Here is the original posting from Facts and other stubborn things
I think I would like to perhaps clarify, partly for me, the logic between calculation, prices, and incentives. Daniel is correct in asserting that many people have a tendency to link these three but I would separate prices and calculation from incentives. As I stated in the post below, there are two aspects to the Socialist Calculation Debate (SCD). Let me start with calculation.
The calculation problem, in a parsimonious description, refers to the inability of a central planner to properly allocate resources to their most efficient and Rawlsian welfare maximizing use. This is the central tenet of Mises' 1920 monograph. He starts to lay out the reasoning for why a central planner cannot establish value.
In an exchange economy the objective exchange value of commodities enters as the unit of economic calculation. This entails a threefold advantage. In the first place, it renders it possible to base the calculation upon the valuations of all participants in trade. The subjective use value of each is not immediately comparable as a purely individual phenomenon with the subjective use value of other men. It only becomes so in exchange value, which arises out of the interplay of the subjective valuations of all who take part in exchange. But in that case calculation by exchange value furnishes a control over the appropriate employment of goods. Anyone who wishes to make calculations in regard to a complicated process of production will immediately notice whether he has worked more economically than others or not; if he finds, from reference to the exchange relations obtaining in the market, that he will not be able to produce profitably, this shows that others understand how to make a better use of the goods of higher order in question. Lastly, calculation by exchange value makes it possible to refer values back to a unit. For this purpose, since goods are mutually substitutable in accordance with the exchange relations obtaining in the market, any possible good can be chosen. In a monetary economy it is money that is so chosen.
Mises is writing strictly about the socialist system where there are no prices and therefore valuations are impossible. Therefore, the central planner will not know how to best allocate scarce resources. In particular, where and when to allocate capital such as building a new factory when supply and demand intersection is impossible to determine.
For me, the calculation problem ends there. I think that others try to say more about it than is really there. I believe that the Hayek extension of Mises' argument, the response to Lange, is really the brilliant point in the SCD. One that gets mixed up with the calculation problem.
Hayek uses the problem with establishing value to write about prices and their composition. He lays out an argument that develops Mises' calculation problem to describe exactly why prices are not calculable and in turn why market derived prices are impossible for a central planner to determine.
I cannot find the direct quotation, but Hayek uses the example of a tractor to show how no central planner could price a used tractor. To me, the point that a central planner cannot possibly price the tractor is far less important than the awesomeness of the information implicitly contained in a market derived price. I remember getting chills reading how a single price can communicate the mileage; the age of the tractor; the condition both overall and any particular attributes; the need for tractors in the location in which it is being sold; the value of the tractor to the owner and the buyer, simultaneously; and so on.
Hayek's essay is what convinced me that distortions to market derived prices must result in some loss of economic efficiency. My guess is that Daniel would agree with this, where we might disagree is how much efficiency loss is acceptable given some other set of objectives.
This is my reading of the SCD and I think that many people have a tendency to overlap and merge these arguments into a murky mess. What this has to do with incentives, I am not sure, but I do have some thoughts about it which I will discuss later. I think that what tends to happen is that in the overlap, the calculation problem=>a failure of central planning=>incentive problems as central planners misallocate resources. I do not agree that the last step follows the logical progression.
Hayek uses the problem with establishing value to write about prices and their composition. He lays out an argument that develops Mises' calculation problem to describe exactly why prices are not calculable and in turn why market derived prices are impossible for a central planner to determine.
I cannot find the direct quotation, but Hayek uses the example of a tractor to show how no central planner could price a used tractor. To me, the point that a central planner cannot possibly price the tractor is far less important than the awesomeness of the information implicitly contained in a market derived price. I remember getting chills reading how a single price can communicate the mileage; the age of the tractor; the condition both overall and any particular attributes; the need for tractors in the location in which it is being sold; the value of the tractor to the owner and the buyer, simultaneously; and so on.
Hayek's essay is what convinced me that distortions to market derived prices must result in some loss of economic efficiency. My guess is that Daniel would agree with this, where we might disagree is how much efficiency loss is acceptable given some other set of objectives.
This is my reading of the SCD and I think that many people have a tendency to overlap and merge these arguments into a murky mess. What this has to do with incentives, I am not sure, but I do have some thoughts about it which I will discuss later. I think that what tends to happen is that in the overlap, the calculation problem=>a failure of central planning=>incentive problems as central planners misallocate resources. I do not agree that the last step follows the logical progression.
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