Friday, April 22, 2011

Misean "Calcuation Problem" debunked.

 Note: This article is in reference to the socialist vs capitalist debate, so it doesn't completely apply to TVP vs Capitalist. However, it kind of smashes the economic calculation argument (theory) that we are being told we need to solve and demonstrates how flawed it is.

 Taken from here.

At first blush, the ECA would appear to be highly plausible. However, on closer inspection we can discern hairline fractures in the very foundations of this model which render it highly vulnerable to sustained criticism. Let us consider some of these defects first before turning our attention to the organisation of production and the allocation of production goods in a socialist economy.

A) Subjective valuation and price

According to Mises and the Austrian School of Economics, the value of goods and services is necessarily subjective and does not inhere in the good or service in question; economic costs are essentially subjective, opportunity costs and utility preferences can only be expressed along an ordinal scale – i.e. ranked – as opposed to a cardinal scale which entails precise measurement. How then do we arrive at the necessary data upon which a system of economic calculation is predicated? Salerno puts it thus. The problem with socialism, he claims, is that it lacks “a genuinely competitive and social market process in which each and every kind of scarce resource receives an objective and quantitative price appraisal in terms of a common denominator reflecting its relative importance in serving (anticipated) consumer preferences. This social appraisal process of the market transforms the substantially qualitative knowledge about economic conditions acquired individually and independently by competing entrepreneurs, including their estimates of the incommensurable subjective valuations of individual consumers for the whole array of final goods, into an integrated system of objective exchange ratios for the myriads of original and intermediate factors of production. It is the elements of this coordinated structure of monetary price appraisements for resources in conjunction with appraised future prices of consumer goods which serve as the data in the entrepreneurial profit computations that must underlie a rational allocation of resources.”4

But what is actually happening in this “transformation process” whereby the “incommensurable subjective valuations” of individuals purportedly come to be expressed as objective exchange ratios or prices? Do the latter in fact actually capture the former? There is a kernel of truth in the claim that they do in that obviously if someone is willing to pay a price for a good he or she must ipso facto subjectively value that good. Otherwise the “willingness to pay” for it would not have arisen. But, of course, in a market economy mere “willingness to pay” is not enough; the means of payment – purchasing power- is what is crucially required and it is only willingness to pay that is backed up by purchasing power that actually affects prices. This is what economists call “effective demand” (presumably to be distinguished from “ineffective demand”). The subjective valuation that a pauper places on a square meal may be considerable but in the absence of the wherewithal to pay for such a meal, this counts for nothing. In short, the subjective valuations individuals place on goods cannot reasonably be said to be captured or embodied by the objective prices such goods attract in the market. Indeed, one might add that to suggest that they do, flatly contradicts a key myth of bourgeois economics – namely, that our wants are essentially “infinite” and the resources to meet them, limited.

It may be objected that while it does not aim to “quantify” our wants as such (along a cardinal scale), price does nevertheless reflect our subjective valuations insofar as it sheds light on our preferences (along an ordinal scale). Thus, if we prefer roast beef to a McDonald’s hamburger this will be reflected in the higher price we would be willing to pay for such an item. However, this still does not get round the basic problem: in a market economy you cannot express a preference if you do not have the means to do so: purchasing power. You might prefer roast beef but after consulting your wallet may discover to your consternation that you will just have to resign yourself to the hamburger instead. While, according to conventional economics, effective demand determines price in conjunction with supply of the goods demanded, this effective demand is itself grossly unequally distributed by virtue of the unequal distribution of income. Austrians respond to this by arguing that such differentials reflect the valuations individuals place on different occupations and the different contributions they make to society (which “society” duly “rewards” them for) but there is no way of testing this claim since such valuations are themselves subject to the limitations of “effective demand”. Salerno’s “integrated system of objective exchange ratios” (prices) reflects or is conditioned by, this unequal distribution of effective demand. Thus, frivolous luxury goods can be “valued” more highly – i.e., attract a higher price – than food for the hungry because a rich elite has vastly more purchasing power at its disposal to competitively bid for, and so push up the price of, the former compared to the latter.

We should bear these points in mind in considering the merits or otherwise of the ECA; it is based on so-called objective data that are fundamentally biased or skewed and cannot be said to correspond truthfully to the subjective valuations of economic actors in the market as claimed. To believe otherwise is to commit what is called the Fallacy of Composition – the illusion that what is true for each part of a whole must be true for the whole It is an error that overlooks the interrelationships between the different parts of the whole.

B) What do we mean by “costs”?

D R Steele contends: “The total cost of producing anything is the total effect in reducing production of other things because of the factors used up. This what we mean by the ‘cost of production’. It is this that we always want to minimise when we produce anything”5. As we saw earlier, this definition of cost equates with opportunity cost. Opportunity costs are often counter-posed to accounting costs . The latter are usually taken to denote the explicit costs represented by the cash outlays that a firm makes in purchasing its inputs, whereas the former are associated with implicit or hidden costs and may be difficult or impossible to quantity, or even be completely unknown. For example, the opportunity cost of spending more money on a new school may be to forego spending this money on improving the local ambulance service which could have meant more lives being saved. But just how do you weigh up the cost of a life?

Going back to our example of consumer good X, we can see that the ECA relies on the notion of accounting cost rather than opportunity cost, despite its copious lip service to the latter. This is because it involves comparing the explicit cash outlays to be made on different combinations of A and B to arrive at a notional “least cost combination”. Certainly there is an opportunity cost in making that decision – this almost goes without saying – but this is not what this example of economic calculation is about. It is not measuring what a factory foregoes in opting to produce 1 unit of Y using method 2. Choosing a least cost combination of factors has essentially to do with accounting costs, not opportunity costs. That being so, one might well ask, how does this help one to calculate the “total effect in reducing production of other things because of the factors used up”? Acknowledging there is, theoretically speaking, a “total effect” is not the same as saying that this is what is being precisely measured – or, indeed, that it can ever be precisely measured. Moreover, who decides which is the “best alternative foregone”? One person’s preference may not be another’s. Such considerations are simply brushed under the carpet by the ECA.

