WEBVTT NOTE 08. The Debate on the Socialist Calculation Debate (video) 1 00:00:00.000 --> 00:00:04.000 This is the debate on the socialist calculation debate. 2 00:00:04.000 --> 00:00:12.000 The socialist calculation debate raged in England in the 1930s and earlier in Germany in the 1920s. 3 00:00:12.000 --> 00:00:21.000 It was resurrected by Austrian economists who debated the meaning of the debate itself during the 1990s. 4 00:00:21.000 --> 00:00:27.000 It actually continues today, though I think the two sides have grown closer. 5 00:00:27.000 --> 00:00:35.000 I have the infamy of having sort of started the second debate, the debate on the debate. 6 00:00:38.000 --> 00:00:47.000 Though before my article had appeared in 1990, there was an article by Israel Kirzner in the late 80s on the Socialist Calculation Debate, 7 00:00:47.000 --> 00:00:56.000 pointing out that Austrians could learn quite a bit still from that debate, despite the fact that it had taken place 50 years earlier. 8 00:00:56.000 --> 00:01:04.000 And so, in part, mine was a response to his article, though his article wasn't really controversial. 9 00:01:04.000 --> 00:01:11.000 First, let's talk about what the calculation debate was all about. 10 00:01:11.000 --> 00:01:19.000 Then I'll give you my take on it, which is not the take of others, but we've become, I think, closer, as I'll show you. 11 00:01:19.000 --> 00:01:42.000 Basically, the debate was started by Ludwig von Mises in the 1920s, in his famous article, Economic Calculation in the Socialist Commonwealth, which was published in 1920, and then was incorporated into a book that he wrote on socialism in 1922. 12 00:01:42.000 --> 00:01:54.000 Basically, Mises' achievement in this article, I think this is one of the greatest articles of the 20th century, by the way, was to destroy the intellectual foundations of the case for social central planning. 13 00:01:54.000 --> 00:02:04.000 But secondly, it was really a revolutionary breakthrough in economic theory, demonstrating the nature and necessity of the price system, and here I do agree with Israel Kirzner. 14 00:02:04.000 --> 00:02:28.000 And thirdly, it was really the completion of the Mangerian Revolution. What Mises did in this article was to show how subjective values were transformed into objective prices which could be used as meaningful cardinal numbers in economic calculation. 15 00:02:28.000 --> 00:02:45.000 So, it was a step in the direction of the completion of the Mangerian debate, which was fully completed, as I said, with his Human Action, in which he completely gave us a complete theory of monetary calculation. 16 00:02:45.000 --> 00:02:58.000 In 1920, he only gave us those parts of monetary calculation or the theory of monetary calculation that were necessary to show the impossibility of socialist central planning. 17 00:02:58.000 --> 00:03:04.000 The word impossibility now has to be carefully parsed. 18 00:03:04.000 --> 00:03:12.000 When Mises said that socialist calculation was impossible, or he sometimes says that socialist economy is impossible, 19 00:03:12.000 --> 00:03:21.000 He did not mean that you couldn't have a group of people owning all the factors of production and producing something. 20 00:03:21.000 --> 00:03:32.000 What he meant was that they would not be able to determine if they were producing the optimum pattern of output, even from their own point of view. 21 00:03:32.000 --> 00:03:40.000 That is, he was saying that they could not economically allocate resources to the highest valued uses. 22 00:03:40.000 --> 00:03:45.900 even if they themselves determine the scale of values for society. 23 00:03:45.900 --> 00:03:56.900 The reason is without a price system you could never find the costs of these various goods in which you had output. 24 00:03:56.900 --> 00:04:03.400 Right, so Mises' thesis was as follows. 25 00:04:03.400 --> 00:04:09.800 He said that the rational allocation of resources was impossible without monetary calculation. 26 00:04:09.800 --> 00:04:28.800 And the reason why, well, the reason why this was so was because without a price system, there would be no way of determining how much the production of any particular good costs and without knowing the cost of various goods, you could never determine the most profitable line of production. 27 00:04:28.800 --> 00:04:38.800 And he points out that there were three preconditions, institutional preconditions, real world preconditions for economic calculation. 