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NOTE The Debate on the Socialist Calculation Debate

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This is the debate on the Socialist Calculation Debate.

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Socialist Calculation Debate raged in England in the 1930s and earlier in Germany in the 1920s.

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And it was resurrected by Austrian economists who debated the meaning of the debate itself during the 1990s.

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Okay, and it actually continues today, although I think the two sides have grown closer.

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I have the infamy of having sort of started the second debate, the debate on the debate.

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Though before my article had appeared in 1990, there was an article by Israel Kirzner in the late 80s on the Socialist Calculation Debate

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pointing out that Austrians could learn quite a bit still from that debate, despite the fact that it had taken place 50 years earlier.

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And so, in part, mine was a response to his article, though his article wasn't really controversial.

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First, let's talk about what the calculation debate was all about, and then I'll give you my take on it,

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which is not the take of others, but we've become, I think, closer as I'll show you.

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Basically, the debate was started by Ludwig von Mises in the 1920s

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in his famous article, Economic Calculation in the Socialist Commonwealth, which was published in 1920

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and then was incorporated into a book that he wrote on socialism in 1922.

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Basically, Mises' achievement in this article, I think this is one of the greatest articles of the 20th century, by the way,

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was to destroy the intellectual foundations of the case for social central planning.

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But secondly, it was really a revolutionary breakthrough in economic theory,

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demonstrating the nature and necessity of the price system, and here I do agree with Israel Kirzner.

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by Israel Kirzner. And thirdly, it was really the completion of the Mangerian Revolution.

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What Mises did in this article was to show how subjective values were transformed into objective prices,

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which could be used as meaningful cardinal numbers in economic calculation.

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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.

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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.

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The word impossibility now has to be carefully parsed.

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When Mises said that socialist calculation was impossible, or he sometimes says that socialist economy is impossible,

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he did not mean that you couldn't have a group of people owning all the factors of production and producing something.

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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.

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That is, he was saying that they could not economically allocate resources to the highest valued uses, even if they themselves determined the scale of values for society.

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The reason is, without a price system, you could never find the costs of these various goods in which you had output.

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Right, so Mises' thesis was as follows.

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He said that the rational allocation of resources was impossible without monetary calculation.

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And 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

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and without knowing the cost of various goods you could never determine the most profitable line of production.

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And he points out that there were three preconditions, institutional preconditions, real world preconditions for economic calculation.

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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.

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Secondly, there had to be a freedom to exchange.

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If there was a system that existed in which people were allowed to own property but could not exchange it, and that system has existed in history at times,

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where for example in the Middle Ages land couldn't be alienated from the families that owned it, it could only be passed on.

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Without that freedom to exchange, the freedom to exchange was the second prerequisite of economic calculation.

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And third, there had to be sound money, because all prices in the real world market economy are money prices.

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Now what he points out is that socialism really abolishes all three.

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It abolishes all three. It abolishes private property and all orders of goods because the capital goods are owned by the state.

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And it abolishes the freedom to exchange because the state, being the monopolist of these goods, cannot trade with itself.

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So, since there is no exchange possible in capital goods, there can be no price of these goods.

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And without prices of these goods, there's no way to determine cost of production.

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Let me give you a simple example of this. Mises never denied that the central planners could know their, what we might call their, technical production function.

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I'll make sure I do this right.

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Chad, I'm getting a shadow. Hit the lights. Okay, so I'll make sure I do everything.

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Okay, good.

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Okay, this is a production function for an automobile.

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I'm not being very technically oriented. I don't really know how many tons of steel are in an automobile, maybe two or something.

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But anyway, let's assume that the central planners know, through their teams of engineers and so on, exactly how many tons of steel, P tons of steel are required for production of an automobile, plus certain number of hours, Q number of hours of machine time, plus certain number of hours of unskilled labor and of engineering labor, plus a certain number of square feet of factory space and kiloliterals.

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The Key is, is it worth producing that automobile?

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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.

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Are you using those goods in the most valuable way?

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Are you using those goods in the most valuable way?

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Meaning that they can be used to produce many other goods in an industrialized economy.

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Are you using those goods in the most valuable manner from their own point of view?

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And the answer, of course, is no, because the units in which these goods are specified are heterogeneous.

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There's no way to add up kilowatt hours with square feet of factory space,

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with hours of machine time, with tons of steel, and come up with one unitary cost figure.

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There's no way to do that.

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So that was Mises' main objection.

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Now, we know that certain other problems arise once there are no objective prices for these things.

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For example, should the production, would it be better to produce these automobiles with, let's say, more capital-intensive methods?

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So, instead of just Q hours of machine time, would it be better to have Q plus A hours of machine time?

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In other words, why not have more machines operating, maybe in the case of turning the factory into run by, mainly by robots,

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with one or two people just manning the computers that control the robots, and reducing the amount of labor.

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So, reducing the amount of unskilled labor to R minus B.

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So they can't know, even if they decided somehow that this was the best use, that they wanted another automobile,

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they don't know the cheapest way of producing that automobile.

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Should they produce it in a more capital-intensive fashion or less capital-intensive fashion?

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Also, let's assume now that they're producing a run of automobiles,

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and that this factory that they have can be allocated to producing 20,000 automobiles

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or the factors could produce 150,000 motorcycles or 500 houses.

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Once again, without knowing costs, because each of these things would take different proportions of these factors, of these inputs,

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they would not be able to determine what the output should be.

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Again, remember, take the US economy and hold that in your mind.

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Imagine all the different uses of steel. There's a certain amount of steel in the economy, and there's only one optimal pattern for using that steel.

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Now, entrepreneurs operating under a market economy can easily figure out the best use of the whole stock of steel.

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There's a certain demand, as we'll see, based on their forecast of future prices, and they, based on those forecasts, bid for the steel,

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If you use the steel, and let's say the steel is $300 a ton, then every use of steel that is expected to increase revenue in the different industries in the economy by at least $300 will absorb some of the steel.

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Anyone who has a prospective use of steel that has a marginal revenue product in addition to total revenue that is less than $300 will not get any of the steel.

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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.

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How does the economy solve this problem of determining whether, the market economy, determining whether or not we should produce this automobile?

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Well, under market economy, where the three preconditions of economic calculation are fulfilled,

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where there is private ownership in the means of production, every single unit of every single input,

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of the hundreds of thousands of different inputs and types of labor and so on, maybe millions,

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has a market price, every single one.

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So that any conceivable and technically feasible production project, or production process, can be, the cost of that process can be determined, okay?

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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 and the price of the automobile itself, let's say, is $21,000.

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Now, that's not the current price, that's the expected price.

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The current price might be less.

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But next year, at the end of this process of assembling this course,

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entrepreneurs, as we'll see, may expect that the price would go from 17,000 to 21,000.

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So it's the future price that is important.