Nevertheless, it is on the point of “precise measurement” that the ECA presses its claim. As Steele points out: “In this case, it so happens that it would be sufficient merely to know which was ‘more’ or ‘less’ but that is just an accident of the way I have set up the example. Generally, we should have to know exactly how much more or less. For instance, if the choice were between a method using 4lbs of rubber and 5 pounds of wood and a method using 5 lbs of rubber and 3 pounds of wood, it would not be enough to know that wood were more costly by weight, then rubber; we should need to know how much more costly”6.

Certainly, accounting costs are amenable to “exact calculation” using monetary prices but the question is what exactly is being accounted for in the process?. “Precise measurements” doesn’t tell us much; a game of monopoly entails precise measurement too but nobody suggests this implies some earth-shattering insight we would be foolish to overlook. What then is the significance of what is being precisely measured using monetary prices?

The ECA asserts that a socialist economy would be unable rationally to chose between different combinations of factors to arrive at a least cost combination. In answer to the obvious retort that a socialist economy would not concern itself with costs in this monetary form, it might be contended that there will still be a need to reckon costs in some other guise and that it is precisely these substantive costs – or if you like, “real world” costs – that the price mechanism is able faithfully to represent via its pattern of objective exchange ratios. But how could this be proven.? To prove this is the case one would have to demonstrate a precise correlation between these “substantive costs” and their monetary representations. One can determine whether such a correlation exists only by measuring one against the other. But that presents a problem for the ECA since, in doing this, one would have inadvertently shown that costs can indeed be independently measured, and rendered calculable, without recourse to market prices.

This places the proponents of the ECA in a invidious position since failure to demonstrate a putative correlation between these substantive costs and their alleged market representations means that all they have to fall back on is a tautology: that only a market economy is able to perform economic calculations couched in market prices. Steele himself has attempted to circumvent this argument with the (specious) claim that it is “parallel to arguments which have frequently been levelled against general theories. Thus every year or so some new genius discovers that Darwin’s theory of natural selection is vacuous, because it says that the fit survive, but there is no way to measure who are fit except by seeing who survive”7. But, of course, the analogy is completely inapt; the relationship between “fitness” and “survival” is a causal one which simply does not apply in this case. What is involved here is nothing quite so grand as a “general theory” but a modest proposition concerning the alleged statistical correlation between two sets of data without causation being invoked in any way.

Finally, if the ECA is really about narrow accounting costs rather than opportunity costs as such then presumably we have a solid basis for testing the proposition that a system of market prices can faithfully calculate the costs incurred in production decisions. Here we are referring to “costs” in their positive sense, not opportunities foregone. It is evident that in this sense, market-based calculations are far from adequate. There is an enormous literature on the problem of externalities and spill-over effects which illustrates this point very well. Suffice to say that in a competitive market economy there will always be an obvious in-built incentive for competing firms to externalise their costs as far as practically possible or to the extent to which they can get away with doing this. Pollution costs are one example of this and typically necessitate some intervention by the state to impose curbs on the offending firm in question in the interests of other firms who may have to indirectly pick up the tab. “Social costs” are another example. A firm may consider it necessary to lay off part of its workforce to reduce its production costs and remain competitive. However, this reduction of its labour costs has costly repercussions for the workers involved and society in general which tend not to be accounted for on the firm’s own balance sheet.

Attempts to get round the problem of externalities and spill-over effects through the application of concepts such “willingness-to-pay” (WTP) and “willingness-to-accept” (WTA) are problematic and provide little, if any, comfort for proponents of the ECA. WTP has to do with what people would be prepared to pay to mitigate or avert some undesirable effect while WTA refers to the level of financial compensation they would be willing to receive for having to put up with such an effect. Mainstream economists tend to regard the costs involved in both instances as roughly equivalent but there is considerable evidence based on surveys to suggest that this is simply not the case – not according to people’s “subjective evaluations” of environmental losses and gains, at any rate.8 In fact, environmental losses tend to be more highly valued than environmental gains even where similar sums of money are involved. There are a number of other problems associated with these techniques (e.g. the tendency to underestimate the value of future resources; the problem of non-use values and option values which are to do with resources that you do not yourself make use of or might only do so at a later date) all of which highlight the shortcomings of market valuations, shortcomings which the ECA tends to gloss over.

C) The problem of “net income”

According to the ECA not only is there a need to discover the least cost combinations of inputs required to produce a given good; there is also a need to ensure that the revenue obtained from the sale of this good is sufficient to cover the cost of producing it. This can only be done by attaching prices to a firm’s inputs (A and B in our example) as well as its output (good X).

“Net income” is the difference between a firm’s revenue or proceeds and its costs. Positive net income is what is usually referred to as profit; negative net income, as loss. As Mises put it, “Every single step of entrepreneurial activities is subject to scrutiny by monetary calculation. The premeditation of planned action becomes commercial pre-calculation of expected costs and expected proceeds. The retrospective establishment of the outcome of past action becomes accounting profits and losses”9.

This statement is revealing. It inadvertently highlights a serious flaw in the ECA. The ability to compute profit and loss is what in theory is supposed to ensure the efficient – that is “profitable” – allocation of resources. But it turns out that it ensures nothing of the sort. Just because a system of market prices affords one a set of figures with which one can perform precise calculations does not mean that these figures will turn out to be correct – that is to say, will unerringly guide the entrepreneur towards a positive net income.

