05 Jul 2016

## Monetary Calculation

This is not the same old, same old. I tried to motivate Mises’ insights on economic calculation with new angles. An excerpt:

In complete contrast, a for-profit operation in a market economy can make very precise calculations. When I worked at the dairy department in high school, we did have a “scoreboard” that was always lurking in the background, “keeping us on point.” Our manager knew whether it made sense to assign so many workers to a particular shift or whether to carry quarts of chocolate milk in addition to the white whole, 2%, and skim quarts. Monitoring of employee effort wasn’t perfect, of course, and there was still some guesswork, but monetary calculation at least provided a coherent standard against which my manager could judge all of her decisions.

#### 23 Responses to “Monetary Calculation”

1. Kevin Regal says:

Great examples. I was recently thinking about a problem that exists for evaluating the worth of some church staff. While everyone generally agrees that the work of a minister is valuable (in an abstract sense), the fact that ministry is not sold makes it difficult to evaluate appropriate pay levels.

It is also true that that lack of a standard probably tends to make ministers less productive as well. The fact that there isn’t (or shouldn’t be) a “bottom line” of profit probably makes tends to cause ministers to gravitate toward enjoyable tasks rather than important tasks.

I’m not saying that makes ministry a bad thing, just that ministry, by its nature, generally lacks the advantages of prices.

2. Transformer says:

To play the devils advocate here:

There is an earthquake that traps some people under rubble. Rubble also lands on some property but noone is hurt.

A volunteer rescue team shows up and starts to free trapped people. One of the the crew is an economists and says “hang on a minute, how do we know we’re doing the optimal thing here, guys – we need monetary calculation. The decide to sell their volunteer labor and use the proceeds to hire better equipment. Turns out that richer property owners will pay more to have rubble removed from property than poor people to have rubble removed. from human.

Are the volunteer truly using monetary calculations to good effect here ?

• Andrew_FL says:

• Andrew_FL says:

Paraphrased from the movie I, Robot:

Susan Calvin: What happened to you?

Detective Del Spooner: Headed back to the station. Normal day, normal life. The driver of a semi fell asleep at the wheel. Average guy, wife and kids, working a double. *Not* the devil. The car he hit, the driver’s name was Harold Lloyd. Like the film star, but no relation. He was killed instantly. But his twelve-year-old was sitting in the passenger’s seat. Never really met her. Can’t forget her face, though. Sarah.

[fingering the necklace]

Detective Del Spooner: This was hers. She wanted to be a dentist. What the hell kind of twelve-year-old wants to be a dentist? Yeah, um… the truck smashed our cars together and pushed us into the river. You know, metal gets pretty pliable at those speeds. She’s pinned, I’m pinned, the water’s coming in. I’m a cop, so I know everybody’s dead. Just a few minutes until we figure that out. Utilitarian economist was passing by and jumped in the river.

Utilitarian Economist: [from flashback] You are in danger!

Detective Del Spooner: [from flashback] Save her!

Utilitarian Economist: [from flashback] You are in danger!

Detective Del Spooner: [from flashback] Save her! Save the girl!

Detective Del Spooner: But he didn’t. Saved me.

Susan Calvin: The utilitarian’s brain is a difference engine. He’s reading vital signs. He must have done…

Detective Del Spooner: He did. I was the logical choice. He calculated that I had a 45% chance of survival. Sarah only had an 11% chance. That was somebody’s baby. 11% is more than enough. An Austrian would’ve known that. Utilitarians,

[indicating his heart]

Detective Del Spooner: nothing here, just lights and clockwork. Go ahead, you trust ’em if you want to.

• Tel says:

Money is a god invention, but not perfect.

Money collapses dimensions, which makes calculation easier (only one dimension to consider, you can have more or less, end of story) however collapsing dimensions means you are actually solving a somewhat different problem to any real world problem which is multi-dimensional.

One trivial example of this is at the supermarket, where they might sell one item for \$1.20 but two of those for \$2.00 and thus the marginal cost of the second item is only 80c but if you come back and buy the second item tomorrow the marginal cost for the same item the next day goes up to \$1.20 which is making what should be a simple calculation a bit more difficult.

The other problem of course is setting up a workable auction where all parties can bid, including someone who wants to be charitable and bid up the price of a human life (but very difficult to know what they are bidding on, the guy might have been a scumbag). This all has to be done in a short space of time, and all relevant parties need to respond rapidly. Given the difficulty of such transactions, just fall back to simple rules of thumb… rescue the people who appear to be likely to survive.

• Bala says:

I do not see why you present the case as bereft of costs of choices. While you are quick to bring in monetary revenue, you are clearly ignoring psychic revenue and costs, which are the critical elements here.

• Bala says:

Equally interesting is the point that your example is presented as an either-or. Is it such a case? I think not.

• Transformer says:

Using “psychic revenue” alone would probably lead the volunteers to value life over property.