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In any case, then that is telling them that they are taking resources

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that have a lower value in all other uses in the economy, at least a lower perspective value,

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And they are redistributing this entrepreneur to a more highly valued use from the point of view of consumers, okay?

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On the other hand, should the cost exceed the expected price?

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Should the cost be maybe $22,000 per car for this bundle of resources that is needed to produce a car?

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then the loss would indicate that it's not rational to produce that good

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because you're misallocating resources, you're taking resources that could

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produce goods worth about $22,000 on the market to consumers and using them to

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produce a good that's worth only 21,000. Okay, now is that to say entrepreneurs

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using economic calculation are infallible? Well, of course not, okay. In the first

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In the first quarter of this year, GM lost $2 billion. They're laying off 25,000 workers.

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That doesn't mean that economic calculation doesn't work.

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What that means is that in the past, they've overestimated the demand for their products.

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And therefore, they anticipated a higher selling price.

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But at least they know that they're making mistakes.

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And at least they know that they have to restrict production of these automobiles.

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The way they are in fact doing, they're laying off, as I said, I've seen different, 25,000 or 28,000 in the next few years.

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And they're going to reduce their total capacity for producing vehicles from 6 million, I read, to 5 million.

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So it tells you when you're doing something wrong.

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Now, my opponents in the debate, Israel Kirzner, Pete Becky, Dean Horowitz, would say something like,

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Well, they would agree with me, and they say that one of the things that this tells us is that this market economy is an error correction process, or it's a corrective process.

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No, it's not a corrective process, because it doesn't mean that things can't change, that there's not continual changing going on, so that they can't simply follow the past losses and say,

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Aha! Once and for all we need fewer cars and that's what we're going to do.

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In fact, things could turn around in 90 days,

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you know, or things could turn around in two quarters.

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They have to forecast that this trend will continue into the future

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in order to make that decision to cut the number of automobiles.

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If they believe that gasoline prices would dramatically drop,

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if they have some information that indicates that gasoline prices will dramatically drop,

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and the demand for the bills will skyrocket, particularly the models of their firm, then they wouldn't blindly cut back, you know, just simply follow prices and say, hey, we're losing money, we lost $2 billion in the first quarter, we're going to lay off workers.

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In fact, they might actually expand.

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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.

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Let me mention something else that Mises makes clear, that there is a difference between what we call economic calculation and valuation.

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Mises never denied that an individual or a small family, let's say living in isolation,

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what we call in economics a household economy, couldn't figure out the cost of production without money.

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Money is only needed in a complex industrial economy in which you have heterogeneous capital goods,

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which can be used in different uses, where all capital goods only had one use.

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If every resource only had one use, there would be no problem of monetary calculation.

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If it couldn't be used anywhere else, and it could only be used to produce cars,

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then all the resources that could be used to produce cars would produce cars,

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because they can't be used anywhere else.

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They have no opportunity costs, in other words.

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But what Mises says is that in a household economy,

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people can figure out opportunity costs.

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So let's take the famous Robinson Crusoe, his value scale.

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What do you mean to do that?

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That's his value scale for allocating, let's say, 12 hours of labor a day.

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Let's say he sleeps 12 hours a day, and he's going to do it in four-hour units.

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And let's say that's his value scale, that he prefers four coconuts highest on his value scale,

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then two fish, three pounds of mushrooms, one sack of berries.

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But he only has 12 hours, and each of those alternatives absorbs three hours.

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The question then becomes, what's the cost of producing one sack of berries?

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Let's say it's 400 less.

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Well, he could easily see since the natural resources aren't really scarce,

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it's really his labor that's the scarce good here.

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His labor in this situation has a cost of the expected utility of three pounds of mushrooms.

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He will only engage in production processes which have a higher value than the utility of three pounds of mushrooms.

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So what if he suddenly sees, finds that there's rabbits, or rabbit, I don't know if that's a coral, but he finds that there are rabbits on the island.

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Okay, and he says to himself, now wait a minute, now can I afford to hunt that rabbit?

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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.

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So, it's a matter of his value scale.

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The current cost of labor is the expected utility from three pounds of mushrooms.

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If he expects that rabbit will satisfy him more than the mushrooms, then what will he do?

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The benefit from the rabbit is higher than the cost, the cost being always the last, the least most valuable use of the resource that is currently undertaken.

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So what he will do then is to devote the resources to hunting the rabbit.

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If the benefit from the rabbit is lower than the cost, then he will not.

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So Mises says that, yes, you can run a socialist economy within a small household, or an individual can.

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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,

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which are non-specific, which can be used in many different, but not all, production processes.

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Now, I think some people who have been at the Mises University have heard this story.

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I have a friend in Montana who used to live in New Jersey and I grew up with her.

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And in any case, she actually married a real cowboy, believe it or not, from Montana.

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They live on a ranch.

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And one day she called me up and we were talking and she says, you know, I've got a new house.

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And I said, well, so you moved off the ranch?

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She says, no, no, no, she says, we had the house shipped in.

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So I said, what?

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She said, well, here in Montana, since labor is so scarce in Montana

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and therefore has a much higher value, you know, herding cattle,

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which they actually do, they have cattle drives and everything,

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it's very scarce and expensive, they don't build the houses on site.

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In fact, her house was built in Nebraska and these huge trucks

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haul the modular pieces of the house to the area where they're going to be built

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and they put them together so it's very capital intensive it uses a lot of

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capital because capital is relatively cheaper than than labor whereas in the

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Northeast of course where labor isn't scarce you know no one in their right

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mind would ever think of buying a house somewhere else and then having it shipped

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to where to where it's going to be you know the residence now could a socialist

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planner ever figure this out that you should build houses that are you know

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So, hundreds of miles away, and then have them shipped, without economic calculation, it's very unlikely, I mean, someone, they might figure it out, but it's extremely unlikely.

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Alright, let me just mention a few conclusions that we get from Mises' analysis.

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They tell 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.

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Even the term socialist planning or socialist economy is an oxymoron. Now, why is it an oxymoron?

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It's an oxymoron because not only do socialist planners make mistakes, but they can never know if they're making mistakes.

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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 to go in.

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So, in the same sense that Robinson Crusoe rationally allocates his resources, his labor, to the most highly valued consumer goods,

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the market economy with cardinal prices generated through entrepreneurial bidding and entrepreneurial forecasts

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can in effect allocate goods to their highest valued uses from the point of view of consumers.

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So the market economy operates rationally in the same sense that Robinson Crusoe operates rationally.

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The Soviet Union does not, or the former Soviet Union or any other centrally planned economy cannot do that.

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So in that sense they don't economize, there is no such thing as a socialist economy.

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It's an oxymoron, an inconsistent use of words.

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The reason being that they don't know how to allocate all these different resources with multiple uses among the most valuable uses.

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Even if they themselves are going to determine as dictators the most valuable uses.

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They can never know the trade-offs.