As Steele puts it: “Since all production decisions are about the future and the future is always uncertain, decision makers have to make guesses, take gambles, play hunches and follow their experienced noses.”10 and “In the market, entrepreneurs anticipate, speculate, agonise, guess and take risks. They also frequently perform elaborate calculations, aware that the results of such calculations are only as good as their assumptions. Always enveloped in a cloud of ignorance, market decision-makers strain to discern the indefinite contours of the changing shapes that loom ambiguously out of the fog.”11

This seems unambiguous enough but then, curiously, Steele feels prompted to ask: “Does the fact that production is actually guided by estimates of future prices, and not by reading off ‘current’ (recent) prices, destroy the force of the Mises argument? Apparently not, for two reasons: 1. past prices are a guide which helps people to make more accurate (though still fallible) estimates of future prices; and 2. people’s estimates of future prices are eventually confirmed or refuted. There is an objective test of the accuracy of the estimates: profit and loss.”12

Steele’s first point rather undercuts his previous claim that production cannot actually be guided by current (recent) prices and he does not quite seem able to make up his mind on how relevant the latter are. By his own admission, entrepreneurs can and often do get things spectacularly wrong when relying on current /recent prices – the energy crisis of the 1970s being a case in point. It is also to be noted that these current/recent prices are a record of accounting costs, not opportunity costs, and so do not shed much light on the opportunities foregone in making a production decision since the latter are a “tacit reference to hypothetical future income”13 which can only be guessed at. He admits that entrepreneurs are fallible yet does not seem to see the inconsistency in admitting this and claiming that the price system ensures “exact calculation”.

Steele’s second point – that there is an objective test of the accuracy of entrepreneurial estimates – is presumably the more important one but, even so, holds no water. Remember that what we are looking for is some way of reliably guiding the entrepreneur to make sound production decisions concerning net income in the future – otherwise there would be little point in going on about the need for “exact calculation”. The fact that the market process is retrospectively “self-correcting” in eliminating or bankrupting those firms that err (incur an economic loss) in their future estimates is completely irrelevant. The resource allocations these firms committed themselves to constitute what economists call “sunk costs” and cannot be retrieved once made. Bygones, as the saying goes, are bygones. More importantly, there is no guarantee that those entrepreneurs, having had the good fortune to estimate future prices accurately, will continue to do so. We are emphatically not talking about some selective process at work here which incrementally refines the abilities of entrepreneurs generally to make sound economic judgements which Steele seems to be implying. If this were the case then the history of the market economy would manifest itself as a progressive reduction in uncertainty and risk.

On another matter, when Steele refers to profit and loss as an objective test of the accuracy of estimates of future prices one presumes he is using “profit” here to mean accounting profit or net income. However, this is a little confusing. This is because he also uses the term “profit” in another, more specialised, sense as well. The entrepreneur’s return on her capital, he contends, is called “interest” (or what we would normally called profit) and where this is equal to her accounting profits “there is no profit in the strict economic sense. True profit is a return above interest; loss, a return below interest”14. The irony is that such profit can only arise where the economy departs form the abstract model of perfect competition and optimal resource allocation. As Lachmann observes “profits are earned whenever there are price-cost differences; they are thus a typical disequilibrium phenomenon”15. Thus , according to the free marketeers’ own theory of how the market behaves, the very imperfections which they deplore (such as monopolistic tendencies) “are, in fact, key profit-generating dynamics in the economic system. In other words, market imperfections are the main source of profit in the economy”16. Such profit, as Steele points out, is the result of the entrepreneur outguessing the market and benefiting society in the process. Presumably, such benefits would not be forthcoming in the idealised (and completely unrealistic) competitive model of the free market which free marketeers strive to realise and that what is needed instead is a less competitive model in which price distortions are allowed more free play. But that, of course, undermines an important assumption of the ECA about the need for market forces to be given free rein in order to ensure the “accuracy” of market prices.

According to the ECA, in the absence of market prices that allow entrepreneurs to make profit and loss computations, economic efficiency cannot be assured. This, it is argued, is incompatible with the maintenance of a developed economic infrastructure. However, we have seen just how problematic such profit and loss computations are in the real world despite the evidence of a developed economic infrastructure around us (which the proponents of the ECA themselves delight in pointing out and attributing to the market). This suggests that there must be something seriously awry with the theory itself.

In any event, the claim that a socialist economy would need to be able to calculate “net income” in some sense does not stand up to close scrutiny. The notion of “net income” in fact derives purely from the functional requirement of capitalism to realise profit through market exchange – that is, it is system-specific. Certainly, this requires inputs and outputs to be reduced to a common denominator – to facilitate comparison and thereby ensure that when one commodity is exchanged for another, they are equivalent to each other. Indeed, market transactions necessitate such equivalence. However, it does not follow that this kind of comparison making use of a common denominator would be required in a socialist economy. In such an economy, “economic exchange” of any sort would no longer apply. It would not be necessary to determine whether “more” or “less” wealth in general was being created than was being used up in the production of that wealth for the very simple reason that the concept of wealth “in general”, a completely abstract and crudely aggregated notion of wealth, is of no practical use in itself and would be utterly meaningless outside the context of commodity exchange. This emphatically does not mean that a socialist economy will have no way of ensuring that resources would be efficiently allocated (which I will consider later); it simply means that such an economy does not need to operationalise this wholly unsatisfactory notion of “net income” in order to achieve this efficient allocation.

