19
Mar
2018
The “Calculation Problem” and “Knowledge Problem” Are Distinct
I know there is some bad blood on this topic, but I am being sincere in my praise for Hayek. Anyway:
Mises and Hayek were both brilliant economists who made numerous contributions in the Austrian tradition. Yet is inaccurate to refer to “the Mises-Hayek position” in the famous socialist calculation debate, and to do so obscures the Misesian understanding of calculation, which is necessarily monetary calculation. Although scholars should always take care to exercise courtesy in their assessments, it is proper to disentangle distinct arguments that are sometimes lumped together.
This is an interesting topic. At first I was naive to the history of Austrian disagreement, but having read some of the prior discussion by Kinsella (2006) and Rothbard (1991) I think I’m starting to grasp it. On one hand, I feel like the dismissal to some degree of Hayek’s perspective is a bit unnecessary – yes he ignores Mises granting the planners all the information – but obviously that information is still a significant issue and important insight in the real world.
On the other hand, if the socialist planners truly have a complete knowledge of all value scales, circumstances of people and resources, etc…what is to stop them from taking Mises’ criticism re: prices seriously, and then using their wealth of information to reconstruct the price system through some computation that would bid/ask on behalf of each consumer?
As far as I know Mises didn’t grant the “knowledge” of value scales. He granted normal things that can be known. Knowledge about the availability of all resources, what can be done with them and all possible technical production procedures. However he granted to know what people wanted if you had a market in consumer goods. That is how I remember it at least.
But you can’t call it “knowledge” to know what all people prefer to all other things, and how this simultaniously plays out with preferences of all other people. That is inconceivable. I guess that is what Bob and Salerno mean as “something new under the sun” but cannot be called knowledge.
Because if you really “knew” all value scales and how they would play out interpersonally then you actually could “plan” the socialist economy, since value scales contain not only consumer goods, but also what kind of work you prefer etc.. To really know a value scale means to know ALL possible decisions you could make.
*decisions you WOULD make*
“But to Mises the central problem is not “knowledge.” He explicitly
points out that even if the socialist planners knew perfectly, and
eagerly wished to satisfy, the value priorities of the consumers, and
even if the planners enjoyed a perfect knowledge of all resources and
all technologies, they still would not be able to calculate, for lack of
a price system of the means of production.” Rothbard – P. 66 The End of Socialism and the Calculation Debate Revisited. 1991
https://mises.org/library/end-socialism-and-calculation-debate-revisited-0
“But to Mises the central problem is not “knowledge.” He explicitly points out that even if the socialist planners knew perfectly, and eagerly wished to satisfy, the value priorities of the consumers”
That doesn’t mean all individual value scales. They just knew WHAT should be produced. But not because they knew all value scales and “added” them up. But because there was a market in consumer goods (assumed that would work perfectly without having one in the capital market). He was giving them the benefit of the doubt to somehow make it happen to at least find out what needs to be produced for the people e.g. by a having a market in consumer goods.
I may reread Mises wording on that. But that is how I understand it.
I dunno, many of the commenters on this issue see m to be assuming that the planners have access to complete information of consumer preference, including Bob in the article he links below.
In my view knowing ALL preferences (that includes what work you rather do, what product you rather produce, how much you want to work etc..) and knowing how to combine/add up individual value scales, which is what you need if you would want to know what to produce without a market in consumer goods, would solve the problem for the planner in the realm of capital goods at the same time. No need for a market anymore at all. So you would assume the problem away the market actually is needed for.
As far as I can see Bob nowhere says that Mises assumed socialists knew all value scales. What he grants is that they knew all objective factual dispersed information and could process them in real time. But:
“In contrast, when we ask, “How much economic value does the oven possess?” then that is a fundamentally different question. This isn’t an objective fact that is embedded in the arrangement of matter. The question takes into account all of the subjective preferences of everyone on the planet, as well as their expectations about the possibility of transforming matter into different forms. It is a mind-boggling question, in fact, that can only be answered by setting up a market economy and then making informed guesses as to what people would be willing to pay for the oven.”
.
Here is what I was referring to from Bob’s article re: Cantor down below.
” Just as a Walrasian
theorist could characterize an efficient use of resources equipped only with
endowments, consumer preferences, and technology—the very items that
Mises conceded to the hypothetical planners—so too (Dickinson claimed) the
omnipotent dictator could, at least in principle, concoct a grand plan that
channeled resources to their most desired ends”
But see here as well. Where does the knowledge of the consumer preferences come from?
From the market that Mises grants could be had in consumer goods, not from knowing all value scales.
Anyway I will reread that chapter in HA to be sure.
To me, the issue always kinda comes back to that scene in the Matrix where Neo confronts the Architect. The Architect points out why all the other Matrixes failed, and Neo points it out. “The problem is choice.” There’s even a single moment where the Architecht failed to predict Neo’s next action despite his near perfect prediction of all other of Neo’s actions before that.
That was my impression too, but in that case it’s not much fun to argue over.
There’s probably a deeper question of whether the central planners CARE about the individual value scales, even if they did know them. For example, if they were designing a Bob-prime (see below discussion on emulation of humans) the central planners would be tempted to say, “Seems like Bob spends too much time at Panera Bread, so we tweaked Bob-prime to have less preference for hearty meals, and a greater preference for working out at the gym. There, we improved him!”
If you think that’s far fetched, take a peek at what the behavioural economists are up to.
Austrian economists might jump in and shout, “You promised not to be evil.” but the central planners would claim they aren’t evil, they made a better Bob by fixing up his value scales.
If the only thing the central planners can do is produce prices the exact same as the real economy produces prices, might as well just let people do what they want and use normal prices. You become a central planner because you feel the need to change all that.
Let’s suppose the central planners have some kind of subliminal advertising that rearranges a person’s internal value scale. They give Bob a blast and then let the economy continue on it merry way. Does this diverge from what the economy WOULD have done without interference? Yeah, but that’s the whole idea. Is the new adjusted economy better than the old one? Well, the central planners seem to think so, and if you ask the new adjusted Bob what he thinks, he says he’s happy too.