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Because, think about it, in our economy today, resources, let's take the U.S. economy, the available stock of capital goods,

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which approaches millions and millions and millions of units of capital goods, can be reallocated an infinite number of ways.

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There's an infinitude of different economies that we could create out of existing resources.

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In other words, there's a different number of different patterns of outputs that can be produced today.

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How do we figure out the right one?

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Well, we never know. There is a way of forecasting the right one, and that is through market prices and economic calculation.

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What happened in the Soviet Union was that they used a system called gross output planning.

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Okay, and there was the planning, Central Planning Board was a ghost plan.

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And basically what they did was that they would specify quantitative targets for output, okay.

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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, okay.

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So basically, they motivated the managers by giving them bonuses for meeting or exceeding the targets, okay.

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And they got a trip to the gulag for not meeting the targets consistently, okay?

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But what's interesting then, it turned into a system of mutual lying, of course.

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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?

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They raise the target, they say, aha, this factory can, you know, give us, has greater capacity.

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So the manager will always lie and say, that target's way too high, he'll try to get it down.

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And he'll make sure he maybe exceeds it a little bit, but not by much.

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And on the other hand, they know, the commissars of each industry know that he's lying,

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and so they'll raise it, so the information is completely distorted.

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The incentive is that information is not accurate.

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One of the interesting, funny, one of the jokes that was often made

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about the Soviet Union or one was when it was actually a cartoon and I can draw it here and what what it was was there was a huge nail okay and the nail is being is on a long train okay so you have a train here it's carrying the nail to wherever it's supposed to go you know when it's you know a hundred ton nail or something like that and then there's the

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And then there's the plant manager, and he's saying, well, comrade, he says, I've met my output target for this year, which was 100,000 tons of nails.

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He would always make the nails in the easiest possible way.

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That permits him to meet his target.

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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, or roofs.

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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.

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You've got to use more resources to make the smaller ones than the larger ones.

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And there's stories about smaller sizes of women's clothing not being available,

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everybody walking around in huge clothes, and so on.

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Because you make things as large as possible.

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Now, on the other hand, if they specify a number, then you make a lot of small nails,

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and the large nails will disappear.

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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,

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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.

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Seriously, there was kind of like people saying, what are you talking about?

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You know, Westerners didn't know what was going on here.

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They're pulling ceilings down.

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And of course, a big joke, the joke that went around in the 1970s was that

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Khrushchev in the 50s had banged a shoe on the podium at the United Nations

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and he said, you know, we will bury you, meaning economically, we will bury you.

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And so the Soviet economists told their Western counterparts,

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We'll bury all of you, except for Hong Kong, because we need to know prices, so we'll allow one small island where there are prices.

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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.

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But those prices were still inefficient because they didn't exactly reflect their local conditions.

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Now, what about the very existence of the Soviet Union?

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People later on said, well, Mises is obviously wrong, here it is, it's the 1930s and the Soviet Union hasn't collapsed yet.

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Well, Mises' impossibility thesis was not undermined, but he pointed out, in his first article he said,

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look, he said, real world socialist economies, such as the USSR, which was already in existence by 1920,

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he said, are not inconsistent with my thesis.

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He said, because they exist in a world of capitalist prices.

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He said, it's just like the post office.

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The post office, as inefficient as it is here in the United States,

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can exist and can go on in a fashion by using the prices that are generated around it.

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But Lenin, on the other hand, said that he wanted to turn the whole economy into a post office.

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If you're turning the whole world into a post office, then you have the problem of economic calculation.

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Now, it's not to say that using world prices that don't reflect scarcities in your area or in your economy

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will allow you to be very, very productive, and the Soviet Union wasn't very productive, okay,

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despite CIA statistics, and then Paul Samuelson and Galbraith, along with the CIA,

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who claimed that the Soviet Union was catching us and that eventually there would be a convergence

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and their rate of growth would eventually surpass us, and they'd be eventually a bigger absolute economy than us,

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and also other nonsense, okay.

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And also in the Soviet Union there were black markets and there was a system of bribes between social enterprises.

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There was trade, even though it wasn't supposed to be.

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If someone had an excess of nails and needed copper wiring, they would trade.

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And there were brokers who would buy and sell, you know, who would broker the deals.

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And so these were a system of bribes called BLAT, B-L-A-T.

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Also, there was other black markets, the purchase of Beatle albums and jeans and so on in the Soviet Union.

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Because of foreign hard currency, the Soviet authorities looked the other way.

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Was there a true period of socialist economic planning? Yes, there was, war communism.

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Socialism really existed from about 1917 to 1921 during the period of the counter-revolution in Russia, the fight, the war between the whites and the reds.

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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.

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In any case, everything started to break down.

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Lenin said, we are abolishing money, we're abolishing all accounting and money prices,

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and we're going to just have accounting in natural units.

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How can you have that? Natural units, as I showed, tons of steel, kilowatts, hours of electricity,

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they're heterogeneous, you can't add them up.

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You can't get a single figure for cost.

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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, the cities were emptying out by 1921, they were going into the countryside and leading a nomadic existence.

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That's what socialism leads to, a complete breakdown of the social division of labor.

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Universal Brigandage, they're just forging and stealing, these small household groups or small bands fighting with one another for resources.

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So yeah, socialism can exist after fashion, but it's impossible to run the social division of labor at a high level without economic calculation.

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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.

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At least Lenin was moving in the right direction. He allowed some exchange and so on.

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and so on.

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Now let me just talk a little bit about the intellectual division of labor and what I think is one of my contributions here.

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I mean it's really in Mises but I think I brought it out a little bit more.

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And this is the social appraisal process.

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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?

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How is all of that information and knowledge translated into objective cardinal numbers that can be used meaningfully in economic calculation?

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So, I call this a social appraisal process. Mises uses the word appraisement in two different senses.

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And here's what we have. You have the entrepreneur at the center here.

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The entrepreneur wants to earn pure profit. He wants to buy resources at a price that is lower than the expected output prices of whatever production process he is engaged in.

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So, what the entrepreneur starts off as doing is the following, he has experience of what present prices are.

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Now, the prices that exist right at this moment have now become past prices.

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So, the price that was just paid for a bottle of wine over at Kroger's just now is now, we might call it a present price, but it's a past price.

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And entrepreneurs have experience of immediately past prices, which Mises calls present prices.

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And they have experience of present market conditions.

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They have experience of what goods consumers are demanding,

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or that are in heavy demand by consumers, and what goods aren't being demanded.

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That is, they have experience of profits and losses that are currently occurring.

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Now, that has no direct relevance, and here's where I think Mises and Hayek differ.

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has no direct relevance, present prices and profits and losses,

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to what decisions entrepreneurs are going to make in producing today.

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Why? Because production today is always for a future market, okay?

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To produce an American car used to take, from the drawing board to the dealer's showroom, seven years.

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So, you, when you decide to begin to build equipment and invest in producing a line of automobiles,

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that's seven years before the fact.