D) Estimating the negative effects of misallocation

Mises was clearly adamant that socialism could not be realised because it lacked any method of rational calculation. The implication of such a claim is that the effect of not having such a method would be so devastating as to prevent socialism from ever being realised. However, as Bryan Caplan points out, this flatly contradicts Mises own opinion that “economic theory gives only qualitative, not quantitative laws”17. According to Mises in Human Action (quoted in Caplan), “economics is not, as ignorant positivists repeat again and again, backward because it is not quantitative. It is not quantitative because there are no constants”. But if that is the case, how could you quantity the negative effects of this supposed misallocation in a hypothetical socialist economy and come to the conclusion that they were so severe as to make socialism infeasible?

The Misesian argument would appear to rest on the claim that while there is only a finite number of options concerning the use of inputs that would lead to their efficient allocation, whereas there is an infinity of options that would result in those same inputs being misallocated. The chances are that without the means of making economic calculations, decision-makers in a socialist economy would chose one of the latter options. As Mises put it, economic calculation “provides a guide amid the bewildering throng of economic possibilities. It enables us to extend judgements of value which apply directly only to consumption goods – or at best to production goods of the lowest order – to all goods of higher orders. Without it, all production by lengthy and roundabout processes would be so many steps in the dark … And then we have a socialist community which must cross the whole ocean of possible and imaginable economic permutations without the compass of economic calculation”18.

However, as we shall see later, a socialist economy would be quite capable of avoiding this fate through the institutionalisation of a set of constraints that steer decision makers towards the efficient allocation of resources. In any case, Mises’ claim about the lack of a reliable compass to guide these decision makers might as well be directed at market capitalism. This is what can be inferred from the Theory of The Second Best formulated Richard Lipsey and Kelvin Lancaster in 195619. Looking at the “general equilibrium” model of the economy, they argued that in order for equilibrium (pareto optimal allocation) to obtain a number of equilibrium conditions need to be simultaneously satisfied such as the supply of all goods being exactly equal to the demand for them, the output price of goods being equal to marginal cost of producing them and the long term profit for all firms being equal to zero. Where just one of these optimal conditions is not met then the ‘second best’ position can only be reached by departing from all the other Paretian conditions. To put it in a nutshell, any single price distortion leads to all other prices being distorted because of its ramifying consequences for exchange ratios throughout the economy and since price distortions are inevitably going to arise in the market, capitalist decision makers will likewise have to contend with whole ocean of possible and imaginable economic permutations in which their ability to perform precise calculations using market prices will be to little avail. This is because such prices, being distorted as it were, will almost by definition be unable to provide a reliable guide (in terms of price theory). Of course the notion of a “general equilibrium” is merely an abstraction and has no empirical basis in fact. While Mises acknowledged this he did not seem to perceive the devastating consequences that this had for his own theory of “economic calculation”.

The implication of Mises’ argument is that the more scope one allows for the free interplay of market forces the more efficient and reliable the allocation process. Can this claim be empirically tested? It is often argued for example that so-called free market economies perform better than their more interventionist, state capitalist, competitors. But this can be for any number of reasons other than “economic calculation”: differences in natural and labour resource endowments, the prevalence of natural disasters, historical circumstances (e.g. civil conflict), the incentive problem in oppressive regimes (a point that Caplan makes) and economic dependence (a reference to “dependency theory” and the argument that the already developed First World systematically “under-develops” the Third World). There is a further problem of disentangling cause and effect. For example, is it the case that relatively successful economies are successful as a result of implementing free market policies or are those policies themselves the result of economic success? Those economies that are more competitive are likely to be more favourably disposed towards free trade for the obvious reason that they have little to fear from competition, whereas, conversely, less competitive or economically successful economies will tend to want to adopt a more protective and interventionist approach to protect their own interests. Indeed this is what enabled Germany, at the end of the 19th century to overtake Britain in terms of industrial production: Whereas the latter was still relatively laissez-faire in its outlook, Germany and other continental economies at the time relied heavily on tariffs and other interventionist measures to build up their industries.

Empirical support for the economic calculation thesis is thus remarkably weak. In any case, there is not, never has been and never will be such a thing as a strictly “free market” economy in the real world. In the real world, the market necessarily operates closely in tandem with the capitalist state, varying only in the degree to which this happens. As Karl Polanyi has noted: “The road to the free market was opened up and kept open by an enormous increase in continuous, centrally organised and controlled intervention”20.

E) The costs of economic calculation

What is often overlooked is that accounting, while it might concern itself with cutting costs, is itself a significant cost. This has important implications for the ECA. Parallel to a system of physical accounting (see section 5) what we have today as well is a system of monetary accounting. Monetary accounting is a highly complex process in which all enterprises in a capitalist economy must of necessity engage, even though it plays a supernumerary role as far as the physical process of organising production is concerned. In earlier class-based social formations money played a secondary role in the economic life of society; in modern capitalism, however, its influence is all-pervasive. Its purpose is not to ensure the efficient allocation of resources as such but to expedite market exchanges by providing a universal equivalent against which all other commodities exchange, so enabling the computation of profits and losses by competing actors engaged in these market exchanges. That is why it eventually supplanted the traditional system of barter – because of the obvious structural shortcomings of the latter which impeded market exchanges. For example, you cannot swap your pig for two chickens from your neighbour if he or she already has an ample supply of pigs; paying your neighbour in cash overcomes this problem.