28 00:04:38.800 --> 00:04:48.800 The first, he said, was private property in all orders of goods, both consumer goods had to be privately owned and traded as well as capital goods and natural resources. 29 00:04:48.800 --> 00:04:57.800 Secondly, there had to be a freedom to exchange. If there was a system that existed in which people were allowed to own property but could not exchange it, 30 00:04:57.800 --> 00:05:06.800 and that system has existed in history at times where, for example, in the Middle Ages, land couldn't be alienated from the families that owned it. 31 00:05:06.800 --> 00:05:18.800 Without that freedom to exchange, the freedom to exchange was the second prerequisite of economic calculation. 32 00:05:18.800 --> 00:05:27.800 And third, there had to be sound money, because all prices in the real world market economy are money prices. 33 00:05:27.800 --> 00:05:31.800 Now what he points out is that socialism really abolishes all three. 34 00:05:31.800 --> 00:05:38.800 It abolishes private property in all orders of goods because the capital goods are owned by the state. 35 00:05:38.800 --> 00:05:46.800 And it abolishes the freedom to exchange because the state, being the monopolist of these goods, cannot trade with itself. 36 00:05:46.800 --> 00:05:52.800 So, since there is no exchange possible in capital goods, there can be no price of these goods. 37 00:05:52.800 --> 00:05:58.800 And without prices of these goods, there's no way to determine cost of production. 38 00:05:58.800 --> 00:06:11.260 Let me give you a simple example of this. Mises never denied that the central planners 39 00:06:11.260 --> 00:06:17.260 could know their, what we might call their, technical production function. 40 00:06:17.260 --> 00:06:19.260 I'll make sure I do this right. 41 00:06:22.260 --> 00:06:24.260 Chad, I'm getting a shadow. 42 00:06:24.260 --> 00:06:26.260 Hit the lights, okay, so make sure I do everything. 43 00:06:36.260 --> 00:06:39.260 This is a production function for an automobile. 44 00:06:41.260 --> 00:06:47.260 Not being very technically oriented, I don't really know how many tons of steel are in an automobile, maybe two or something. 45 00:06:47.260 --> 00:06:56.260 But anyway, let's assume that the central planners know through their teams of engineers and so on, 46 00:06:56.260 --> 00:07:01.260 exactly how many tons of steel, P tons of steel are required for production of an automobile, 47 00:07:01.260 --> 00:07:10.260 plus a certain number of hours, Q number of hours of machine time, plus a certain number of hours of unskilled labor and of engineering labor, 48 00:07:10.260 --> 00:07:22.760 Plus a certain number of square feet of factory space and a certain number of kilowatt hours of electricity and v-hours of managerial labor. 49 00:07:22.760 --> 00:07:30.860 If you combine all of those things according to a technological recipe, which they also know, you'll get one automobile. 50 00:07:30.860 --> 00:07:34.260 The key is, is it worth producing that automobile? 51 00:07:34.260 --> 00:07:43.260 Given that, all of those things are non-specific inputs, meaning that they can be used to produce many other goods in an industrialized economy. 52 00:07:43.260 --> 00:07:50.260 Are you using those goods in the most valuable manner, from their own point of view? 53 00:07:50.260 --> 00:07:56.260 And the answer, of course, is no, because the units in which these goods are specified are heterogeneous. 54 00:07:56.260 --> 00:08:11.260 There's no way to add up kilowatt hours with square feet of factory space, with hours of machine time, with tons of steel, and come up with one unitary cost figure. 55 00:08:11.260 --> 00:08:14.260 There's no way to do that. 56 00:08:14.260 --> 00:08:17.260 So that was Mises' main objection. 57 00:08:17.260 --> 00:08:29.260 Now, we know that there are certain other problems arise once there are no objective prices for these things. 58 00:08:29.260 --> 00:08:44.260 For example, should the production, it would be better to produce these automobiles with, let's say, more capital-intensive methods. 59 00:08:44.260 --> 00:08:52.760 So, instead of just Q hours of machine time, would it be better to have Q plus A hours of machine time? 60 00:08:52.760 --> 00:09:06.260 In other words, why not have more machines operating, maybe in the case of turning the factory into run by, mainly by robots, okay, 61 00:09:06.260 --> 00:09:11.260 with one or two people just manning the computers that control the robots, okay, and reducing the amount of labor. 