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You're not interested in what the price of an automobile is today.

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You're interested in it as a starting point, okay?

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And then what you have to do is to forecast,

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and Mises used the word understanding, based on your experience,

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You apply your understanding or forecast of how consumer tastes, resources, and technology will change over the course of the production period.

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All right. But that's still qualitative. We still don't have prices.

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Well, given that you're starting from a present price, you can say, all right, I think demand is going to go up for these automobiles so that in seven years they're not going to be worth $18,000, they'll be worth $22,000.

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So even if this particular automobile or type of automobile is losing money today you may very well decide to go on with production of it.

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So in that sense, present prices are not a guide to actions that are oriented towards the future.

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And here's, I think, one of the biggest sticking points in the debate, the current debate over the debate.

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Now, based on their appraisements,

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okay, now, what entrepreneur appraisement means,

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to put a cardinal number, a price,

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based on qualitative information on a good.

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So, individual entrepreneurs all begin to appraise the prices of the goods

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that they're going to produce in the future.

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So, for example, it could be a good that doesn't even exist.

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Stephen, I don't know if it's, is it Job's or Jobs? I don't know how to pronounce it, the founder of Apple, okay?

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He's sitting in his garage, or so the story goes.

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IBM has developed, late 70s, early 80s, the technology for PC.

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President of IBM at the time, appraises the future very wrongly,

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says that PCs will only be household toys to play games on.

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They'll never have a widespread use in the business world.

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So, I think his name is Watson at the time,

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goes on with production decisions to continue to produce huge mainframe computers.

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Stephen Jobs appraises prices of personal computers differently.

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He believes that, in fact, they will be used in business, okay?

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They'll be more than just gadgets for kids to play video games on or whatever.

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And he goes on with the production. Now, based on all of that, the entrepreneurs, based on their conflicting or competing visions of what future prices of different consumer goods will be, go to the resource market and they bid prices for those resources.

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And in bidding, based on their expectations of future prices of consumer goods, it's at that point that we get a whole structure of resource prices.

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and that is social appraisement, okay? No one mind determines what those resource prices will be.

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It's the hundreds of thousands of entrepreneurs bidding on the basis of their individual visions of what future market conditions will be,

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of what future prices will be, who determine, given the supplies of the various resources and decisions made by resource owners,

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that bidding determines the prices of resources.

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So now, every single resource right now, every ton of steel, any input into any process, has a price.

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And so it allows the entrepreneurs, okay, bidding against one another, to determine if their production project is profitable, okay, or expected to be profitable, or if it is not.

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So, the existing resources go to the most highly valued uses as anticipated by entrepreneurs.

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They don't know for sure. They anticipate it.

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And this changes. Changes not just from year to year, but from day to day.

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It's continual change. Continual revision of decisions.

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So, unlike Hayek and Kirzner who claim that present prices give us knowledge,

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No, present prices don't give us any knowledge.

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In fact, you have to know, there's this famous tin example by Hayek, he says,

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look, he says, no one has to know the conditions in the tin market.

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Let's say that there's a strike in Bolivia and it's impending.

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In a month or two, unions are threatening to go on strike, supply of tins is going to decrease,

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Prices are going to go up and therefore builders here in the United States are going to have to or users of tin here in the United States are going to have to substitute other materials such as plastic and copper and so on.

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Well, according to Hayek, when that occurs, prices change and the user of tin here in the United States automatically then substitutes something cheaper, plastic.

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The demand for plastic goes up. Price of plastic goes up.

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Well, the users of plastic don't have to know why that happens, they have to economize.

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So, they produce fewer skateboards, let's say, because they're made of plastic.

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Or they substitute other composite materials for plastic.

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And then, so that the demand for something else goes up.

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And this ripples through the economy, and isn't this nice, the way all this knowledge is spread through the economy,

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simply by prices, people don't have to know anything else.

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Well, if you're an entrepreneur and you forecast market conditions, you have qualitative knowledge, you're a user of TIN and you say,

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hey, you know what? TIN is going to go up in price. You read the trade journals, you have an idea that there's going to be some sort of, you or speculators do,

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that there's going to be some kind of disruption of the TIN supply. You jump in as an entrepreneur or a speculator, you buy up the TIN now and you sell it later.

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Or, if you're a producer, you immediately start buying plastic at a lower price today,

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because you know you're going to have to shift to it, rather than use the TIN.

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And you earn profits.

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So even in Hayek's TIN example, there is a mistake, I believe, that somehow present prices are all that is needed.

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Now, Roger Garrison has disagreed with me and said, well, you know, prices are guides, they're not marching orders.

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Hayek says that somewhere. Hayek does say that. But if you read Hayek's work, it works very closely.

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He keeps lapsing back into this terminology that somehow prices...

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He points out that in the market economy, prices do their job because they're always very close to equilibrium.

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Which, according to Mises, of course, they're not, in fact, the prices that are relevant for today don't even exist yet.

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And the resource prices, they're no guides because resource prices themselves are determined by prices that people expect to emerge in the future of consumer goods.

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So, it's expectations of the future that determine present prices of resources, which are relevant to entrepreneurial decisions.

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But the point is entrepreneurs have to have a lot of other information besides prices to make their forecast of the future.

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So present prices depend on information.

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Not the other way around.

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It's not that you don't need information or knowledge because present prices give them to you,

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but rather it's that you need the knowledge and so on as an entrepreneur to forecast the future in order to make reasonable bids for resources.

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So now, as I'm showing in a moment that the state of the debate has become, in fact maybe I'll do that now, there's been a closing of the gap.

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Steve Horowitz, in an article in the History of Political Economy, has made some significant admissions, though I don't want to say that he agrees with me on everything.

385
00:44:13.260 --> 00:44:24.260
He said a few following. First of all, his article called monetary calculation of Mises, he says there are two important implications of this argument.

386
00:44:24.260 --> 00:44:38.260
First, given that later participants in the calculation debate, including Hayek, downplayed Mises' emphasis on monetary calculation and ignored its relationship with the use and functions of money and monetary institutions,

387
00:44:38.260 --> 00:44:45.260
A re-emphasis of the monetary roots of the Mises critique enables us to view the calculation debate through a fresh lens.

388
00:44:45.260 --> 00:44:49.260
Meaning Mises always, always focused on money prices.

389
00:44:49.260 --> 00:44:54.260
That's another reason why the general equilibrium criticisms of von Mises later on didn't hold water.

390
00:44:54.260 --> 00:45:01.260
I'll talk about the socialist criticisms in a few minutes, but it didn't hold water because Mises wasn't talking about general equilibrium.

391
00:45:01.260 --> 00:45:05.260
You don't have money prices in general equilibrium. You have only barter prices.

392
00:45:05.260 --> 00:45:14.260
A few other things that Horowitz said. He says that Mises' elaboration of this point centered around the use of money prices.