As well as enjoining economic actors to engage in monetary accounting, the development of capitalism gave rise to a whole plethora of institutions and economic activities directly or indirectly concerned with the handling and circulation of money rather than the production of use values as such – for example, banks, insurance companies, pay departments, building societies and so on. Indeed, this already vast and steadily proliferating sector of the economy is a natural outgrowth of the systemic needs of an economic system centred on the competitive accumulation of capital; such institutions and activities arose precisely to service those needs. One might want to argue that a bank, for example, performs a useful role in that it lends money to a factory and thus enables the latter to manufacture useful things that consumers in a market economy may value. Therefore, banks perform no less a useful role than factories in the production of these useful things. But this is to engage in a sleight of hand; it is to overlook the distinction that needs to be made between the specific conditions under which a factory has perforce to operate within a given socio-economic system and the physical process of production itself. It is the former that is precisely being questioned which proponents of the ECA, on the other hand, take wholly for granted and assume is seamlessly linked to the latter. That is to say, they assume what they need to prove: that you cannot operate a modern system of production without market prices (and hence those kind of institutions – like banks – linked with market exchanges in capitalism).

It is the elimination of such activities and institutions , essential though they may be to a functioning market economy but unproductive in themselves from the standpoint of producing use values or meeting human needs, that constitutes perhaps the most important (but by no means only), productive advantage that a socialist economy would have over a capitalist economy. The elimination of this structural waste intrinsic to capitalism will free up a vast amount of labour and materials for socially useful production in socialism. Just how much resources will be made available for socially useful production in this way is a moot point. Most estimates suggest at least a doubling of available resources by comparison with the present.21 Yet the proponents of the ECA, while claiming that socialism would sink into the slough of inefficiency and falling output without the guidance of market prices, seem wilfully determined to deny socialism this particular productive advantage that it has over capitalism by positing the necessity for institutions such as banks – or some analogue of banking – in a socialist economy. This is a specious claim; it is unwittingly reading into socialism the functional requirements of capitalism.

Friday, April 15, 2011

The Zeitgeist movement is not going anywhere.

Seriously people. Calm down.

Recently there have been some disagreements between Peter Joseph and the Venus Project. And now my research on the “TROLL” documentary gets more data in the form of all of the people spreading hysteria that this will mean that the movement will somehow fold. I am going to be blunt about this. This quite simply, is nonsense.

Peter Joseph helped the movement a great deal with research, making great movies, and providing some good guidance. But he was not even involved with the vast majority of the day to day work of the movement. He rarely attended meetings, and does not generally get involved with any of the working aspects of the movement itself. The chapter coordinators, moderators, etc. handled all of that. And while this obviously means that there won't be anymore films coming from Peter about the Venus Project, it does not suddenly mean the sky is falling.

Virtually every function of the movement was already being run by other people. Peter has stated he will continue to fund the global movement's work. Which is highly generous. He is not leaving the movement. He is just stepping back from any form of spokesman role. This does not by any means that he is no longer an activist for this direction. But the newsletter, chapter coordination, etc. was all already handled by other people anyway. And those people did not suddenly cease to exist.

Peter was never the leader. Despite propaganda to the contrary. And everything I point out above was part of that. He would share his views just like everyone else. He of course had some authority over the website that he pays for and administrates, but it's not like he called up every chapter coordinator and gave them directions or “orders”. It's not like he wrote every single newsletter article. It's not like he did all of the planning and the speaking. He was already asking us to step up more as he was going to be backing away before any of this. Because he needs to. He needs and deserves a break. And the reality is that if Peter stopped doing anything in the movement for a month, the average member of the movement would not even notice. You know why? Because Peter Joseph was not the movement. So much work was done by other people behind the scenes.

I am asking people to stop contributing to the hysteria. Stop posting links to these trolls videos. They are having quite the laugh at our expense. And your giving them a reward. If people do post these videos then explain to them that this is NOT the end of the Zeitgeist movement. Share this blog post with them. Right now the trolls are trying to cause a panic in the movement. It is important that people understand that the movement is not going anywhere. So Peter backs away for a while. Does this mean that suddenly everyone who saw his films doesn't feel the RBE is the best solution? Obviously not.

I absolutely appreciate everything Peter has done. And will continue to support his work. I look forward to his upcoming film about the impact of war. 

I heard the website is down. If you guys want to talk about this stuff my forums are open at And yes, I am still doing broadcasts. And yes, when you wake up tomorrow, there will still be a Zeitgeist Movement.  

Wednesday, April 6, 2011

A realistic look at the economic calculation problem.

A realistic look at the economic calculation problem.
By Neil Kiernan

The economic calculation problem is at the core of debate between free market advocates and socialists. And because a Resource Based Economy suggests distribution of resources to people absent a price tag we find ourselves not only being labeled socialists, but the same arguments being leveled at us that are leveled at socialists. So we have the economic calculation debate. At it's core is the question:

“Will we be able to efficiently distribute resources absent the price mechanism?”

First lets get some background on the positions of the Austrian/Free Market school of thought and then talk about how this relates to our own arguments on the subject.

So how does the price mechanism supposedly function insofar as distributing resources?

The idea behind the price mechanism is that in in the market resources will be given a value by the market. This value would be calculated based on the cost of production which includes resources expended and labor. And then finally consumer demand. The theory is that if a producer of a given product charges too much for that item then no one will buy it. Hence forcing the producer to lower the cost. Competitive forces also play a part here as rival producers of a given product will vie for dominance in the market by offering competitive prices.

So breaking this down into an analogy:

Bob produces widgets. Bob calculates a price based on the cost of the resources that were used in making his widgets, including how much he had to pay his employees at the widget factory. He of course wants to make a profit so he charges a price that is above and beyond the costs involved in production. If he gets too greedy then people instead may buy a rival product that has a lower price.

So Mises and the other Austrian economists basically contend that this is the most efficient way to distribute resources. And in fact is the only way that would actually work. Lets get into why.