Win win all round really.
Yes then it would not be much fun to argue, but since it is about what Mises really meant in contrast to Hayek, we need to stick true to it.
For the rest right, aboslutely agree. The whole point of having planners is to design it differently from what the market would do (since planners are supposed to be more virtuous), though they still need to have a rational way of doing it.
Let’s suppose I build a Zoopercomputer, and then sneak up on Bob Murphy while he is sleeping and use mind control rays through the wall to extract his entire brain pattern, which I load into my computer. I have then captured the knowledge of Murphy and I can emulate any Murphy decision by feeding in suitable circumstances and calculating the result, thus giving a reliable and definitive answer to the age old question “What would Murphy do?”
But I could repeat the nefarious process for everyone who deals with Murphy, then everyone who deals with those people and onwards. Thus capturing the full knowledge of the community. I can use this to emulate multiple people, interactions between people, and any market transaction I might be interested in. Which means I can generate prices, in a perfect simulation of the way real prices are generated.
Thus, having a complete solution to the knowledge problem, necessarily implies I can also solve the price calculation problem.
However, it may be possible to get a close approximation of prices even with incomplete knowledge, given that quite likely some sort of statistical averaging occurs in a marketplace, and not every person is using ALL of his or her knowledge at any given time. This suggests that the price problem is somewhat easier to solve than the knowledge problem.
Murphy’s brain upload has no continuity of conciousness with Murphy the flesh and blood guy. After you upload the brains, they start to become different people from the people they are copied from.
I would get him while he is sleeping, so he doesn’t have continuity of consciousness with himself anyway.
Both the real Bob and Bob-prime would wake up in the morning feeling like they might have had some peculiar dream, but they are both quite sure they are awake now.
We have done some tests with identical twins let loose with identical credit cards in identical shopping centers. 🙂
Tel, not so sure about that. The idea we could with enough data and computing horsepower ‘solve’ problems is heavily challenged if you read a book like https://mitpress.mit.edu/books/outer-limits-reason
Even in principle we cannot solve quite simple to articulate puzzles regardless amount of time or computing power. Interactions of billions of humans is needless to say orders of magnitudes higher.
Once you say “regardless amount of time or computing power” then there cannot be anything orders of magnitude larger than that… because you have stipulated an unlimited resource.
I accept that quite a lot of computing power would be required, and we don’t currently know how humans think, so there’s no operational model that emulates even simple human functions. There are a few practical hurdles to overcome.
But you know infinity is really surprisingly big. Always bigger than you expect!
Hey guys, a few things:
(1) Tel, I predicted you would say that.
(2) I wrote this article arguing that even “in principle” it can’t be done.
(3) Tel, let’s say you’re right and Bob’ (Bob-prime) is created inside the simulation. Then I would totally hire him to do some of my work. So there would be a new economy, which included not just our world, but the trade between Bob and Bob’. That couldn’t be modeled by your computer, since your computer’s simulation was just one part of the whole system.
The paper on Cantor is very interesting. I think there are two things conflated: the market outcome and an efficient allocation of resources.
Perhaps we can agree that a perfect market will allocate the resources efficiently. But just as it is impossible in principle for a socialist planner to calculate the efficient outcome due to uncountable in infiities, it is also impossible in principle for any real market to produce the perfect market outcome.
Therefore, there is no reason in principle that the socialist planner cannot do as well or better than the real market. In practice we cannot get anywhere near this.
Unless you are actually Bob-prime, and just part of a fiendishly clever algorithm to calculate prices for the socialist planner.
“it is also impossible in principle for any real market to produce the perfect market outcome.”
Compared to what? If the ‘perfect market outcome’ that you refer to is based on an idealized model with unrealistic assumptions, than in what sense is it a relevant comparison?
How is this relevant? The efficient allocation of resources. Mises acknowledged that individuals do not necessaritly make choices that will attain their goals. This is very clear in his writing, I will find quotes if you don’t agree. But assume for now that we all agree that the choices individuals make based on their instantaneous prefernces have no guarantee to produce the desired outcome for that individual.
It cannot be an efficient allocation of resources if the outcome is not what the individual wants.
A perfect market, to my mind, would produce the desired outcome. This would require perfect knowledge on the part of the individual, which is of course impossible due to uncountable infinities.
It seems a very good comparison to me, to say that socialist planner cannot attain a perfect market outcome due to uncountable infinities, but equally a market cannot produce a perfect outcome due to uncountable infinities.
Neither can produce perfection, so it is pointless to argue *on that basis* that one is superior to the other.
It strikes me as a little unfair to hold socialism to a standard of perfection whilst giving the market a pass on the same basis.
This sort of brings us back to the mises/hayek difference. Since perfection is impossile, why not discuss practical outcomes? It seems overwhelmingly more likely that a market will get closer to the “perfect” outcome than a completely controlled system. But for most practical purposes this is a false dichotomy. these days very few are arguing for a control economy.
Bob, there’s only a few billion humans on Earth, and approx 40 trillion cells per human, not all of those cells are involved in decision making. That’s barely a spec compared to infinity.
So you point to a convergence problem, in as much as some human behaviour depends on random factors, and we could plausibly expect that entrepreneurial activity (i.e. inventing new things) might be linked to randomness. Since the emulation cannot accurately clone quantum entropy then different things might be invented inside the emulation as outside, and the emulation diverges from the real world.
There’s a number of ways to deal with the convergence problem. Most obviously, if you think economics is worth studying at all, you have to believe that quite a lot of the mass behaviour of large numbers of people is highly convergent and resistant to quantum effects. Let’s consider a housewife is buying bread at the supermarket and she is momentarily distracted for a moment by a butterfly that strangely has entered the picture. This distraction means she gets to the bread display very slightly later and selects a different loaf from the display. However, will this effect the market price of bread across the entire nation? Probably not, because supply and demand curves push towards equilibrium. Large numbers of butterflies will average out, as per the Central Limit Theorem. This is where the “wisdom of crowds” comes from, and it has been empirically tested too (see also guessing the weight of the cow).