393
00:45:14.260 --> 00:45:23.260
And again, Hayek doesn't stress money prices like Mises does. But now Steve is doing that.

394
00:45:23.260 --> 00:45:31.260
A couple of other statements he makes. He says, as accurate as these arguments were, and these are the arguments from the use of knowledge in society,

395
00:45:31.260 --> 00:45:36.260
and society when applied its most famous articles and its other very famous article, Economics and Knowledge.

396
00:45:36.260 --> 00:45:42.260
So he says as accurate as these arguments were and as much as they were crucial to the recent revival of Austrian economics,

397
00:45:42.260 --> 00:45:48.260
they largely neglected the original monetary themes that pervaded Mises's 1920 article.

398
00:45:52.260 --> 00:45:58.260
And he also says it was to the process of actual exchanges against money that competing entrepreneurs endowed prices

399
00:45:58.260 --> 00:46:03.460
with their own appraisals of existing and expected market conditions.

400
00:46:03.460 --> 00:46:07.560
So the prices aren't something that are automatically there telling entrepreneurs what to do.

401
00:46:07.560 --> 00:46:12.960
It's the entrepreneurs themselves who I call the social appraisal process.

402
00:46:12.960 --> 00:46:19.760
By the way, Mises says that the problem of socialism isn't a problem of knowledge.

403
00:46:19.760 --> 00:46:24.060
He says it's a problem of one will acting.

404
00:46:24.060 --> 00:46:25.860
Very stark statement.

405
00:46:25.860 --> 00:46:28.220
What does that mean, the problem of one will acting?

406
00:46:28.220 --> 00:46:31.940
What it means is, if you, instead of the entrepreneur there,

407
00:46:31.940 --> 00:46:37.740
if you have one monopolist who owns all the factors of production,

408
00:46:37.740 --> 00:46:42.020
he owns all of those things, then there's no bidding process.

409
00:46:42.020 --> 00:46:45.900
Then there's no way of generating prices.

410
00:46:45.900 --> 00:46:50.860
So, where there's one will, and Murray Rothbard, by the way, expanded that to say,

411
00:46:50.860 --> 00:46:55.700
you couldn't have one big cartel in a market economy that owns everything for the same reason.

412
00:46:55.700 --> 00:47:02.700
It would immediately break down, it would become chaotic, it would lose money and it would produce the wrong things and it would break down.

413
00:47:02.700 --> 00:47:04.700
Because it's the same problem as socialism.

414
00:47:05.700 --> 00:47:13.700
So one last point that is made by Steve Horowitz.

415
00:47:17.700 --> 00:47:24.700
He says, monetary calculation is intricately linked with Mises' conception of the entrepreneur.

416
00:47:25.700 --> 00:47:32.940
Salerno has rightly called attention to Mises' very important discussion of valuation and appraisement.

417
00:47:32.940 --> 00:47:39.100
What entrepreneurship is for Mises is the formulation of an expectation of the future constellation of prices,

418
00:47:39.100 --> 00:47:45.260
as I've shown here, and the attempt to see opportunities within that vision that others do not currently notice.

419
00:47:45.260 --> 00:47:52.460
So Steve Jobs sees something that others did not notice,

420
00:47:52.460 --> 00:47:59.060
is that, in fact, PCs will be widely demanded in the future by businesses, and he was correct.

421
00:47:59.060 --> 00:48:08.460
IBM, on the other hand, loses $13 billion in 1990-1991 because of the decisions they make in the early 1980s

422
00:48:08.460 --> 00:48:12.860
and continuing to produce mainframes.

423
00:48:12.860 --> 00:48:20.860
So, the largest loss in industrial history, I think GM's loss of $2 billion last quarter

424
00:48:20.860 --> 00:48:25.860
is something like the third-largest loss or something like that, because they have made mistakes.

425
00:48:27.660 --> 00:48:30.860
So this is what Mises calls the intellectual division of labor.

426
00:48:30.860 --> 00:48:32.860
It has nothing to do with dispersion of knowledge.

427
00:48:33.360 --> 00:48:35.160
Hayek talks about the division of knowledge.

428
00:48:35.160 --> 00:48:36.760
Mises talks about the intellectual division of labor.

429
00:48:36.760 --> 00:48:37.660
What does that mean?

430
00:48:37.660 --> 00:48:43.160
It means this, that every one of us are involved in the social appraisal process

431
00:48:43.160 --> 00:48:48.060
as consumers bidding for consumer goods against existing stocks,

432
00:48:48.060 --> 00:48:50.660
which gives consumer prices to the entrepreneurs,

433
00:48:50.660 --> 00:48:55.740
and as owners of labor and other resources who are reacting to bids by the entrepreneurs

434
00:48:55.740 --> 00:48:57.780
and of course the entrepreneurs themselves.

435
00:48:57.780 --> 00:49:05.540
Every human being in a market society is involved in the social appraisal process.

436
00:49:05.540 --> 00:49:09.860
And that's what Mises means by the intellectual division of labor.

437
00:49:09.860 --> 00:49:17.580
I stress that point because others have claimed, well, he's talking about the division of knowledge.

438
00:49:17.580 --> 00:49:21.340
And, you know, he really is not, okay.

439
00:49:23.300 --> 00:49:30.860
Okay, we have a few more minutes. I'll talk a little bit about what the socialist response to Mises was,

440
00:49:31.100 --> 00:49:33.380
what Mises' response to the socialists were,

441
00:49:35.220 --> 00:49:39.980
or responses to the socialists were, and what Hayek's later responses to the socialists were.

442
00:49:41.020 --> 00:49:42.380
What Mises,

443
00:49:42.380 --> 00:49:56.380
When he first wrote the article, it was written in German, and it was German Marxists, basically, that tried to respond to him.

444
00:49:56.380 --> 00:50:10.380
The dumbest response came from Otto Neurath, who was in Boehm-Bawerk's seminar, interestingly enough, with Mises and with Schumpeter and with other famous economists.

445
00:50:10.380 --> 00:50:14.380
And he said, what's the problem? What is Mises talking about?

446
00:50:14.380 --> 00:50:19.380
He says, under socialism we'll abolish money and we'll have what he called innatura calculation.

447
00:50:19.380 --> 00:50:23.380
That is, we'll have accounting in kind.

448
00:50:23.380 --> 00:50:29.380
Of course, this dismisses the whole idea that you can't add apples and oranges, which we all learn in first grade.

449
00:50:29.380 --> 00:50:37.380
That the heterogeneity of goods, when you have the heterogeneity of goods, there is no common denominator.

450
00:50:37.380 --> 00:50:43.380
To add up these units of goods. You can't add up, as I said, tons of steel, labor, and so on.

451
00:50:43.380 --> 00:50:48.380
So Mises had already disposed of that criticism in the original article.