62 00:09:11.260 --> 00:09:16.260 So, reducing the amount of unskilled labor to R minus B, okay? 63 00:09:16.260 --> 00:09:23.260 So they can't know, even if they decided somehow that this was the best use, that they wanted another automobile, 64 00:09:23.260 --> 00:09:26.260 they don't know the cheapest way of producing that automobile. 65 00:09:26.260 --> 00:09:32.260 Should they produce it in a more capital-intensive fashion, or less capital-intensive fashion, okay? 66 00:09:32.260 --> 00:09:37.260 Also, let's assume now that they're producing a run of automobiles, 67 00:10:07.260 --> 00:10:08.260 should be. 68 00:10:08.260 --> 00:10:14.500 Again, remember, take the U.S. economy, and hold that in your mind, imagine all the different 69 00:10:14.500 --> 00:10:19.180 uses of steel, there's a certain amount of steel in the economy, and there's only one 70 00:10:19.180 --> 00:10:22.620 optimal pattern for using that steel. 71 00:10:22.620 --> 00:10:29.440 Now, entrepreneurs operating under a market economy can easily figure out the best use 72 00:10:29.440 --> 00:10:31.740 of the whole stock of steel. 73 00:10:31.740 --> 00:10:37.020 There's a certain demand, as we'll see, based on their forecast of future prices, and they 74 00:10:37.020 --> 00:10:43.340 Based on those forecasts, bid for the steel, and let's say the steel is $300 a ton, then 75 00:10:43.340 --> 00:10:49.260 every use of steel that is expected to increase revenue in the different industries in the 76 00:10:49.260 --> 00:10:55.940 economy by at least $300 will absorb some of the steel. 77 00:10:55.940 --> 00:11:00.620 Anyone who has a prospective use of steel that has a marginal revenue product in addition 78 00:11:00.620 --> 00:11:05.660 to total revenue that is less than $300 will not get any of the steel. 79 00:11:05.660 --> 00:11:14.660 Supply and demand, the market will clear, we'll have a supply and demand, an equilibrium price, an equilibrium quantity that's exactly equal to the available stock of steel. 80 00:11:16.660 --> 00:11:27.660 How does the economy solve this problem of determining whether, the market economy, determining whether or not we should produce this automobile? 81 00:11:27.660 --> 00:11:35.660 Well, under market economy, where the three preconditions of economic calculation are fulfilled, 82 00:11:35.660 --> 00:11:42.660 where there is private ownership in the means of production, every single unit of every single input, 83 00:11:42.660 --> 00:11:47.660 of the hundreds of thousands of different inputs and types of labor and so on, maybe millions, 84 00:11:47.660 --> 00:11:50.660 has a market price, every single one. 85 00:11:50.660 --> 00:12:04.660 So that any conceivable and technically feasible production project or production process can be, the cost of that process can be determined. 86 00:12:04.660 --> 00:12:27.660 So, let's say that this is the decision about producing a Ford Taurus and the total cost, which is the sum of all of the prices of the inputs, is $18,000, including the interest return on the investment of capital. 87 00:12:27.660 --> 00:12:34.660 And the price of the automobile itself, let's say, is $21,000. 88 00:12:34.660 --> 00:12:38.660 Now, that's not the current price, that's the expected price. 89 00:12:38.660 --> 00:12:41.660 The current price might be less. 90 00:12:41.660 --> 00:12:44.660 But next year, at the end of this process of assembling this course, 91 00:12:44.660 --> 00:12:49.660 entrepreneurs, as we'll see, may expect that the price would go from $17,000 92 00:12:49.660 --> 00:12:51.660 and it could shoot up to $21,000. 93 00:12:51.660 --> 00:12:54.660 So it's the future price that is important. 94 00:12:54.660 --> 00:13:11.660 In any case, then that is telling them that they are taking resources that have a lower value in all other uses in the economy, at least a lower perspective value, and they are redistributing this entrepreneur to a more highly valued use from the point of view of consumers. 95 00:13:11.660 --> 00:13:36.660 On the other hand, should the cost exceed the expected price, should the cost be maybe $22,000 per car for this bundle of resources that is needed to produce a car, then the loss would indicate that it's not rational to produce that good, because you're misallocating resources. 