For new inventions, there’s positive feedback… once people know about the invention they change behaviour, and more and more people get interested. The model is metastable, but that’s not insurmountable. You could for example presume such events are rare and be willing to reset your emulation now and then to outside measurements (the invention of a new device tends to be well telegraphed).
Some people argue that these inventions are really “discoveries” of a thing that was hanging around waiting to be discovered. It would be fascinating to rewind history a number of times and see how different the various outcomes were. We have a kind of natural experiment in human history in as much as various societies were mostly isolated but they did develop many things in common (astronomy, music, arithmetic, construction, etc). With a good simulation you can run it multiple times loading different random patterns and see how consistent the results are… this is the standard technique for building a confidence interval on the outcome. You might discover for example that over a million runs of the model for the next 10 years you get 7 significantly different end states and around each of the 7 you get a cloud of minor variations. That might be a typical result of a metastable model. You could assign probabilities, but if you were a central planner you would probably be temped to decide which final state you liked best, and get with the nudge, nudge.
I grant you that convergence can often be a problem in models. If we were being realistic about the resources available to run the model, it might be a big problem, but with enough resources I think there’s ways to deal with it.
One step further… if you are claiming that the model is metastable, the implication would be that the real economy as a whole is also metastable, and that destroys things like the theory of Comparative Advantage (see also Path Dependence). The bigger implication is that long run economic equilibrium simply does not exist (not even as a concept). Those are big claims.
OK, so that’s the recursion problem. Clearly you cannot build a model that fully contains both itself and more than itself. It would be necessary to keep Bob-prime locked up and away from the open market (sorry, it’s for his own good). It would also be necessary for the central planners to have access to significantly better equipment than anyone else has access to, otherwise you might be tempted to build your own Bob-prime at home, and we can’t be having that!
If you build a machine to predict the stock market, you cannot also make that machine generally available else everyone would be using it.
So yeah, there might be a few other limitations, none of these really sets the price problem apart from the knowledge problem.
Since Mises was willing to give the central planners all knowledge and unlimited resources, doesn’t sound too off the wall that they can also keep secrets and prevent you building a copy of their facility. That’s the recursion problem solved (in principle at least). The central planners have to be better than someone, else they wouldn’t be the central planners, now would they?
Convergence is a common problem that people run into with models… even simple models like integrated circuits, for example. There’s plenty of papers written about it, and people find ways to work around it.
What you are suggesting is that economics has unique features making it intrinsically non-convergent. That has yet to be proven, but the implication would be that some sort of future chaos awaits us all. Not many people go about their daily lives with that in mind though, there is at least the illusion that most of the world is predictable… if the best thing we can do is just give up, then might as well keep trying regardless, because in the face of chaos trying and failing is neither better nor worse than throwing in the towel early.
Isn’t Hayek just taking the argument to the Market Socialists who replied to Mises that they could have market prices with state ownership?
Mises: “Market prices are necessary condition for rational economic calculation.”
Hayek: “But they are not a sufficient condition.”
” The Matrix, were they responding to
“given” consumer demand for a movie involving widespread deception by a
computer and incredible martial arts footage? Or is it more accurate to say
that the Wachowski brothers invented The Matrix on their own, and then after
the innovation consumers realized how much they loved it?”
A bit if a digression, but at almost the same time as the Matrix (release date March 31 1999) was released out came Existenz – a film about the impossibility if knowing if you are in a simulation (release date Apr 23 1999). The Wachowski brothers were almost certainly responding to consumer demand to a reasonable extent, as was Cronenberg.
What needs to be incorporated in these discussions is that the preferences what you (rather) want to create/produce are just as relevant.
E.g.: The band Tool definitely didn’t respond to consumer demand, They just produced what they wanted, und luckily for them the market liked it.
In short: The producer in a market is acting just as much. So it is actually a back and forth between preferences of consumers and producers influancing each other.
Aren’t those ‘producer’ preferences captured as consumer preferences? If they’re not producing it for others, then they’re producing it for themselves (as you admit) and thus it could be said that they are actually responding to their own consumer preferences.
Well you could definitely describe this example like that. Nevertheless, it was a producer decision, they didn’t buy their own product but other people did. Also producers can say no to certain demands, or only offer them their service in altered form that is different from what the consumer wants.
Like consumer demands that seem immoral to the producer. Or maybe just as basic as you could earn more money for the same job at place X, yet you stay at place Y. And that got nothing to do with your own consumer preference on the product you produce but with something else unrelated,,
“The band Tool definitely didn’t respond to consumer demand, They just produced what they wanted, and luckily for them the market liked it.”
Do you think they produe their music in a vacuum? they were respnding to what people wanted, as displayed in what they were listening to. it is not entirly due to luck that demand as there, but due to a complex feedback from consumer to producer. They are as much a product of their society as they are shapers of it.
There is a difference between being influenced by other music, and having a different taste and therefore wanting to make music X (which is not like any other nevertheless), and quite another to actually try to catch others people music taste Y, and produce that.
If there is a group of people who is notoriously ignoring what other people actually want, it is musicians. Not all of course, there is a big part of musicians who really produce for the market. But a ton is not, some of them, like Tool, luck out.
Finally your taste being shaped by other people, doesn’t make you intentionally target others poepls taste if you make music. Musicians (artists) very often do not chase the market. That is why it is such a big talking point if artist X is supposed to suddenly sell out. Because people think he switched from making what is “good”, to chase the biggest market..
All I am saying is not everyone is formed by other people to the same degree. There are people who more or less have their own mind, and do what they think is right/good. And it is them who as producers of something form/influence what the market wants instead of chasing what the market already wants.
It is chasing existing market wants vs creating market wants (intentionally or unintentionally).
I think I see what you are getting at. Musicians may produce music just for themselves, to simply fulfil their need to make it. Tool however put the music on the market – they wanted people to listen to it.