From Wikipedia:

Ludwig von Mises argued in a famous 1920 article "Economic Calculation in the Socialist Commonwealth" that the pricing systems in socialist economies were necessarily deficient because if government owned or controlled the means of production, then no rational prices could be obtained for capital goods as they were merely internal transfers of goods in a socialist system and not "objects of exchange," unlike final goods. Therefore, they were unpriced and hence the system would be necessarily inefficient since the central planners would not know how to allocate the available resources efficiently. This led him to declare "...that rational economic activity is impossible in a socialist commonwealth."


“Without money to facilitate easy comparisons, socialism lacks any way to compare different goods and services. Decisions made will therefore be largely arbitrary and without sufficient knowledge, often on the whim of bureaucrats.”

But what about the inefficiencies in the price system? Just how good of a job does it actually do when it comes to efficiently distributing resources? Lets take a look.

Mises suggests that no rational prices can be reached without a price system. But are rational prices actually reached within a price system? No. The reason? The entire price engine is driven by the profit motive. And profit by no means depends on rationality.

First of all, lets talk about advertising. Advertising has evolved over the years into what amounts to outright brainwashing. They specialize in ensuring that consumers have irrational desires for products that they do not even need. Or are even harmful to them! The work of Edward Bernays in assisting the cigarette companies in their quest to give women the irrational desire to smoke is an example I have frequently brought up on V-RADIO. Documentaries such as “Psywar” and “Consuming kids” really dig deep into the very dark reality of advertising and it's ability to target our minds in a way that causes us to feel “needs” for objects that have no rational purpose.

One such industry is the fashion industry. A never ending cycle of convincing people that unless they wear certain clothing, (and more specifically are willing to pay a higher price for it) they are worth less as a human being. The $3,000 hand bags mentioned in “Zeitgeist: Moving Forward” are just one of many absurd fashions that resources are devoted to. A company named Louis Vuitton will also be happy to sell you a shoulder bag for $8,000. A pair of sneakers for $1,000. Or a belt for $3,000! The price mechanism has attached to it elements of social stratification. This brings us back to the reason that Air Jordan shoes that were purchased at Foot Locker were somehow more valuable then those purchased at K-Mart. Solely because the person could afford to pay the price. It was therefore more fashionable.

The fashion issue goes beyond clothing. Accessories. Cars. Houses. Etc. The entire system is designed to tell people that the higher price paid the better. But we are not talking about the higher price paid meaning the better the product. We are talking about an industry that convinces people that the higher price someone paid the more value someone has as a person! Psychological and Sociological research is done by advertising firms to plug their products into our self esteem, our attractiveness to the opposite sex. And our status within society. If your carrying a $8,000 shoulder bag then it means you are superior on a fundamental level to the person carrying a $30 shoulder bag.

The price system is subject to corruption in other ways. Planned obsolescence and perceived obsolescence of goods is also built into this system to ensure that people are forever in stores moving inventory. Products are made to break down or to not be easily fixable intentionally for the sake of profit. The price to fix a given product is set in such a way to artificially make it more expensive to simply repair an item then it is to buy an entirely new item. The price system creates the motivation to do all of this contradictory to the ecological and environmental impact of such wanton production. Because it is a system for an economy with profit as the motivator producers of given products are encouraged to find as many ways to cut corners as much possible when it comes to ecological safety of their products. Products are made without recycling in mind because a product that is easy to take apart to be recycled is in many cases easy to repair. This would allow the consumer to simply repair their products rather then buying new ones.

The price system because it is based solely on the whims of consumers also permits the production of goods completely irrespective of the long term effects of using up given resources. The consumer at the counter of a store does not consider, nor are they encouraged to consider the long term implications of their purchases. What will buying all these plastic products do to the environment? What if this useless junk I am purchasing has resources in it that will be required for mankind's survival? What impact will the fact that I purchase a new I-Pod every year have on my grand children? Or their children? None of this is taken into account in the price system.

Because you want to be able to offer your goods at the lowest possible prices the price system also encourages worker exploitation. Wal-Mart's goods made in sweat shop factories can be offered at a far lower price then products produced locally. And the profit motivated price system will only serve to perpetuate this. Outsourcing to more and more desperate economies where people are willing to accept a lifestyle no better then conventional slavery.

Another example of corruption of the price model is when businesses collude to sell a vital product at an ever increasing price. Take the oil industry. The oil companies formed a cartel to cooperate on what the price of gasoline should be. They agreed to compete by no more then a few cents at the pump. The benefit of this is that profits in all of the oil companies collectively went up to record heights. It was to the benefit of everyone in the cartel to see this happen. And because gasoline is not an optional commodity they were able to get away with it. It was not as if the consumers could simply choose not to drive to work.

A further proof of the price mechanism's failure is that outside of the stores that sell these products there are often homeless people lying on the street. People who could feed themselves for MONTHS if they had even a quarter of the money spent on a single item purchased at the prices above. When it comes to a system of allocating resources the billions of people starving on this planet are a testament to the absolute failure of the market system to give any option to these people. There is no mechanism in the market or the price system that will distribute resources to these people despite the fact that technologically we could provide for them.

When attacking any centrally planned system, the Austrian economists point to examples such as the various instances of mass starvation supposedly created by centrally planned economies. They point to death camps and gulags as the inevitable solutions of failed centrally planned economies. That when scarcity exists we will be forced to somehow depopulate. Of course they leave out that a great deal of these death tolls were created by fascist regimes trying to stay in power. But they go on to heap praise on the market system with it's price based economies with an absence of death camps and gulags. They leave out of course that even in the free markets there would still be huge pockets of poor and starving people. The “death camps” of the market system are places like Africa. Where hundreds of thousands of people starve every day. The price system has no place for people who cannot find ways to be useful to people who have more. Basically, suggesting that centrally planned economies lead to starvation ignores the blatantly obvious truth that the market system does the exact same thing. But far more insidious is that the entire time people are inclined to think it is a fair system that is leaving all these people to die. And even encourages people to think that it is somehow their fault for dying. If they just worked a bit harder or started their own business they would be fine. They sell everyone the pipe dream that they too can be rich and famous if they just apply themselves. And this delusion helps everyone agree to be part of a system where 1% of the population has 40% of the wealth. And where statistics are greatly against people who are not part of that 1% ever becoming part of it.