96 00:13:36.660 --> 00:13:46.660 You're taking resources that could produce goods worth about $22,000 on the market to consumers and using them to produce a good that's worth only $21,000. 97 00:13:46.660 --> 00:13:51.660 Now, is that to say entrepreneurs using economic calculation are infallible? 98 00:13:51.660 --> 00:13:55.660 Well, of course not. 99 00:13:55.660 --> 00:13:59.660 In the first quarter of this year, GM lost $2 billion. 100 00:13:59.660 --> 00:14:04.660 They're laying off 25,000 workers. 101 00:14:04.660 --> 00:14:07.660 What does it mean that economic calculation doesn't work? 102 00:14:07.660 --> 00:14:13.660 What that means is that in the past they've overestimated the demand for their products 103 00:14:13.660 --> 00:14:17.660 and therefore they anticipated a higher selling price 104 00:14:17.660 --> 00:14:20.660 but at least they know that they're making mistakes 105 00:14:20.660 --> 00:14:25.660 and at least they know that they have to restrict production of these automobiles 106 00:14:25.660 --> 00:14:27.660 which they are in fact doing. 107 00:14:27.660 --> 00:14:33.660 They're laying off, as I said, 25,000 or 28,000 in the next few years 108 00:14:33.660 --> 00:14:40.660 in two years, and they're going to reduce their total capacity for producing vehicles from six million, I read, to five million. 109 00:14:40.660 --> 00:14:43.660 So it tells you when you're doing something wrong. 110 00:14:43.660 --> 00:14:52.660 Now, my opponents in the debate, Israel Kirzner, Pete Becky, Steve Horowitz, would say something like, 111 00:14:52.660 --> 00:15:01.660 well, they would agree with me, and one of the things that this tells us is that this market economy is an error correction process, 112 00:15:01.660 --> 00:15:07.740 Process, or it's a corrective process. No, it's not a corrective process, because it 113 00:15:07.740 --> 00:15:12.460 doesn't mean that things can't change, that there's not continual changing going on, so 114 00:15:12.460 --> 00:15:19.060 that they can't simply follow the past losses and say, aha, once and for all we need fewer 115 00:15:19.060 --> 00:15:24.220 cars and that's what we're going to do. In fact, things could turn around in 90 days, 116 00:15:24.220 --> 00:15:31.220 or things could turn around in two quarters. They have to forecast that this trend will 117 00:15:31.220 --> 00:15:37.120 will continue into the future in order to make that decision to cut the number of automobiles. 118 00:15:37.120 --> 00:15:43.620 If they believe that gasoline prices would dramatically drop, if they have some information 119 00:15:43.620 --> 00:15:48.860 that indicates that gasoline prices will dramatically drop, let's say, in six months, and that the 120 00:15:48.860 --> 00:15:55.580 demand for automobiles will skyrocket, particularly the models of their firm, then they wouldn't 121 00:15:55.580 --> 00:16:00.400 blindly cut back, simply follow prices and say, hey, we're losing money, we lost two 122 00:16:00.400 --> 00:16:05.400 2 Billion Dollars in the first quarter, we're going to lay off workers. In fact, they might actually expand. 123 00:16:05.400 --> 00:16:18.400 So, it is not a corrective process, it's a selective process, meaning it selects those entrepreneurs that are continually making the right decisions in a world of uncertainty and change. 124 00:16:18.400 --> 00:16:29.400 Let me mention something else that Mises makes clear, that there is a difference between what we call economic calculation and valuation. 125 00:16:29.400 --> 00:16:44.400 Mises never denied that an individual or a small family living in isolation, what we call in economics a household economy, couldn't figure out the cost of production without money. 126 00:16:44.400 --> 00:16:55.400 Money is only needed in a complex industrial economy in which you have heterogeneous capital goods which could be used in different uses. 127 00:16:55.400 --> 00:17:02.400 where all capital goods only had one use. If every resource only had one use, there would be no problem of monetary calculation. 128 00:17:02.400 --> 00:17:09.400 If it couldn't be used anywhere else, and it could only be used to produce cars, then all the resources that could be used to produce cars would produce cars. 129 00:17:09.400 --> 00:17:13.400 Because they can't be used anywhere else. They have no opportunity costs, in other words. 130 00:17:13.400 --> 00:17:18.400 But what Mises says is that in a household economy, people can figure out opportunity costs. 