From WIki “After almost two years of practicing and performing locally in the Los Angeles area, the band was approached by record companies,[3] and eventually signed a record deal with Zoo Entertainment.[6]”
See- they were performing from the start. They wanted people to enjoy their music. They had an audience in mind. Then they signed a record deal so more people could hear them. I think it is doubtful that they were not influenced at all by the audience response, which must have influenced their writing and performing.
Some musicians are more “commercial” than others – some have a eye on producing what will sell more than others.
Some musicians never release anything. They simply make music that the rest of us don’t get to hear. These could be said to make music for its own sake.
Others, as you say, are seen to “sell out” if they become more commercial.
I think it is OK to say that some musicians are more commercial than others, and Tool could be a band that was less motivated by targeting the audience than others. I think it more accurate to say that Tool were less influenced by consumer demand than other bands, rather than they definitely did not respond to consumer demand.
Ok fair enough. Obviously I am not in the positon to say if they weren’t affected by actual consumer demand at all, especially after they sold their first records.
But for sure they were much much less inclined to actually target a market than say Katie Perry.
Every or most musicians would love if their music is liked in the market, so why not release it? You still can make it without any regard if there actually was a market for it. So why not try if you are at it anyway, not to forget that you must make money anyway as well someway.
Bob says:
‘In contrast, when we ask, “How much economic value does the oven possess?” then that is a fundamentally different question. This isn’t an objective fact that is embedded in the arrangement of matter. The question takes into account all of the subjective preferences of everyone on the planet, as well as their expectations about the possibility of transforming matter into different forms. It is a mind-boggling question, in fact, that can only be answered by setting up a market economy and then making informed guesses as to what people would be willing to pay for the oven.’
I agree this is true in the real world, but if one grants the assumption that Mises does (knowledge of the relevant production functions, resource supplies, and consumer preferences) then things become sufficiently simplified that the question of how much economic value the oven possess can be answered by equations with no need to setup a market economy.
Wasn’t Hayek pointing out that Mises had been too generous with his allowable assumptions – with those assumptions calculation is possible. But for the kind of reason that Bob encapsulate in his oven example it is perfectly reasonable to roll back those assumptions. But them it seems to me it is “the knowledge issue” not “the calculation issue” that wins the day.
“… to do so obscures the Misesian understanding of calculation, which is necessarily monetary calculation.”
That belief comes from Human Action:
Part Three: Economic Calculation
XI. VALUATION WITHOUT CALCULATION
2. The Barter-Fiction of the Elementary Theory of Value and Prices
“… In the market society there are money prices. Economic calculation is calculation in terms of money prices. … It is a fictitious assumption that an isolated self-sufficient individual or the general manager of a socialist system, i.e., a system in which there is no market for means of production, could calculate. There is no way which could lead one from the money computation of a market economy to any kind of computation in a nonmarket system.
and from the same Part and Chapter as above:
3. The Problem of Economic Calculation
“Where there are no money prices, there are no such things as economic quantities. There are only various quantitative relations between various causes and effects in the external world. There is no means for man to find out what kind of action would best serve his endeavors to remove uneasiness as far as possible.
There is no need to dwell upon the primitive conditions of the household economy of self-sufficient farmers. These people performed only very simple processes of production. For them no calculation was needed, as they could directly compare input and output. If they wanted shirts, they grew hemp, they spun, wove, and sewed. They could, without any calculation, easily make up their minds whether or not the toil and trouble expended were compensated by the product. But for civilized mankind a return to such a life is out of the question.”
Mises *says* that economic calculation can’t happen without money, but just thinking about the meaning of those two words should give you reason to think otherwise. Unless Mises has some super-specific nuance he’s attaching to those words, it doesn’t make sense to make that claim.
(Don’t worry, I avoid the Socialist conclusion that “society” [a loaded word, imo] can exist without money.)
Calculation. If you pick both the name of a homogenous good and a number out of a hat and then try to stick that number of goods in between transactions (that is, attempt to use them as a medium of exchange), you will find that you are quite capable of performing calculations on those numbers. The problem is going to be that the numbers you come up with aren’t economically meaningful.
Economic. Austrian Economics holds the (correct) position that one of the qualities of economic goods is that they are scarce. The reason is because infinitely abundant resources don’t need to be economized – Acting Man would not factor in the cost of using such resources into their preference rankings, because any quantity he could want would always be available. So, Austrian Economics says that infinitely abundant goods are not economic goods
Also, economic goods are physical goods that are used in the fulfillment of preferences; So, friendship cannot be an economic good (it’s actually a service).
So, when I see the phrase “economic calculation”, what I read is “calculation that is economically meaningful”.
(And for something to be economically meaningful, it *must* have a link to physical goods that are used to fulfill preferences – that is, a link to use-value. So, money that allows for calculation that is economically meaningful is going to have a link to use value.)
Mises, in this chapter, correctly argues against the idea that you can make calculations based on the ranks of preferences (ranks are ordinal, not cardinal). But, I think that in his eagerness to stress this point, he inadvertently overlooked the fact that, for any given (subjectively preferred) end, there are, in fact, a limited, calculable number of each economic goods that can optimally be employed for the attainment of said end (optimal from the point of view of the individual, of course) – a law we have termed “the law of returns” (HT2 Praxgirl videos).
These numbers are present, and calculable in all economic conditions, whether under a Crusoe-like hermit economy, with no money and where you make everything, yourself, or under a completely free market economy with money and a stock market.
The purchasing power of real money – commodity money – is simply a logical extension of those calculable units available under barter (or, as I’ve said before, there is nothing significantly different between a barter economy and a money economy – in the end, goods are traded for goods).
Under Crusoe economics, tools (however simple) and under-consumption provide arbitrage opportunities between present consumption and increased future consumption (or, at least, future consumption at a lower opportunity cost).
With more than one person living around each other, specialization and trade provides arbitrage opportunities between what costs the least in terms of opportunities foregone, and what could be produced under self-sufficiency only if he sacrificed some other thing he was currently producing. He can now have both.