Introducing “monetary calculation” might lead them to the view that saving property is more valuable than saving lives.

Starting from a situation where wealth (including human capital) is distributed in a certain way then “monetary calculation” will undoubtedly contribute to resources being used efficiently to maximize the utility of those holding the wealth. Monetary calculation will help much IMO in determining if the initial distribution of wealth , or the use of resources it drives, is fair or not.

• Transformer says:

error in last sentence: “NOT help much”

• Bala says:

You are still making the mistake of placing a monetary value on retrieving the property but not putting a monetary cost on not saving those lives. You are assuming it is without cost. That’s a fundamental error. It’s cherry picking.

• Transformer says:

Perhaps I am missing your point. If the volunteers just wanted to make a profit then (in my scenario) this would be optimized saving property. If they decide that they would rather save lives and make smaller (or no) profit, then that reflects their “psychic valuation”, but I’m missing how monetary calculations has helped much here. (Though I suppose if they decided to only save lives they could use monetary calculation to work out the optimal set of lives to save?)

3. Silas Barta says:

I thought I might ask this here, since it’s an interesting application of the concept of economic calculation.

What about the *idea* calculation problem? If it requires a market with ownership of goods to determine what goods are efficient to produce, doesn’t this apply to ideas as well? If you have a choice to apply some set of inputs to produce 30 widgets, or the solution the problem, you have to solve an economic calculation problem there. But if you can’t charge for usage of the idea …

• Bob Murphy says:

I’ll answer you Silas, but only for a bitcoin.

• Silas Barta says:

What if the answer is worth 0.001 bitcoins to each of a thousand people?

• Bob Murphy says:

I try to make my thought experiments at least plausible.

• Tel says:

Barta’s example is totally plausible, the problem comes up a lot.

It started out with the idea of software “bounties” where a large number of people would make small pledges to pay for some software work to be done, and then that software (once finished and paid for) gets published as “Open Source”. This allows the people who really want it to pay and everyone else to free-ride after the fact.

It now has expanded into stuff like “go fund me” and “kickstarter” and other situations where you are attempting to gain an economy of scale on the demand side in order to overcome some development barrier on the supply side.

By the way, I checked that old KrugmanDebate.com website, did you see they are trying to sell your domain for over \$2k? How about that?

• Tel says:

So I’m told, Bitcoin is a poor choice for micropayments because it’s too slow and clunky.

Actually, I had plan for a redesign of the whole Internet which requires some sort of crypto-currency micropayment system (doesn’t need to be Bitcoin specifically).

Basically, you could combine something like TOR with a system where people provide a general purpose connection-oriented routing service and (most importantly) get paid in crypto-currency in return for their routing service. Thus someone who wants cheap routing will pay for minimum hops and save some coins, but someone who feels that anonymity is useful might pay extra for more hops. People who own a router can then offer the service and save their coins until they need to access something, at which point they spend the coins down again.

Since this is connection-oriented, it does not require to run TCP/IP, nor do all the hops need to be over public Internet. For example if a hobbyist group set up a wireless mesh around town, they can still “sell” routing services into the larger network and they have hops available that are not visible by any other means.

The problem that TOR has with “exit nodes” can easily be solved by just making a rule that there aren’t any exit nodes. However, certain providers might choose to mirror popular websites into this tunneled network. Austrian economics blogs would no doubt be a popular choice.

Newcomers to the network will need to either buy coins from existing network members, or else they would bring routing capacity with them and run as a routing service for long enough to save up some coins. Presumably some kind of auction mechanism would also be needed to achieve price discovery… I’m frantically handwaving here I know, but all the basic building blocks are understood and you might imagine how such a thing could fit together.

• Silas Barta says:

That works for cases where everyone knows in advance what the idea needs to accomplish, not ideas that appear good only in retrospect.

• Tel says:

I presume you are responding to my comment higher above about “go fund me” and “kickstarter” and other similar crowd funding systems?

In practice it only needs *sufficient* people to like the idea, in order to get over the initial funding hurdle. Once that happens, more demand will come along if the the idea is any good.

In terms of my other idea (the network routing system), the presumption is that we already have a large and demonstrated demand for communication services but this might be an alternative mechanism to build that.

• Silas Barta says:

I think the problem is clearer in the case of novels. Harry Potter was only recognizable as “worth paying for” in hindsight. You couldn’t have Kickstarter’d something like “oh, I’m gonna write this cool book about wizards…”

• Bob Murphy says:

BTW Silas I’m swamped with work and your question is a thought provoking one; I’m not just screwing with you…

4. Keshav Srinivasan says:

People may be interested in reading the book “Red Plenty’, which is a fictionalized account of the Soviet Union’s efforts in using socialism to address the economic calculation problem. They were making interesting advances using rigorous mathematics, but ultimately those endeavors proved unpalatable to the political leadership. Here is Scott Alexander’s of the book:

slatestarcodex.com/2014/09/24/book-review-red-plenty/