing up the former marginal cost is equal to price he says this completely sees the nature of capitalism capitalism is a static managerial system capitalism is an entrepreneurial system okay how are they going to know when they should shut down their plants when they should build different plants that's the whole point of capitalism so he says they're just playing market capitalism is not a material system it's an entrepreneurial system for example as i pointed out gm is now cutting back capacity by by by eighteen percent firing twenty five thousand workers closing down plants there's a lot with this with these rules given by trial and error method there is is no um... way of doing that so these points out that um... the key is the capital markets that you're going to have to have investors trying to it to to to to to will shift their funds out of industries that are losing industries in which there are perspective profits uh...
so whole to use shumpaders term shumpaders term on capitalism is a process of creative destruction you have to have profits and losses which you're not given by any sort of equilibrium method to know which industries to destroy which jobs destroy and which new industries to put in their place and which jobs to create a place uh... he has a point out that under capitalism managers don't make a final decision they're completely constrained by the stock market credit markets and commodities markets but if you put out these are what are absent under socialism these markets which control the flow of capital in the dynamic system these goes on to say um... or rather but the response to me was well you know what the socialist investment bank and uh... we'll have these funds that we've been for by the socialist managers or the industry heads whatever and uh...
they'll have been for quite an interest rate and we will then loan the money out but this is just playing a child's game uh... because you still have what one mind setting up the rules under which these people can be so it's a game it's not the more it's not real markets where you have real trade in in various shares of stocks and in our bonds and so on and a very interestingly of rockwood point out that he wants to ask me this um... you can have you in mind for example sweden you know is the belief argument sixty is sweet and socialist economy and if it is it's operating very well so rockwood said when can you say that the economy is a socialist economy and he said when it no longer has a stock market okay so you can have individual uh... like like an artist to allow individuals to continue on their firms but if there's no stock market if the state is the investor then there's a single will operating on the economy and then there's not true prices in the country so um...
let me let me sum up with mises versus diackians um... according to mises calculation is a practical problem facing crew so and uh... and uh... uh...
that faces uh... crew so and uh... i'm sorry that's not a screw so you can you can have the regulations but it faces people acting on the social division of labor he also says that kept that that um... socialism is a problem of means and not of ends meaning that it's a problem of how to allocate goods to ends and to be taken as data whether they're the ends that the uh...
dictator or central planner tries to determine from consumer valuations or the details on it now character for example claims that and i would do one of the problems with socialism is that they can't get the dispersed knowledge of subjective ends from everyone well mises puts a promise that doesn't matter let's just use a dictator's own on ends um... one example i i i give um... what i keep on the graduate system is uh... let's say you have the star trek episode of in which there's a woman on a planet she's an empath decor and anyone around her she feels their needs and their reactions and expectations towards a decade of impact so we can absorb everybody's value scales and and and according to his own feelings of intensity of these needs he can write them even in that case he's points out i don't know if he was a star trek fan you like wasn't space but um...
even in that case um... mises points out you you still could they still can calculate because there is no social appraisal process okay he's still can figure out in a world where you have a multitude of multiple use resources still can't figure out prices you can't read with yourself in general prices capitalism has solved the problem of economic calculation using money prices that's extremely uh... the entrepreneur at the center of the system of capitalism he is the appraiser of future prices and it's his bid for inputs that that's that brings up uh... brings about a cost system for all inputs and in order to make those bid for resources he must have prior knowledge he must have qualitative knowledge prices don't give him any knowledge what except what prices are today and that helps him determine given his qualitative knowledge how prices will change in the future and use those future prices determine his bids against other entrepreneurs for the inputs which brings about the resource prices that gives you the basis for for course and finally as i said past prices or not any kind of a direct i to your production decisions today as high as sometimes lucy uh...
when speaking lucy says but in fact they are really starting point part of the experience of the entrepreneur that is necessary to figure out what future consumer prices will be and i will stop there and take any questions i don't want to make some of this yes right let me just say one thing is i want to be misinterpreted and that is actually partly my own fault because when i wrote my first article on this it was so much focus on knowledge and not on on on on on our calculation that i may have over stated the case believe or not later on i i i developed a social appraisal process or at least i i i i i i i i i i fleshed out mrs is something that was implicit in mrs i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i i point out that there is an important role for knowledge but it's knowledge that individual entrepreneurs must absorb themselves okay from their experience of present market conditions which will allow them then to formulate their understanding of future market conditions that is their forecast so what i'm saying is that prices don't give you this knowledge prices don't give you the knowledge of what to do prices that you see today do not give you the knowledge of what to do to when you're oriented in producing towards the future okay so i so i didn't make that in the original article i maybe didn't make that as clear as i should have done so i you know i i i i i think this whole focus on on yeah i don't think high focus is enough i think steven even amidst this in economics and knowledge and use of knowledge in society doesn't focus enough on monetary calculation okay now Steve and Pete you know who also has come to a group with me about the appraisal process and the centrality of the entrepreneur and of money prices and all of that they still don't want to say um well prices are imperfect substitutes for knowledge of the future or for knowledge that you need for production they they they laugh back into conflating future prices and present prices they're not okay prices do not give you knowledge of the future prices give you knowledge of what happened in the past okay if you see price it's either going to be a price that returns to the entrepreneur or profit or loss so it means that he made a mistake or he was correct in the past okay the only reason why that price is good or is useful is because it's a starting point by which you can say well the man goes up and supply changes these things will happen to price but to know if the man or supply you're going to change the