452
00:50:51.380 --> 00:50:57.380
Secondly, other Marxists said, well, you know, we'll have calculation in terms of labor hours.

453
00:50:57.380 --> 00:51:02.380
Labor is homogeneous. We'll just add up the number of labor hours it takes to produce goods.

454
00:51:02.380 --> 00:51:14.380
And that will tell us our costs, so then we'll at least know the relative costs of different things and then the planners can make their decisions based on their own value scales.

455
00:51:14.380 --> 00:51:21.380
Well, first of all, of course, labor itself is heterogeneous, Mises said, and of different quality.

456
00:51:21.380 --> 00:51:28.380
Just, for example, watch the NBA championship game tonight between the Spurs and the Pistons.

457
00:51:28.380 --> 00:51:37.380
You'll see, they're all basketball players, they're all working for the same amount of time, but their skills are tremendously different.

458
00:51:37.380 --> 00:51:43.380
Even in the same industry, labor is not homogeneous, let alone between industries.

459
00:51:43.380 --> 00:51:50.380
How do you compare an hour of labor of the ditch digger to an hour of labor of the brain surgeon, and so on.

460
00:51:50.380 --> 00:51:55.380
So he immediately, he already responded to that.

461
00:51:55.380 --> 00:52:08.380
Secondly, that answer leaves out of account the fact that you have to take into account or account for the value of capital goods.

462
00:52:08.380 --> 00:52:14.380
Obviously, we have more capital goods producing a good. The hours of labor that you need are going to be lower.

463
00:52:14.380 --> 00:52:24.380
So you're not going to get a true accounting of costs when you leave out of account capital goods, which are heterogeneous and which you can't add up in terms of hours of labor.

464
00:52:24.380 --> 00:52:29.380
So capital goods are scarce, they must be economized.

465
00:52:29.380 --> 00:52:39.380
Third answer is a little bit more, I wouldn't say sophisticated, but a little more clever.

466
00:52:39.380 --> 00:52:47.380
The socialist says, wait a minute, you claim capitalism works well, that under capitalism,

467
00:52:47.380 --> 00:52:53.380
there's a tendency to produce the correct goods that are demanded by consumers and to use the correct technical methods.

468
00:52:53.380 --> 00:53:08.380
What we'll do is, we'll allow simply, we'll tell managers, just keep doing, we'll keep the same managers, keep doing what you're doing, right?

469
00:53:08.380 --> 00:53:14.380
You just keep producing the same goods, use the same methods. We don't need accounting, we don't need prices.

470
00:53:14.380 --> 00:53:16.380
Well, of course, what's wrong with that?

471
00:53:16.380 --> 00:53:22.780
The market economy's dynamic is a continuous change in technology, in consumer demand, in resources.

472
00:53:22.780 --> 00:53:28.580
Some resources are becoming completely depleted, where new sources of resources are being opened up.

473
00:53:28.580 --> 00:53:37.280
So to make a long story short, that only applies that argument to a static or stationary economy where there is no change.

474
00:53:37.280 --> 00:53:44.280
And in general equilibrium, in a static economy, no one would need to know prices.

475
00:53:44.280 --> 00:53:46.360
keep doing the same things over and over again.

476
00:53:46.360 --> 00:53:48.960
That's what Mises called the evenly rotating economy.

477
00:53:48.960 --> 00:53:51.160
It's the same things every year.

478
00:53:51.160 --> 00:53:54.360
There's no need to change because there is no exogenous change.

479
00:53:54.360 --> 00:53:59.560
No one changes, their preferences, technology remains static and so on.

480
00:53:59.560 --> 00:54:03.440
It's precisely in a dynamic economy where every minute things are changing

481
00:54:03.440 --> 00:54:08.760
and you want to make sure that there's a way of continually reshuffling resources

482
00:54:08.760 --> 00:54:11.920
so that you're producing the most highly valued

483
00:54:11.920 --> 00:54:16.120
and not producing something that has a lower value than something that you're not producing.

484
00:54:16.120 --> 00:54:19.820
It's only in that situation where economic calculation is important.

485
00:54:21.820 --> 00:54:31.920
So that was Mises' responses to the more naive Marxist replies to his original article.

486
00:54:32.420 --> 00:54:39.720
All right, now in the 1930s then, this socialist debate breaks out in Great Britain and the United States.

487
00:54:39.720 --> 00:54:52.420
And there's a number of neoclassically trained economists, in a neoclassical sense, very good economists, that respond to Mises.

488
00:54:52.420 --> 00:55:02.420
Oskar Lange, who eventually went back to Poland and became an apparatchik in Poland, but was trained at the University of Chicago.

489
00:55:02.420 --> 00:55:06.720
Abba Lerner, who was trained at the London School of Economics.

490
00:55:06.720 --> 00:55:21.720
Some of their responses went as follows, one response was, well, we'll just use a system of simultaneous equations which embody the data, the consumer value scales, production functions and resource availabilities.

491
00:55:21.720 --> 00:55:33.720
And when we solve this system of equations, we will get the equilibrium prices and equilibrium quantities, including the equilibrium input and output combinations.

492
00:55:33.720 --> 00:55:44.720
So, as long as we have all the data that are needed to insert into our equations, we will get the optimal pattern of output and the optimal prices.

493
00:55:46.720 --> 00:55:54.720
But, in fact, Barone and Pareto, two general equilibrium theorists, Barone was Pareto's student who wrote before Mises,

494
00:55:54.720 --> 00:56:03.720
pointed out that even a very small economy would take thousands and thousands and thousands of equations which could not be solved.

495
00:56:03.720 --> 00:56:06.720
This is the era before computers.

496
00:56:06.720 --> 00:56:10.720
But that's not Mises' critique.

497
00:56:10.720 --> 00:56:15.720
A second socialist response to Mises is the trial and error method.

498
00:56:15.720 --> 00:56:17.720
This is the Lange-Leuner solution.

499
00:56:17.720 --> 00:56:21.720
Also an American economist named Fred M. Taylor advanced this sort of a solution.

500
00:56:21.720 --> 00:56:27.720
Here you tell the Central Planning Board, directs the managers and firms of industries to follow some very simple rules.

501
00:56:27.720 --> 00:56:32.720
They say one, make sure input and output decisions are based on prices.

502
00:56:32.720 --> 00:56:35.720
And we, the Central Planning Board, are going to set these prices.

503
00:56:35.720 --> 00:56:40.720
So you simply take the prices as, they use the word parametric.

504
00:56:40.720 --> 00:56:49.720
They're parameters.

505
00:56:49.720 --> 00:56:54.720
You don't question these prices, these consumer goods prices and these input prices.

506
00:56:54.720 --> 00:57:02.720
You simply take them as parametric and then in each firm you minimize the average cost of producing any particular good.

507
00:57:02.720 --> 00:57:06.720
You don't try to maximize profit, you simply minimize cost.