It's ironic that the same incident of the rules suddenly changing in the book “Animal Farm” that was supposed to be a story about communism applies just as well to people living in a capitalist system.

“All animals are equal. But some animals are MORE equal then others...”

Mises and his disciples stated that centrally planned economies fail due to the fact that the resources would be distributed according to the “whims” of bureaucrats. And that apparently instead we should allow resources to be distributed according to the “whims” of consumers. Consumers who's “whims” are being controlled by a profit motivated system. If we were talking about a world of infinite resources this might work. But as was demonstrated earlier, the “whims” of consumers in a profit motivated world are not by any means rational. And the fact that there is anyone anywhere who on a whim will buy an $8,000 shoulder bag while people are starving outside of the store they purchased it in is testament that the price mechanism is not efficient at all. And that “rational” prices are not being achieved. There is nothing rational about an $8,000 hand bag. Period.

So lets look at the obstacles that Mises and Hayek suggest we will never be able to overcome.

The knowledge problem: Will we be able to effectively get the information we need as far as the needs of our consumers within a society? Mises seems to think that this is an insurmountable problem. That we will never be able to get enough information to be able to make rational decisions about what to produce. This like many other Austrian theories is obviously way out of date. Information technology is vastly superior to anything that Mises would of even conceived of in the 1920's when he said this would be impossible.

The other notion that is presented by Hayek is that people would have no incentive to share information they have. Which simply does not make any sense. Obviously in a resource based economy the incentive is we want to eat. We want shelter, clothing, etc. So we share that information so that the system works.

Another argument against Austrian economists from Wikipedia:

“It has also been claimed that the contention that finding a true economic equilibrium is not just hard but impossible for a central planner applies equally well to a market system; As any Universal Turing Machine can do what any other Turing machine can, a system of dispersed calculators (i.e. a market) has no in principle advantage over one central calculator.

Austrian economists emphasise that a central planner cannot have access to all the necessary information (including local conditions, know-how and changing individual preferences) to feed into such a central calculator.”

As I have already illustrated earlier the price mechanism has many failures and is far too open to corruption. So they were never operating from any sort of superior system to begin with. As pointed out above there is no special advantage to mankind operating as a mob of people making economic decisions based on whims. And the claims that any centrally planned economy would fail due to lack of information is based on a completely out of date idea as far as what information any central planner would have access to.
The idea that desires are infinite or irrational:

This concept basically works on the assumption that people's desires are infinite and are not trackable or understandable. And this assumption is flawed. The needs of human beings are in fact calculable. And in fact once all of the noise that has polluted the “desires” of mankind is gone, (advertising, fashion, etc.) deciding what to produce will be far easier. The reason it is hard to calculate now is because mankind has an inflated idea of what it “needs” that is based largely on the conditioning we are given through advertising from the earliest ages. This entire industry of convincing people to consume things they do not need will vastly change the amount of resources expended. I have already felt this myself as my own consumption habits have changed once I became aware of the vast propaganda machine that was put in place to make people believe that the act of consumption in of itself was an expression of freedom. I watch now as people chain themselves to debt for endless amounts of junk that is designed to be sure to fail as soon as it is paid off. My entire perspective changed on what I buy and why. There is no reason the rest of mankind will not experience this as well.

So what is different between what we suggest and other “centrally planned” economies?
Well first of all, all of those systems advocated force or coercion to achieve their goals. Every one of those systems were run by people who did not understand the environmental impact on human behavior. They relied on laws, prisons, etc. to deal with the inevitable problems that arise from circumstances of scarcity.

Secondly, and more importantly the points that Mises and Hayek used to point to failings in those systems do not apply to ours. There are no “whims” being used to decide the allocation of resources. All of those systems were microcosmic attempts at human opinion based central planning. As pointed out previously it was at the “whims” of bureaucrats. And no such whims will exist in our system that is based on the scientific method. Every citizen of the society would be acutely aware of the state of resources on our planet and the implications of their consumption.

Thirdly, the technology available to us is vastly superior to what was available at the time that any of these monetary thinkers were contemplating their limitations.

Even without the modern technology we have today this was achievable. In early 1970 the government of Chile asked a British operations research scientist named Stafford Beer to develop a system for tracking information all over the country for the purposes of a computer controlled economy. The system was highly advanced for it's time and did work. It was called Project Cybersyn. When I was doing research on it I was not surprised to see that several conservative bloggers have made really bogus reports as to it's success. But without fail people who were actually involved in the project came forward and refuted the nonsense that was being portrayed. Chile had decided to nationalize it's copper production. In typical “economic hitman” fashion the United States didn't like that very much and eventually went out of it's way to cause problems for the socialist Chilean government. The following is from one of the accounts of someone involved in the project:

“Across Chile, with secret support from the CIA, conservative small businessmen went on strike. Food and fuel supplies threatened to run out. Then the government realised that Cybersyn offered a way of outflanking the strikers. The telexes could be used to obtain intelligence about where scarcities were worst, and where people were still working who could alleviate them.(ref Andy Beckett/Guardian)
The interconnected telex machines, exchanging 2,000 messages a day, were a potent instrument, enabling the government to identify and organize alternative transportation resources that kept the economy moving.”