future that's where your experience of the market and your forecast of the future of consumer demands and so on like steven joe's and so on that's where that comes in so that's where i i still think there's a gap between Pete and steven the highest view and and what i take to be the mise's view okay yeah um yes give up right right right right i don't think so what i think is this and at some point at the end of his discussion human action mise's says it talks about monetary calculation he says and this is um and besides this fundamental criticism there's a criticism brought forth by Hayek and Robbins about the fabulous number of equations you would need so that then then then in the article in which he does criticize Hayek which was only in french which published in 38 and a week we translated and had published in the quarterly journal there he says his critique is different from Hayek and is the fundamental critique so i would agree that um the more productive one time ago when i wrote this article i think it may have said what you were saying and maybe and what he said was well aren't exchange ratios knowledge you know that his prices aren't aren't they knowledge well yeah i mean i agree sure you know anything that we we learn i mean you know that is new is knowledge okay the question and make it exactly but anyway the reason why we hammer on this point if you say and we do and we're hammering more lightly now because i think people are you know we're coming together in some sense um but the reason we hammer on this point because this is social calculations a fundamental criticism so even if you had all the knowledge which you can't have and hi it's right and things are dispersed and there is you know entrepreneurs do discover new things and so on well that's correct but even if you had all the knowledge you could not calculate economically so it's a fundamental it's a question what's fundamental and what's something that's additional to it no you restated because i don't think i got it yeah right let me put it another way prices for example Stephen Cansella has written some good things on the web on this but um prices that we see any price that exist you know that that are realized realize prices okay which means price are in a pass only convey the extent they do convey knowledge they convey knowledge about past decisions okay prices future forecast prices are based on our knowledge of past conditions in other words we have to have the knowledge before we we can forecast these prices and then when we bid for the resources those prices are are are i guess you can say they convey knowledge of they convey knowledge of what um of of how for any particular entrepreneurship go in buying the services of those resources but that becomes almost trivial right i mean that's just another i mean we're talking about calculations different way hi i didn't mean knowledge in that sense i guess that's my hi i meant knowledge of particular circumstances of time and place that somehow um you know the local entrepreneur knows those things but he needs some idea of what's going on the rest of the economy and so present prices give him that so they take they take knowledge to the decentralized producer who knows local things and allows him to make reasonable decisions and hi it does say that to the extent that the economy works it's because prices are very near the equilibrium level there are a number of quotes i've gone over this and and steve and p refused to answer me on that basis okay so that might clarify that is a little bit and the other question is right right i'm not going to know but i'd like to see i'd like to see something like that that sounds um when you say logical induction what would you actually mean this i never heard yeah yeah although we don't know yet right but that that's called all i see it's not right right right right right so there can be better or worse guesses is a criterion for better or worse well that's very interesting i mean i you know i'm not a philosopher i like to see somebody you know what i i think that there has to be more work on this i don't think this is the final word by any means um and you know there's been a number of papers i gave you just the basics but there's been a number of papers there's another paper in the qj aer journal by odd stalebrink who attempts to uh sort of reconcile our our saw you know my my my view and rockwards view and jeff urbaner's view with the kersner and petite so you don't look at that i don't completely agree with it but i'm the editor of the journal i think it is a contribution i don't know how to have it there so you know if anybody has different takes on it um you know that's that's good i would be happy to paint one or two more questions yes i think that's true right right well i think there has to be some work there because i think there are some subtle critiques by high act of the trial and error process for example i mean you know there is nothing wrong with with with pointing out that knowledge is dispersed and and um that in fact we take it and it's not in the form that can be easily communicated i mean those types of things are are important additional critiques of socialism but they're not the basic critique okay um i haven't thought much about what you're saying but um i think i think there's scope there to develop that further but david gordon um has in a review of something i don't know exactly where he wrote that well you know just because means it's correct i mean hi it's not correct it simply means that means it is more um fundamental oh what i do i do want to say is that i don't think hi i did try to break away from downhill equilibrium that he had learned from visa in his 1937 article in 45 article but the way he did so was not not to make things more dynamic but but to simply say well knowledge isn't given it isn't in one place so if it was we would have generally equilibrium okay which means would deny that but it's not so we need a price system to more or less allow us to allocate resources and he uses this as one mind would if it had all the information and that's a direct contradiction of what what means it would say yeah sure yeah yeah no they you know it went actually i should have mentioned that because that's a very good question really briefly um everyone thought that that means is in high it was a debate well neo-classically times i should say okay and intelligentsia um they go well you know you can have you know look at the soviet union and and you know the learner and longer one of the bait because the neo-classical paradigm is one in which general equilibrium plays a central role and what they said accorded with general equilibrium but with when the soviet union collapsed you know that every even a socialist like um robert hyalbroner came out in i don't know if it was a new yorker or admitted that that means it was right so for in the post-war war two period until the collapse of the soviet union till the day it's called till the day you know there began to be a fall in these collectivized economies um it was thought that that the debate had ended in the 1930s and that the Austrians had been the losers in fact oscolanga sarcastically said um we ought to erect a statue in the ministry of of the economy to look around me is in poland because he did bring up a problem that did affect socialism that background calculation but we solved it so he he he brought up a problem so we learned and long solved the problem what was interesting when lango went back to poland to become an economic commissar he didn't use any mathematical solution he didn't use a trial and error method okay he says we don't need a computer he said that you know the way we operate um is is is a king to that of a of a computer okay but anyway um i'll end there but the debate over the base will go on thank you