Under barter, indirect exchange provides arbitrage opportunities between the available array of barter goods by lowering the opportunity costs of switching production processes to make the barter good that will trade for what one wants, and enabling a double-coincidence of wants. The differences in valuations that other people place on barter goods are what logically provide the individual the incentive to use a good as a medium of exchange. This does *not* require a star-chamber-esque agreement among community members. Individual self interest is all that is required. An increased number of goods are available in terms of the medium of exchange, which will lower the opportunity costs for an increased number of people if they use it.
Under the use of many kinds of mediums of exchange, the Middle-Man does the same thing with mediums of exchange as what was done with barter goods in the previous evolution toward money.
The result of the Middle Man discovering arbitrage opportunities between mediums of exchange is money.
Note that every succeeding step is based on use-values placed on goods by individuals in the previous step. This is why real money – and therefore prices – are a logical and inescapable consequence of any conceivable configuration of society. Attempt to suppress them, and they will just take other forms.
Note also that in every step the calculable quantities for any given subjective preference are always present in every step. That’s why economic calculation (at least economic calculation, as such) is always possible under all economies.
And finally, money being ultimately the result of individuals pursuing their own profit, a higher standard of living will not be possible without the freedom which enables the emergence of money.
That is to say – in keeping with Methodological Individualism – it’s not money, per se, that makes a modern society possible, but rather it’s the freedom to pursue an increased standard of living that makes money possible. So it’s the other way around.
I think this quote gets at some of what you are saying
“There is no need to dwell upon the primitive conditions of the household economy of self-sufficient farmers.”
He then explains that the self sufficient farmer produces everything he consumes.
“But for civilized mankind a return to such a life is out of the question.”
The problem is that there never was a time of self sufficient farmers to which we could even in principle return. He is describing Crusoe, not a farmer. Crusoe is in an artificial isolation. Farmers always exchanged. If they needed a shirt they did not grow a small bit of hemp – they went to the hemp farmer and buy some for some eggs or something.
By maintaining a myth of a time where people existed in such isolation he is removing the need for the bartering type calculations you describe, which I think leads him to errors.
“By maintaining a myth of a time where people existed in such isolation he is removing the need for the bartering type calculations you describe, which I think leads him to errors.”
To be sure, Austrians don’t maintain such a myth. We understand that it’s just a thought experiment intended to isolate the logic of human action when an individual is alone.
From Human Action:
“Socialists, Institutionalists and the Historical School have blamed economists for having employed the imaginary construction of an isolated individual’s thinking and acting. This Robinson Crusoe pattern, it is asserted, is of no use for the study of the conditions of a market economy. The rebuke is somewhat justified. Imaginary constructions of an isolated individual and of a planned economy without market exchange become utilizable only through the implication of the fictitious assumption, self-contradictory in thought and contrary to reality, that economic calculation is possible also within a system without a market for the means of production.”
What I’m criticizing Mises for is not his belief that Socialism can’t result in a modern society, but rather his claim that calculation isn’t possible without money.
To me, what Mises calls “economic calculation” is simply the logical extension of the means-end framework that all individuals logically and necessarily use as the basis for all purposeful actions.
Socialism attempts to force people to abandon the means-end framework, and doing that will not allow individuals to use the calculations available and necessary to create the labor saving devices which enable the higher standard of living that modern societies enjoy.
There’s the classic Adam Smith quote:
Robinson Crusoe cannot afford to become a specialist in anything, so as a consequence he will hit the limitation of his own lack of knowledge in each of the activities he needs to be involved in.
People did live like that, with minimal division of labour and no price system, as nomadic tribal groups. They used an inflexible division between “men’s work” and “woman’s work” but that’s about as far as it went. What you can notice from that is such small nomadic tribal groups never automated their production, didn’t invent much, and never built much. You are supposed to see them as “noble savages” if you follow the “Progressive” narrative, but actually they are people living without division of labour and without a price system to coordinate that.
I certainly would NOT say that people living in these kind of small nomadic tribes are less intelligent than modern people living in big cities. However, the tribal lifestyle requires a small amount of knowledge about a great many things, with each person primarily depending on themselves. The city lifestyle allows a person to learn one single thing in depth and depend on other people for anything else they might need. It allows a limited human brain to be used to better effect.
So to get back to the topic at hand, “economic calculation” becomes increasingly important as society gets more complex. If you look at Maoist China, they survived the imposition of Communism (those that did survive) by devolving to a more simple lifestyle with fewer tasks and a focus on living like a rural peasant. They would put on a show of doing what the central planners told them (e.g. hitting sparrows with sticks to make their crop grow) and then they would get back to growing a small crop for basic survival.
I was not criticising the Crusoe thought experiment. i was criticising conflating farmers with Crusoe. Once you make that error and start thinking that farmers in a bygone age produced everything for themselves you are part way down the road to thinking they did not use economic calculation.
Take a look at the Australian Aboriginals, they lived in small tribal groups (essentially extended family), wandered around and each group was completely self sufficient. They may on occasion have exchanged with other tribes, there’s some evidence they even exchanged limited amounts offshore with nearby islands, but that was not their way of life. They did manufacture everything they needed for themselves, but the number of things they needed was quite small. They used a kind of firestick agriculture which was very primitive and discouraged them from settling in the one place.
Humans probably lived in very similar type of groups all around the world at one stage, before they settled and formed larger groups. Europeans would have been pretty similar in the Mesolithic, living in small groups, building most things for themselves with perhaps occasional exchange of unusual hard to get items (there was trade in things like amber, jade, flint but not on the basis of necessity).
The problem here is that you refer to groups, not individuals as Mises was. also possibly these were hunter gatherers rather than farmers, but I am not sure. I think once you becom a farmer you need wider interaction, but that is secondary to the group thing.
The individual is the decision-making unit and the family (possibly extended) is the survival unit given that humans are unable to reproduce on their own. Now the division of labour between men and women is very, very old, but if we ignore that one then between individual men there is no specialization in these societies.