131 00:17:18.400 --> 00:17:48.400 So let's take the famous Robinson Crusoe, his value scale, that's his value scale for allocating, let's say, 12 hours of labor a day, let's say he sleeps 12 hours a day, and he's going to do it in 4 hour units, okay, and let's say that's his value scale, that he prefers 4 coconuts highest on his value scale, then 2 fish, 3 pounds of mushrooms, 1 salad, 132 00:17:48.400 --> 00:18:03.400 The question then becomes, what's the cost of producing one sack of berries, let's say it's fourth on his list? 133 00:18:03.400 --> 00:18:10.400 Well, he could easily see since the natural resources aren't really scarce, it's really his labor that's the scarce good here. 134 00:18:10.400 --> 00:18:21.400 His labor in this situation has a cost of the expected utility of three pounds of mushrooms. 135 00:18:21.400 --> 00:18:32.400 He will only engage in production processes which have a higher value than the utility of three pounds of mushrooms. 136 00:18:32.400 --> 00:18:46.400 So what if he suddenly finds that there's rabbits, or rabbit, I don't know if that's a quarrel, but he finds that there are rabbits on the island, and he says to himself, now wait a minute, can I afford to hunt that rabbit? 137 00:18:46.400 --> 00:18:56.400 In order to hunt that rabbit, I don't want to give up anything that's more valuable that I could produce in those four hours, right now. 138 00:18:56.400 --> 00:18:59.640 So, it's a matter of his value scale. 139 00:18:59.640 --> 00:19:07.760 The current cost of labor is the expected utility from three pounds of mushrooms. 140 00:19:07.760 --> 00:19:13.960 If he expects that rabbit will satisfy him more than the mushrooms, then what will he 141 00:19:13.960 --> 00:19:14.960 do? 142 00:19:14.960 --> 00:19:22.820 The benefit from the rabbit is higher than the cost, the cost being always the last, 143 00:19:22.820 --> 00:19:29.820 and the least most valuable use of the resource that is currently undertaken, so what he will do then is to devote the resources to hunting the rabbit. 144 00:19:29.820 --> 00:19:34.820 If the benefit from the rabbit is lower than the cost, then he will not. 145 00:19:34.820 --> 00:19:42.820 So Mises says that yes, you can run a socialist economy within a small household, or an individual can. 146 00:19:42.820 --> 00:20:02.820 You can run it without calculation, but you cannot run it in a system in which you have a multitude of heterogeneous goods, capital goods, inputs, which are nonspecific, which could be used in many different, but not all, production processes. 147 00:20:02.820 --> 00:20:30.820 I have a friend in Montana who used to live in New Jersey and I grew up with her and in any case, she actually married a real cowboy, believe it or not, from Montana, they live on a ranch, and one day she called me up and we were talking and she says, you know, I've got a new house. 148 00:20:30.820 --> 00:20:37.820 I said, well, so you moved off the ranch? She said, no, no, no. She said, we had the house shipped in. So I said, what? 149 00:20:37.820 --> 00:20:47.820 She said, well, here in Montana, since labor is so scarce in Montana and therefore has a much higher value, you know, herding cattle, which they actually do, they have cattle drives and everything, 150 00:20:47.820 --> 00:21:03.820 It's very scarce and expensive. They don't build the houses on site. In fact, her house was built in Nebraska, and these huge trucks haul the modular pieces of the house to the area where they're going to be built, and they put them together. 151 00:21:03.820 --> 00:21:10.820 So, it's very capital intensive. It uses a lot of capital because capital is relatively cheaper than labor. 152 00:21:10.820 --> 00:21:23.820 Whereas in the Northeast, of course, where labor isn't scarce, no one in their right mind would ever think of buying a house somewhere else and then having it shipped to where it's going to be the residence. 153 00:21:23.820 --> 00:21:33.820 Now, could a socialist planner ever figure this out? That you should build houses hundreds of miles away and then have them shipped? 154 00:21:33.820 --> 00:21:41.820 Without economic calculation, it's very unlikely. I mean, they might figure it out, but it's extremely unlikely. 155 00:21:41.820 --> 00:21:56.820 Let me just mention a few conclusions that we get from Mises' analysis. 