508
00:57:06.720 --> 00:57:18.720
And in the industry you tell the commissar of the industry that he is to allocate output produced up to the point where

509
00:57:18.720 --> 00:57:26.220
where the last unit of output produced has a marginal cost equal to price, okay?

510
00:57:26.220 --> 00:57:31.720
So you allocate the output among the various industries or various firms in your industry

511
00:57:31.720 --> 00:57:37.740
so that price equals marginal cost, which they claim is what happens in perfect competition,

512
00:57:37.740 --> 00:57:41.180
as does the minimization of loan on average cost.

513
00:57:41.180 --> 00:57:46.220
Finally, prices in all consumer goods markets and all producer goods markets would be set

514
00:57:46.220 --> 00:57:50.220
by the Central Planning Board using trial and error, that's what's called a trial and error method.

515
00:57:50.220 --> 00:57:54.220
What does that mean? That means that if they set a price of steel, let's say $400,

516
00:57:54.220 --> 00:57:58.220
and at that price there's a surplus of steel,

517
00:57:58.220 --> 00:58:03.220
then what they're going to do in the next period is lower the price until the surplus is wiped out.

518
00:58:03.220 --> 00:58:08.220
And they'll find the equilibrium price in that fashion. They'll find the right price.

519
00:58:08.220 --> 00:58:13.220
And eventually competitive equilibrium will be established.

520
00:58:13.220 --> 00:58:31.220
So, this would ensure that the prices and quantities of competitive equilibrium emerge in a socialist economy and in fact they point out it would be superior to the real market economy because like Knight and others, they believe that the real market economy is full of monopoly.

521
00:58:31.220 --> 00:58:41.220
So, we won't have monopoly because we'll have these producers setting their prices equal to low and average cost and make sure that price on the industry level is equal to marginal cost.

522
00:58:41.220 --> 00:58:44.860
All right. Now, Hayek and Robbins were the first to answer this.

523
00:58:47.260 --> 00:58:51.860
They answered these criticisms with articles written in the 1930s.

524
00:58:52.500 --> 00:58:57.180
And basically, they focused on a dispersion of knowledge in the economy.

525
00:58:57.580 --> 00:59:01.620
So, in response to the mathematical solution, Hayek said,

526
00:59:01.620 --> 00:59:04.980
well, socialism is possible in some sense, but it's highly impractical.

527
00:59:06.020 --> 00:59:08.580
He admitted, being a student of Wieser,

528
00:59:08.580 --> 00:59:14.580
that theoretically, if you had all the data, you could solve the calculation problem.

529
00:59:14.580 --> 00:59:24.580
But, practically it's impossible because first of all, the economic data are widely scattered and they're subjective in nature.

530
00:59:24.580 --> 00:59:34.580
So it will be very difficult to get the data to those people that are going to insert them into the equations and solve for the equilibrium quantities and prices.

531
00:59:34.580 --> 00:59:45.580
And secondly, as Hayek pointed out, even if the data were collected, the system of equations would be much too large to solve in this era before computers.

532
00:59:45.580 --> 00:59:55.580
And finally, Hayek points out, even if the system of equations could be solved once, the data are continually changing.

533
00:59:55.580 --> 00:59:56.580
We live in a changing world.

534
00:59:56.580 --> 01:00:03.580
So in a dynamic economy, you have to repeatedly collect new data and resolve the equations.

535
01:00:03.580 --> 01:00:11.580
So, it would not permit a very good solution of the economic calculation problem.

536
01:00:11.580 --> 01:00:19.580
Secondly, in response to the trial and error method, which came to be called market socialism,

537
01:00:19.580 --> 01:00:26.580
and by the way, these 1930 responses, especially this trial and error method, is conceding me to this point.

538
01:00:26.580 --> 01:00:32.580
at this point, the fact that you do need prices, whether they're generated mathematically

539
01:00:32.580 --> 01:00:37.020
or they're generated by some sort of what we call a competitive solution of market socialism,

540
01:00:37.020 --> 01:00:38.100
you need prices.

541
01:00:38.100 --> 01:00:43.900
So they were already agreeing that you have to have economic calculation.

542
01:00:43.900 --> 01:00:49.500
So Hayek's critique is pretty insightful of the market socialism and the trial and error

543
01:00:49.500 --> 01:00:50.500
method.

544
01:00:50.500 --> 01:00:56.060
He says, all right, again, there's a dispersion of knowledge throughout society, which is

545
01:00:56.060 --> 01:00:59.060
is one of many problems facing the central planning board.

546
01:00:59.060 --> 01:01:02.760
And this would lead to great inefficiency for the following reasons.

547
01:01:02.760 --> 01:01:07.660
Number one, the central planning board could not change prices as rapidly as the market.

548
01:01:07.660 --> 01:01:10.660
How long would it take them to change the price of steel?

549
01:01:10.660 --> 01:01:14.860
The market can change the price of steel from moment to moment.

550
01:01:14.860 --> 01:01:19.860
Commodities markets change the prices of commodities from second to second.

551
01:01:19.860 --> 01:01:23.960
But it would take time to change all prices from the center.

552
01:01:23.960 --> 01:01:30.760
So you could change prices, but they would be always on a monthly basis or quarterly basis, whatever it would be.

553
01:01:30.760 --> 01:01:34.360
It would be much slower than it would be in the market economy.

554
01:01:34.360 --> 01:01:42.160
Secondly, Hayek pointed out, since you couldn't get all the local information to the central planning board,

555
01:01:42.160 --> 01:01:47.660
the price changes would not embody all the information that they do under a market economy,

556
01:01:47.660 --> 01:01:51.060
where the entrepreneur knows the local conditions and can change them immediately.

557
01:01:51.060 --> 01:01:59.660
Okay, so basically Hayek's argument stressed a lack of means of communication for knowledge.

558
01:01:59.660 --> 01:02:10.160
Okay, and it concluded that socialism was very, very inefficient and, but not impossible, right?

559
01:02:10.160 --> 01:02:19.660
Alright, socialism would calculate a day late, or a month late, or two months late, but there would be some sort of calculation.

560
01:02:19.660 --> 01:02:25.660
Now, what about the critique of Mises? Mises said, even if the director knew all the information,

561
01:02:25.660 --> 01:02:31.660
so he immediately puts aside Hayek's problems, he says, let's assume they know all the information,

562
01:02:31.660 --> 01:02:35.660
though he doesn't deny that Hayek's right in saying that they wouldn't, but let's assume they do.

563
01:02:35.660 --> 01:02:41.660
He said, he would still not be able to use mathematical equations to find the competitive equilibrium,

564
01:02:41.660 --> 01:02:48.660
the competitive prices and quantities, because, think about it, today's capital, today's machinery,

565
01:02:48.660 --> 01:02:53.780
Today's machinery and factories and so on, are not the right ones.

566
01:02:53.780 --> 01:02:59.160
They embody all errors that have been made by entrepreneurs in forecasting the future.