Sure, one man might be stronger than another, older, younger more skillful, but they all basically did the same work. Any man who needed a spear went and made a spear for himself, likewise any woman who wanted to eat nuts or berries went and collected them herself.
They did have a lot of sharing that went on, but it was sharing amongst the family not economic buying and selling. Without that specialization, they are no different to Crusoe because each person does every job.
” there is no specialization in these societies.”
Not so.
From abc australia:
“Organisational Structure
Each clan-grouping has an important religious specialist who will initiate and foster contact with spirits and divinities. Specific elders may also be keepers of specific stories or rituals. ”
From wikipedia:
“Traditional healers (known as Ngangkari in the Western desert areas of Central Australia) were highly respected men and women who not only acted as healers or doctors, but also generally served as custodians of important Dreamtime stories.”
from “Skills, division of labour and economies of scale among Amazonian hunters and South Indian honey collectors. Paul L Hooper et al. 2015.
“We characterize differences in the skill requirements of different foraging activities and show that individuals participate more frequently in activities in which they are more efficient…These results inform us that the foraging group size and composition are guided by the motivated choice of individuals on the basis of relative efficiency, benefits of cooperation, opportunity costs and other social considerations.”
It is very much the case that there is much less specialisation, but certainly not none in hunter gatherer societies. After all, why would we even think this would be the case? Are hunter gatherers not capable of recognising that you let someone do the stuff that they are better at than you are, and in return you do something for them?
Then as soon as we introduce farming, which Mises was talking about, the level of specialisation increases dramatically. Mises was simply wrong.
This is a very interesting issue and I cannot comprehend why would there be bad blood over this.
I think the knowledge problem of socialism is divided in at least 4 categories. 1. Calculation problem, 2. Centralization/disperse knowledge problem , 3. Tacit knowledge problem, and 4. Price communication problem.
All 4 are problems a socialist system will face. That’s how bad socialism is. I still cannot see why we would fight among Austrians over socialism having more than one fatal flaw. It has many, as expected by a bad economic idea.
Part of the reason is that you don’t want Austrian Economics to be discredited.
I, personally, have a more specific discrediting in mind when I talk about this issue. Namely, that the Calculation/Knowledge position typically held by Austrians ultimately defends the Keynesian position on money, with some Austrians’ position on bitcoins being a dangerous expression of that fact, in my view.
It turns out that I’ve found an even more foundational quote from Human Action that affords a more succinct critique:
I had overlooked it because I was scanning for key words and themes in the sections devoted to the Calculation Problem, and I found that I already agreed with everything I thought that particular section was dealing with.
XI. VALUATION WITHOUT CALCULATION
1. The Gradation of the Means
“The immediate goal of acting is frequently the acquisition of countable and measurable supplies of tangible things. Then acting man has to choose between countable quantities; he prefers, for example, 15 r to 7 p; but if he had to choose between 15 r and 8 p, he might prefer 8 p. We can express this state of affairs by declaring that he values 15 r less than 8 p, but higher than 7 p. This is tantamount to the statement that he prefers a to b and b to c. The substitution of 8 p for a, of 15 r for b and of 7 p for c changes neither the meaning of the statement nor the fact that it describes. It certainly does not render reckoning with cardinal numbers possible. It does not open a field for economic calculation and the mental operations based upon such calculation.”
I already accept that ranking is ordinal and, therefore, calculations don’t apply to them. So I glossed over this as seemingly irrelevant to my particular problem with the calculation argument.
What Mises seems to be doing here is first, acknowledging that there are, in fact, “countable and measurable quantities” that are chosen by individuals, but that, second, since they are ordinally ranked, they are not open to calculation.
It is my belief that because of this, Austrians only consider calculation to be possible when a common unit is used to trade for a wide array of goods among many people; And part of this position necessarily entails a belief that money somehow has its own source of value from which the capacity for economic calculation is derived.
Since I hold that individuals are the source of all value – and more specifically, individuals in their capacity as consumers (as against producers, etc.) – I belief that the typical Austrian understanding of calculation (as applying only to money) abandons Methodological Individualism and thereby undermines the very foundation of Austrian Economics.
And since I believe that money is simply the logical extension of individual human action, I believe it follows logically that everything that money does is capable of being done – at least to some extent, however muted – by individuals in all forms of economies..
The mistake I think Mises makes, here, is placing the “countable and measurable” objects temporally before the ordinal rankings.
When, in fact, *economically meaningful* countable amounts come either after, or at the same time as, the action taken by Acting Man.
The actions, themselves, reveal preferences to other individuals about what is economically meaningful to someone. Or, in other words, all actions result in prices.
That’s what makes barter prices possible, as well as money prices. I would even say that, in the imaginary Crusoe economics, actions result in prices for oneself in terms of success and failure at attaining the ends desired.
Notice that Mises’ critique of cardinality of ranked preferences remains intact.
What is also implied by my approach is that economically meaningful “countable and measurable amounts” can *only* be imputed through physical goods that are used as means to satisfy ends.
This applies to all real mediums of exchange and all real monies.
Bitcoins having been created as claims to nothing, they are squarely outside of the realm of *economically meaningful”.
“They failed to see the very first challenge: How can economic action that always consists of preferring and setting aside, that is, of making unequal valuations, be transformed into equal valuations, and the use of equations?”
The very first challenge is this: How can any action sort and grade, when it’s a binary operation? Ordinal numbers are meaningless when discussing marginal utility, and they invite meaningless equations.
The insight about marginal utility and the value paradox can be preserved without the concept of ordinal valuation, by noting that the uncertainty of any action will tend to increase with its size (ceteris paribus), so the value imputed to extra units of a good will tend to diminish.
There seems to be much sense in what you say, but some of it I don’t get.
“I believe it follows logically that everything that money does is capable of being done – at least to some extent, however muted – by individuals in all forms of economies….When, in fact, *economically meaningful* countable amounts come either after, or at the same time as, the action taken by Acting Man.”