156 00:21:56.820 --> 00:22:05.820 He tells us that a socialist economy is literally impossible because it cannot calculate the opportunity costs of production and investment decisions, which I've just shown you. 157 00:22:05.820 --> 00:22:13.820 Even the term socialist planning or socialist economy is an oxymoron. 158 00:22:13.820 --> 00:22:15.820 Now, why is it an oxymoron? 159 00:22:15.820 --> 00:22:21.820 It's an oxymoron because not only do socialist planners make mistakes, but they can never know if they're making mistakes. 160 00:22:21.820 --> 00:22:28.820 They're in a desert without a compass, and they might want to get to a particular point, but they don't even know which direction they're going. 161 00:22:28.820 --> 00:22:54.820 So, in the same sense that Robinson Crusoe rationally allocates his resources, his labor, to the most highly valued consumer goods, the market economy, with cardinal prices generated through entrepreneurial bidding and entrepreneurial forecasts, can in effect allocate goods to their highest valued uses from the point of view of consumers. 162 00:22:54.820 --> 00:23:01.820 So the market economy operates rationally in the same sense that Robinson Crusoe operates rationally. 163 00:23:01.820 --> 00:23:08.820 The Soviet Union does not, or the former Soviet Union, or any other centrally planned economy, cannot do that. 164 00:23:08.820 --> 00:23:13.820 So in that sense, they don't economize, there is no such thing as a socialist economy. 165 00:23:13.820 --> 00:23:17.820 It's an oxymoron, an inconsistent use of words. 166 00:23:17.820 --> 00:23:29.820 The reason being that they don't know how to allocate all these different resources with multiple uses among the most valuable uses. 167 00:23:29.820 --> 00:23:33.820 Even if they themselves are going to determine as dictators the most valuable uses. 168 00:23:33.820 --> 00:23:37.820 They can never know the trade-offs. 169 00:23:37.820 --> 00:23:57.820 Because, think about it, in our economy today, resources, let's take the U.S. economy, the available stock of capital goods, which approaches millions and millions and millions of units of capital goods, can be reallocated an infinite number of ways. 170 00:23:57.820 --> 00:24:03.820 There's an infinitude of different economies that we could create out of existing resources. 171 00:24:03.820 --> 00:24:09.820 In other words, there's an infinite number of different patterns of outputs that could be produced today. 172 00:24:09.820 --> 00:24:12.820 How do we figure out the right one? Well, we never know the... 173 00:24:12.820 --> 00:24:20.820 There is a way of forecasting the right one, and that is through market prices and economic calculation. 174 00:24:20.820 --> 00:24:29.820 What happened in the Soviet Union was that they used a system called gross output planning. 175 00:24:29.820 --> 00:24:33.820 And the Central Planning Board was a ghost plan. 176 00:24:33.820 --> 00:24:38.820 And basically what they did was that they would specify quantitative targets for output. 177 00:24:38.820 --> 00:24:49.820 Now it's very difficult to specify the exact quality of the types of output that you're giving the various firms, socialist firms, the targets for. 178 00:24:49.820 --> 00:25:05.820 So basically they motivated the managers by giving them bonuses for meeting or exceeding the targets and they got a trip to the gulag for not meeting the targets consistently. 179 00:25:05.820 --> 00:25:09.820 But what's interesting then, it turned into a system of mutual lying, of course. 180 00:25:09.820 --> 00:25:15.820 You want a bonus, but on the other hand, if you exceed your target one year and get a big bonus, what happens next year? 181 00:25:15.820 --> 00:25:21.820 They raise the target. They say, aha, this factory has greater capacity. 182 00:25:21.820 --> 00:25:26.820 So the manager will always lie and say, that target's way too high. He'll try to get it down. 183 00:25:26.820 --> 00:25:30.820 And he'll make sure he maybe exceeds it a little bit, but not by much. 184 00:25:30.820 --> 00:25:36.820 And on the other hand, they know, the commissars of each industry know that he's lying. 185 00:25:36.820 --> 00:25:42.820 And so they'll raise it. So the information is completely distorted. 186 00:25:42.820 --> 00:25:48.820 The incentive is that information is not accurate. 