Because of project Cybersyn, the Chilean government was able to keep their economy running using a fraction of the resources previously demanded. And the strike that was an attempt to get rid of the president who had the audacity to think that Chilean copper should be used for the people of Chile failed.

I am hoping to get someone who was involved in this project on V-RADIO at some point. But suffice it to say, with some ancient telex machines they were able to keep their economy moving. And that technology is dwarfed by the capabilities of our information technology now. More complex versions of Project Cybersyn's style of cybernetic management are already being used by blue chip corporations all over the world to maintain their own infrastructures.

In conclusion, it is important to remember that the Austrian school of economics and the opinions of Ludwig Von Mises are not infallible. They represent limitations that are set by men who have limitations in their understanding of the capabilities of technology. Those limitations are inherent in mankind as technology always manages to exceed our expectations. The Wright brothers were making flying machines while the intellectuals of the day were being paid to write books about why man would never fly. It is important to understand when your dealing with people who are advocates of this school to remind yourself that the Austrian school of economics is a fringe philosophy. It is not embraced by the majority of economists and is in fact rejected as a mainstream school of economics because of the attitude in the philosophy of throwing one's hands up in the air and letting everything just play out what way it may. “It won't work because Mises said so!” is not an argument anymore then continuing to quote the physics experts who said man would never fly would be a viable argument today. Something to consider when people are quoting Mises as if they are quoting something empirical and infallible:

"‎Mises wrote of his economic methodology that "its statements and propositions are not derived from experience... They are not subject to verification or falsification on the ground of experience and facts."

So in other words. He made it up. This is why Austrian theory is rejected by the mainstream. 

During my presentation during the Agora conference I used the analogy of a space ship. When a space ship is going on a prolonged trip there is no free market economy set up on board to determine how the resources on board will be used. They are calculated by scientists on the ground before the vessel ever gets underway. Though mankind lives on a really big spaceship we call earth, the more our population grows and the more our technological capability to impact our environmental conditions the “smaller” the earth effectively gets. In a situation of limited resources allowing the “whims” of anyone to determine resource allocation would not only be dangerous. They would be suicidal. And the danger of anyone “owning” those resources exclusive to themselves with a profit motive as a factor would be obvious. Nobody should have such power. You wouldn't let anyone own all the oxygen on a space ship you were on. The oxygen should be considered the common heritage of everyone on board.

In the end I have noticed a trend while debating these topics. People don't want to consider that they might not be free to buy whatever their hearts desire. The market system and it's price mechanism allow people to continue to look at resources as something that will always be at the store waiting for them. They see people like us pointing out these limitations and they project that we would want to enforce some limitations on them. They fail to see that no matter how free they believe they are if there are only six ounces of a given resource left on the earth they don't have the right to take seven. Not because we are going to force anything on them. But because there are only six ounces left. And if great care is not taken in the use of those limited resources nobody will have access to them.

Then there is the very real issue of the "Golden Billion" effect. A theory  that points to the fact that the "Western world" is consuming resources at a rate that far exceeds the rest of the world. It is through imperialism that we have maintained this circumstance of a few privileged countries gaining all of the benefits of civilization while we loot resources out of any country that might wish to use it's own resources to better itself and the standard of living of the people in it. In an article called: "A clash of civilizations: A possibility?"  by David Bryan he describes this issue:

"Under the once popular “golden billion” theory, people living in the economically advanced European nations, Japan and the United States enjoy in full measure the fruits of civilization at the expense of their less lucky brethren sweating elsewhere in the world. These days this “golden billion”, is being increasingly diluted by a steadily widening influx of migrants coming in from the Third World which means that we are now talking about a considerably larger number of “privileged” ones whose comfortable existence the rest of the world may no longer be will to ensure. Which may also mean that we are in for a new redrawing of the global map say, by China, which is working so hard to get rich and is already setting its sights on global leadership."

The people you see who are addicted to the lifestyle that they have brainwashed themselves into believing is "fair" are trying desperately to ignore the fact that we cannot hold on to 40% of the world's resources in the hands of a small percentage of the population forever. And we can only keep that hold through imperialism masked as "Making the world safe for democracy..." There are not enough resources for everyone on the planet to live the wasteful lifestyle of the average American. World wars have always been the means by which these struggles for dominance have been waged. From the Roman empire to WWII. And with technology getting more and more dangerous we are now looking at destruction on a scale never seen before.

Mankind has to rise above this idea that fighting for the position of dominance in the world economy is acceptable. We need to rise above the idea that any one nation should be better off then the majority of nations. The reality is that the lifestyles that we enjoy in the 1st world are not due to the magic of the market system. The entire system is upheld through imperialism. And the rest of the world is not going to put up with that forever. The market system spreading to such a global scale would either A. set the stage for an apocalyptic WWIII or B. drag the standard of living of everyone on the planet down. The market system hinges on the idea of equal opportunity. And there quite simply is no equal opportunity for the entire world to live the wasteful selfish lifestyle we do in the west. The resources do not exist for this to happen. But a society designed using the scientific method to come to rational values, strategic access of goods, and an egalitarian approach can provide a great lifestyle for everyone.

The price mechanism is no more based on rationality then a bureaucracy arbitrarily deciding how resources should be expended. And neither the whims of bureaucrats in a centrally planned economy nor the whims of consumers in a price mechanism profit motivated economy are sufficient for adequately deciding how resources should be allocated on a planet with finite resources. We don't as a species have the freedom to use resources irrespective of what impact it will have on the earth we all live on. And that is why we must use the scientific method for social concern if we are going to survive.