Here I think you are saying that Acting Man has his preferences, and therefore action will communicate some of this to others, and therefore provide some signalling about something similar to price. If he demands 20 eggs for a chicken, people know that he values at that moment one chicken less than 20 eggs, but more than 19 eggs. If he required 100 eggs for a goat, we could know that he valued goats more than chickens, even if we could not know exactly how much more. I take this to be what you mean by “muted” capability of performing the role of money in all trading societies. The goods themselves are acting as economically meaningful countable amounts. This is a nuanced area and I may have it completely wrong. After all we don’t know for sure that the value of eggs does not become negative after a certain number. It could be that 100 eggs has less value than 20 eggs. However, if this were the case, the person would accept some number less than 100 if they were prepared to accept 100, and we know they would not accept 20, so I see no logical alternative to the man valuing goats more than chickens.
Now say he require 20 bitcoin for a chicken, but 100 for a goat. We could say that he valued goats more than chickens in the same way as we could with eggs. The bitcoin is acting to convey information. I don’t see why this would make outside the realm if economically meaningful. Sure, ultimately the value is in the chicken and goats not the bitcoin. But that is true of most of the value of all money, even gold.
In this instance, “economically meaningful” applies only to the things that are the origin of the value. But in the bitcoin example above, the bitcoin are representing this value. The number of bitcoin exchanged tells us about value, so how is this not economically meaningful?
“Here I think you are saying that Acting Man has his preferences, and therefore action will communicate some of this to others, and therefore provide some signalling about something similar to price. …”
“… The goods themselves are acting as economically meaningful countable amounts.”
Yes, precisely. And money is just a logical extension of that, in that it is the subjective preferences for those goods that are being expressed in real money – that is, you need a link to use value in order for money to do that, otherwise the calculations derived from them are not economically meaningful (which is why you would need a “next sucker” in order to trade them).
“After all we don’t know for sure that the value of eggs does not become negative after a certain number. It could be that 100 eggs has less value than 20 eggs.”
If 100 eggs takes up storage that’s intended for a higher valued food, or if the eggs will smell bad before you’re able to eat them, it could be that Acting Man values every egg after, say 20, as zero.
And if, for some reason, part of the trade required that you have to take all 20 or all 100 eggs, then, even though you value the goat more than the chicken, it’s conceivable that you value the extra storage space (not taken up by the extra 80 eggs) or the leisure time (not reduced by cleaning up bad eggs) more than the goat, given the opportunities having to be foregone.
“Now say he require 20 bitcoin for a chicken, but 100 for a goat. We could say that he valued goats more than chickens in the same way as we could with eggs. The bitcoin is acting to convey information. … Sure, ultimately the value is in the chicken and goats not the bitcoin. But that is true of most of the value of all money, even gold. …
“… In this instance, “economically meaningful” applies only to the things that are the origin of the value. But in the bitcoin example above, the bitcoin are representing this value.”
Bitcoins aren’t a claim to anything having a link to those origins of value, so they cannot logically convey such value.
The reason they trade is because someone else *believes* that they have a link to such values. But as Rothbard unintentionally alludes such motives are not sufficient to convey economically meaningful valuations:
From Man, Economy, and State:
Chapter 4 – Prices and Consumption
3. Determination of Supply and Demand Schedules
“There are only three sources of utility that any purchase good can have for any person. One of these is (a) the anticipated later sale of the same good for a higher money price. This is the speculative demand, basically ephemeral—a useful path to uncovering the more fundamental demand factors. This demand has just been analyzed. The second source of demand is (b) direct use as a consumers’ good; the third source is (c) direct use as a producers’ good.”
Rothbard correctly understands speculative demand as ephemeral and not a fundamental demand factor.
So, to say that bitcoins have value because others will accept them is not saying much. You can voluntarily choose to do that with handfuls of dirt, if you really wanted to.
It’s also a circular argument that Rothbard notices (right before he commits that very fallacy):
Chapter 4 – Prices and Consumption
5. The Marginal Utility of Money
“But how, then, can value scales and utilities be used to explain the formation of money prices, when these value scales and utilities themselves depend upon the existence of money prices?
“B. THE MONEY REGRESSION
“It is obvious that this vitally important problem of circularity (X depends on Y, while Y depends on X) exists not only in regard to decisions by consumers but also in regard to any exchange decision in the money economy.”
Rothbard correctly argues that current valuation based on past valuation is not a circular argument.
But, as Mises correctly noted, historical prices are no indication of future prices:
Human Action
Part Three. Economic Calculation
Chapter XII. The Sphere of Economic Calculation
1. The Character of Monetary Entries
“Information about a past price conveys the knowledge that one or several acts of interpersonal exchange were effected according to this ratio. It does not convey directly any knowledge about future prices. …”
“… The prices of the past are for him merely starting points in his endeavors to anticipate future prices.
“Historians and statisticians content themselves with prices of the past. Practical man looks at the prices of the future, be it only the immediate future of the next hour, day, or month. For him the prices of the past are merely a help in anticipating future prices. Not only in his preliminary calculation of the expected outcome of planned action, but no less in his attempts to establish the result of his past transactions, he is primarily concerned with future prices.”
So, past prices are not sufficient to ground Rothbard’s particular understanding of the Regression Theorem.
To be sure, all transactions have a time element because, temporally, any given action is preceded by not-that-given-action, so the time element is going to be ever present in any correct grounding.
I submit that, notwithstanding the fact that the time element is present, that the Regression Theorem can only be grounded by a chain of valuations – that is, someone ultimately values real money because someone else has a use-value for it.
Bitcoins being claims on nothing, its trade value ultimately relies on the circular logic that X values what Y has because Y values what X has. And because that is logically impossible to carry out, it necessarily results in losses for someone in the economy (and for exactly the same reason fiduciary media, for all the voluntariness of its use, results in losses as it is passed from one sucker to the next).
Money must have a link to use-value in order to convey information about preference rankings for the goods sold and bought for it.