187 00:25:48.820 --> 00:25:57.820 One of the jokes that was often made about the Soviet Union, 188 00:25:57.820 --> 00:26:03.820 or one was when it was actually a cartoon, and I can draw it here, 189 00:26:03.820 --> 00:26:10.820 and what it was was there was a huge nail. 190 00:26:10.820 --> 00:26:17.340 and the nail is being is on a long train okay so you have a train here it's 191 00:26:17.340 --> 00:26:20.540 carrying the nail to wherever it's supposed to go you know when it's you 192 00:26:20.540 --> 00:26:27.820 know a hundred ton nail or something like that and then there's the commissar 193 00:26:27.820 --> 00:26:33.740 you know he's got that big big furry hat on yeah I like that and then there's a 194 00:26:33.740 --> 00:26:48.740 He's a plant manager and he's saying, well, comrade, he says, I've met my output target for this year, which was, let's say, 100,000 tons of nails. 195 00:26:48.740 --> 00:26:54.740 He would always make the nails in the easiest possible way that permits him to meet his target. 196 00:26:54.740 --> 00:27:09.740 So that's an exaggeration, but the truth is that many houses and structures in the Soviet Union were unfinished, even though they couldn't be used because they didn't have roofs. 197 00:27:09.740 --> 00:27:21.740 And the reason why they didn't have roofs is because the small roofing nails that you need weren't being produced because they were more costly to produce, so you were in danger of not meeting your target. 198 00:27:21.740 --> 00:27:25.740 You've got to use more resources to make the smaller ones than the larger ones. 199 00:27:25.740 --> 00:27:30.740 And there are stories about smaller sizes of women's clothing not being available, 200 00:27:30.740 --> 00:27:34.740 everybody walking around in huge clothes, and so on. 201 00:27:34.740 --> 00:27:37.740 Because you make things as large as possible. 202 00:27:37.740 --> 00:27:41.740 Now, on the other hand, if they specify a number, then you make a lot of small nails, 203 00:27:41.740 --> 00:27:43.740 and the large nails will disappear. 204 00:27:43.740 --> 00:28:00.740 And the one story that was told was about Khrushchev, who during a speech to the Pollock Borough berated, of all industries, the chandelier producers. 205 00:28:00.740 --> 00:28:08.740 Because they were making these huge heavy chandeliers that were crashing down and killing some of the comrades in their dachas, you know, in their vacation homes. Seriously. 206 00:28:08.740 --> 00:28:36.740 The joke that went around in the 1970s was that Khrushchev in the 50s had banged his shoe on the podium at the United Nations and he said, we will bury you meaning economically, we will bury you and so the Soviet economists told their western counterparts, we'll bury all of you except for Hans-Hermann Hoppe. 207 00:28:36.740 --> 00:28:40.740 We'll bury all of you except for Hong Kong because we need to know prices. 208 00:28:40.740 --> 00:28:43.740 We'll allow one small island where there are prices. 209 00:28:43.740 --> 00:28:53.740 And it was true that the Soviet Union was using world prices, at least for electricity and things that they traded in, and for steel and so on. 210 00:28:53.740 --> 00:28:59.740 But those prices were still inefficient because they didn't exactly reflect their local conditions. 211 00:28:59.740 --> 00:29:03.740 Now, what about the very existence of the Soviet Union? 212 00:29:03.740 --> 00:29:10.740 People later on said, well, you know, Mises is obviously wrong. Here it is, it's the 1930s and the Soviet Union hasn't collapsed yet. 213 00:29:10.740 --> 00:29:17.740 Well, Mises' impossibility thesis was not undermined. He pointed out, in his first article, he said, look, he said, 214 00:29:17.740 --> 00:29:23.740 real world socialist economies, such as the USSR, which was already in existence by 1920, he said, 215 00:29:23.740 --> 00:29:31.740 are not inconsistent with my thesis. He said, because they exist in a world of capitalist prices, 216 00:29:31.740 --> 00:29:44.740 He said it's just like the post office. The post office, as inefficient as it is here in the United States, can exist and can go on in a fashion by using the prices that are generated around it. 217 00:29:44.740 --> 00:29:55.740 But Lenin, on the other hand, said that he wanted to turn the whole economy into a post office. If you're turning the whole world into a post office, then you have the problem of economic calculation. 