(By the way, I prefer to say “sold and bought” instead of the more common “bought and sold” because goods are logically prior to money – you only need money to buy goods, otherwise there’s no point in using it.)
I think the crux of the argument is here
“Money must have a link to use-value in order to convey information about preference rankings for the goods sold and bought for it.”
This sounds absurd, given how people actually do use bitcoin (if you are arguing no use value for it). Common sense would tell us that some information is provided, but common sense often leads us astray, so lets forget that.
In the egg exchange, the man values goats, chickens and eggs to some extent as he has a use value for them. In the absence of some arbitrary requirement to take all the eggs on offer for the goat but not the same number for the chicken, it is a valid conclusion that he values the goat more than the chicken (at that moment- I agree about future values not being certain).
Now with bitcoin, your argument (I think) is that because he does not value bitcoin for themselves – he has no use value – we could not conclude the same from the bitcoin exchange. This strikes me as somewhat perverse, but that could be due to my assumptions.
I started thinking about how a logical alien observer who knew nothing of eggs or bitcoin would observe both transactions. As they know nothing of eggs or bitcoin, they do not know that one has a use value and one does not. They would draw the same conclusion, whatever that was, from both transactions. However we do not know for certain what that conclusion would be. Perhaps they would think eggs and bitcoin are some sort of punishment, so that does not help as much as I hoped it would.
So we cannot conclude just from the egg and goat exchange in isolation anything about the value he puts on goats and chickens. We do need to make assumptions or have additional information. We often make obvious assumptions examined, which also leads us astray.
We need to observe multiple exchanges, or get the information from somewhere else, or make assumptions. In the egg case, we could in principle observe the exchange in isolation, then observe him consuming the eggs- which we can say is a use value assuming we have knowledge of biology and an assumption of a desire to continue living). So in principle, we could derive the value of the goat and the chicken after seeing only one exchange – if we have this other information. We could not do this with the bitcoin, so I can accept there is some difference between a thing with use value and a thing without. But again only with making some assumptions. Also we could not do this with gold or any other money – it only works with barter. We would never see the person actually using the money for anything other than exchange.
Following this thought, what is the difference between something that had a use value – such as gold – but is exchanged without using it, and something that never had a use value?
I am back where I started, concluding that bitcoin conveys the same information that money does after observing the exchanges, but money is a different thing than barter. An observer of current exchanges would observe no difference.
To put it another way, if one were to conclude relative values from observing bitcoin exchanges these would be the same as money exchanges. The origin of the money makes no difference.
“The origin of the money makes no difference.”
This is ultimately what pro-bitcoiners *of necessity* must logically conclude.
This is a problem for Austrians who agree with the correct position that “completely useless stones” cannot be used as money because “how would you know what they’re worth” (paraphrase of Tom Woods, and by extension Bob Murphy, from the video Smashing Myths and Restoring Sound Money.
The same with handfuls of dirt. If something can work as money simply because people choose to use it, then it doesn’t need a regression theorem to defend it, and anything can be adopted as money at any time.
It would also mean that entrepreneurial error would be impossible, because the value would be coming from your choice to value it – if you don’t like how it’s performing as money, just choose to like it, anyway; problem solved.
Austrians understand that there’s a difference between what is seen versus the unseen counterfactuals.
We see people voluntarily exchanging bitcoins. We saw people voluntarily invest in Bernie Madoff’s Ponzi scheme. Again, the voluntary nature of these transactions does not, itself, sanctify the transactions as economically meaningful.
Even though some people profited by leaving Madoff’s scheme before it went under, it was at the expense of other suckers.
The same is happening with bitcoins and the FRN.
That people trade them tells you that they can trade them to others for goods. That fact cannot tell you whether or not it is rational to believe that it could climb to $1 million or $0 dollars, tomorrow. The nature of bitcoins, themselves, tells you that there’s no reason to believe that they should be worth more than zero.
Bitcoiners are wrong about the value of bitcoins, and I am of the persuasion that bitcoins are only riding the FRN bubble, which is why they’ve lasted even this long.
(To be sure, the FRN bubble is a giant Ponzi scheme held up only to the extent necessary for people to preserve their lives and a standard of living above a certain level. So, I am not saying that FRNs have value; and therefore, I am not making the inconsistent argument that I believe that worthless bitcoins are getting their value from worthless FRNs.)
You say “we” a lot when you’re explaining what Austrians believe. I think it would be better to say “my interpretation of what Austrians believe is…” because 80% of what you say I struggle to even comprehend and the other 20% I think you’re dead wrong.
Unless you’re going to be more specific, I can’t help clarify or respond to your criticisms.
I’m not looking for clarity on your views. I’m simply saying that I think it is a bit much for you to constantly tell people what Austrian economists believe so matter of factly, when in reality you’re describing your interpretation of their beliefs. Just a suggestion. Take it or leave it.
I realize you’re not looking for clarity on my views; I just wanted others to perceive that merely *saying* that I’m misrepresenting the correct Austrian view isn’t saying much.
You say I’m dead wrong on 20% of what I said, but you don’t elaborate.
I wanted people to see that.
Guest “…and anything can be adopted as money at any time.”
Things will only be useful as money if they have certain characteristics. Therefore stones and soil will not be adopted as money because they cannot fulfill the role adequately.
Properties (from visualcapitalist) are:
Divisible: Can be divided into smaller units of value.
Fungible: One unit is viewed as interchangeable with another.
Portable: Individuals can carry money with them and transfer it to others.
Durable: An item must be able to withstand being used repeatedly.
Acceptable: Everyone must be able to use the money for transactions.
Uniform: All versions of the same denomination must have the same purchasing power.
Limited in Supply: The supply of money in circulation ensures values remain relatively constant.
Soil fails many of these, so there will never be agreement to use it as money. For physical objects, anything that is sufficiently durable and sufficiently scarce is very likely to have some use value. Therefore any physical object used as money is likely to have a use value also. It is only with the arrival of virtual currencies that we can have something that fulfills the criteria but has no use value.