218 00:29:55.740 --> 00:30:00.500 Calculation. Now it's not to say that using world prices that don't reflect 219 00:30:00.500 --> 00:30:05.420 scarcities in your area or in your economy will allow you to be very, very 220 00:30:05.420 --> 00:30:09.820 productive and the Soviet Union wasn't very productive, okay, despite CIA, CIA 221 00:30:09.820 --> 00:30:15.420 statistics and then Paul Samuelson and Galbraith along with the CIA who claimed 222 00:30:15.420 --> 00:30:18.300 that the Soviet Union was catching us and that eventually there would be a 223 00:30:18.300 --> 00:30:23.060 convergence and their rate of growth would eventually surpass us and they'd 224 00:30:23.060 --> 00:30:53.060 And also in the Soviet Union there were black markets and there was a system of bribes between social enterprises, there was trade, even though it wasn't supposed to be, if someone had an excess of nails and needed copper wiring, they would trade, and there were brokers who would buy and sell, who would broker the deals, and so these were a system of bribes called BLAT. Also there was other black markets, 225 00:30:53.060 --> 00:31:00.060 Black Markets, the purchase of Beatle albums and jeans and so on in the Soviet Union. 226 00:31:00.060 --> 00:31:11.060 Because of foreign hard currency, the Soviet authorities looked the other way. 227 00:31:11.060 --> 00:31:17.060 Was there a true period of socialist economic planning? Yes, there was. War Communism. 228 00:31:17.060 --> 00:31:32.060 Socialism really existed from about 1917 to 1921 during the period of the counter-revolution in Russia, the war between the whites and the reds. 229 00:31:32.060 --> 00:31:43.060 There was also another group called the greens, they don't get much play, but they were an anarchist group that were fighting both the royalists, the czarists and the communists. 230 00:31:43.060 --> 00:31:54.060 In any case, everything started to break down. Lenin said, we are abolishing money, we're abolishing all accounting and money prices, and we're going to just have accounting in natural units. 231 00:31:54.060 --> 00:32:05.060 How could you have that? Natural units, as I showed, tons of steel, kilowatts, hours of electricity, they're heterogeneous. You can't add them up. You can't get a single figure for costs. 232 00:32:05.060 --> 00:32:26.060 In any case what happened was that you had houses, the whole system began to break down, very little was produced, people began to break up their furniture and then their houses for firewood, people moved from the cities, cities were emptying out by 1921, they were going into the countryside and leading a nomadic existence. 233 00:32:26.060 --> 00:32:31.060 That's what socialism leads to, a complete breakdown of the social division of labor. 234 00:32:31.060 --> 00:32:41.060 Universal Brigandage, forging and stealing, these small household groups or small bands fighting with one another for resources. 235 00:32:41.060 --> 00:32:53.060 So yes, socialism can exist after fashion, but it's impossible to run the social division of labor at a high level without economic calculation. 236 00:32:53.060 --> 00:33:06.060 And by the way, Lenin then reversed himself and instituted the New Economic Policy, by the way, the same name that Nixon took for his policy of wage and price controls. 237 00:33:06.060 --> 00:33:12.060 At least Lenin was moving in the right direction. He allowed some exchange and so on. 238 00:33:12.060 --> 00:33:25.060 Now, let me just talk a little bit about the intellectual division of labor and what I think is one of my contributions here. 239 00:33:25.060 --> 00:33:30.060 I mean, it's really in Mises, but I think I brought it out a little bit more. 240 00:33:30.060 --> 00:33:33.060 And this is the social appraisal process. 241 00:33:33.060 --> 00:33:47.060 How is it that we actually go about transforming subjective values for goods and entrepreneurs' qualitative knowledge about consumer values and their expectations about what market conditions will be in the future? 242 00:33:47.060 --> 00:34:00.060 How is all of that information and knowledge translated into objective cardinal numbers that can be used meaningfully in economic calculation? 243 00:34:00.060 --> 00:34:08.060 So I call this a social appraisement process. Mises uses the word appraisement in two different senses. 244 00:34:08.060 --> 00:34:16.060 And here's what we have. You have the entrepreneur at the center here. 245 00:34:16.060 --> 00:34:24.060 The entrepreneur wants to earn pure profit. He wants to buy resources at a price that is lower than the expected output.