567
01:02:59.160 --> 01:03:03.260
So they have to be continually changed.

568
01:03:03.260 --> 01:03:05.700
So these are not true data.

569
01:03:05.700 --> 01:03:12.300
You have to continually change, even if you knew the future was going to be certain, it

570
01:03:12.300 --> 01:03:15.220
wasn't going to change for another three or four years, whatever it was, you still have

571
01:03:15.220 --> 01:03:25.220
You have to change the capital stock over time from day to day, as certain machines wear out you have to change them and adapt them to new technology that has developed in the past.

572
01:03:25.220 --> 01:03:39.220
As Mises points out, for example, would we have built the railroads, which have lost money since World War I, would we have built the railroads as they were built if they knew that the airline industry was going to develop?

573
01:03:39.220 --> 01:03:44.620
No. So, as railroads wear out, you don't replace them with the same thing,

574
01:03:44.620 --> 01:03:48.220
which is what a general equilibrium solution would do, okay?

575
01:03:48.220 --> 01:03:52.920
You don't replace them with the same thing, you need new and different and better capital goods.

576
01:03:52.920 --> 01:03:59.220
And you can only, the only way to do this, the only way to know how to change your inputs

577
01:03:59.220 --> 01:04:04.320
and make new inputs, different inputs, is through profits and losses, everyday profits and losses.

578
01:04:04.320 --> 01:04:09.600
and an equilibrium mathematical solution, there are no profits and losses.

579
01:04:09.600 --> 01:04:11.680
Everybody gets their marginal revenue product.

580
01:04:11.680 --> 01:04:14.600
Everything is completely adjusted. There are no profits, there are no losses.

581
01:04:14.600 --> 01:04:18.560
So, you could not ever reach the equilibrium state.

582
01:04:18.560 --> 01:04:21.280
And the second point that Mises makes is,

583
01:04:21.280 --> 01:04:25.520
let's assume you know everything about the equilibrium state.

584
01:04:25.520 --> 01:04:29.320
Not what exists today, but you know exactly what capital should look like.

585
01:04:29.320 --> 01:04:34.120
You know exactly which goods, you know, how many airplanes you should have,

586
01:04:34.120 --> 01:04:38.220
how many railroads you should have in the future, where they should go,

587
01:04:38.220 --> 01:04:43.420
how many highways should be built, where laborers, you know, housing patterns,

588
01:04:43.420 --> 01:04:46.320
how that should be changed or where they will be in the future.

589
01:04:46.320 --> 01:04:49.220
Let's say you know that, that 10 years out of line, everything should be this way.

590
01:04:49.220 --> 01:04:51.320
So you know the equilibrium.

591
01:04:51.320 --> 01:04:58.220
Mises points out, but in that case, you're now here with this equilibrium stock of everything.

592
01:04:58.220 --> 01:05:04.020
How do you change it in a way that uses the goods that exist today

593
01:05:04.020 --> 01:05:07.020
in their best uses.

594
01:05:07.020 --> 01:05:10.020
He says without profit and losses, once again, you can't do it.

595
01:05:10.020 --> 01:05:13.020
And since you don't have a market, he says you don't have profits and losses.

596
01:05:13.020 --> 01:05:17.020
So you'll never get to that equilibrium.

597
01:05:17.020 --> 01:05:22.020
And Mises points out, that's just assuming that you know all this stuff.

598
01:05:22.020 --> 01:05:25.020
In a real market economy where things are changing every day,

599
01:05:25.020 --> 01:05:29.020
the equilibrium that you're aiming at changes every moment.

600
01:05:29.020 --> 01:05:33.020
There's a new equilibrium that the market economy is aiming at.

601
01:05:33.020 --> 01:05:45.720
Rothbard uses the metaphor of a rabbit chasing a, I'm sorry, in a dog race, the dog's chasing a mechanical rabbit, okay, they never catch it.

602
01:05:45.720 --> 01:05:50.220
So the equilibrium position is changing moment to moment.

603
01:05:50.220 --> 01:05:55.520
So even if you knew it, you still need profits and losses, it's changing.

604
01:05:55.520 --> 01:06:00.720
So you always want to make the best possible use of your resources today and you need profits and losses.

605
01:06:00.720 --> 01:06:03.920
and an equilibrium solution never gives you profits and losses.

606
01:06:03.920 --> 01:06:08.920
It doesn't tell you, today, you have too much of this and too little of that, all right?

607
01:06:10.920 --> 01:06:16.920
Finally, now, Mises' critique of competitive socialism, or I'm sorry, of market socialism,

608
01:06:16.920 --> 01:06:21.520
and the trial and error method, is completely different from Hayek's.

609
01:06:21.520 --> 01:06:29.920
He says that the distinctive mark of socialism is the oneness and indivisibility of the will directing all production activities.

610
01:06:29.920 --> 01:06:31.920
Now, keep that in mind.

611
01:06:31.920 --> 01:06:38.920
No matter how you try to play market, Mises says all they're doing is like children playing a game, they're trying to play market, okay?

612
01:06:38.920 --> 01:06:45.920
Let's say you have all of these different, you've given the rules to the managers of the firms and the heads of the industries,

613
01:06:45.920 --> 01:06:54.920
and you tell them to go about minimizing costs and producing up to the point where marginal cost is equal to price.

614
01:06:54.920 --> 01:07:05.620
He says, this completely misconceives the nature of capitalism. Capitalism isn't a static managerial system. Capitalism is an entrepreneurial system.

615
01:07:05.620 --> 01:07:13.320
How are they going to know when they should shut down their plants? When they should build different plants? That's the whole point of capitalism.

616
01:07:13.320 --> 01:07:18.820
So Mises says, they're just playing market. Capitalism is not a managerial system, it's an entrepreneurial system.

617
01:07:18.820 --> 01:07:24.500
For example, as I pointed out, GM is now cutting back its capacity by 18 percent.

618
01:07:24.500 --> 01:07:29.140
It's firing 25,000 workers, closing down plants, okay?

619
01:07:29.140 --> 01:07:36.060
There's no, with these rules given by the trial and error method, there is no way of doing that.

620
01:07:36.060 --> 01:07:43.060
So Mises points out that the key is the capital markets,

621
01:07:43.060 --> 01:07:51.140
that you're going to have to have investors who will shift their funds out of industries

622
01:07:51.140 --> 01:07:55.220
that are losing into industries in which there are prospective profits.

623
01:07:57.220 --> 01:08:03.540
So to use Schumpeter's term, capitalism is a process of creative destruction.

624
01:08:03.540 --> 01:08:08.100
You have to have profits and losses, which you're not given by any sort of equilibrium method,

625
01:08:08.100 --> 01:08:11.500
to know which industries to destroy, which jobs to destroy,

626
01:08:11.500 --> 01:08:14.780
and which new industries to put in their place,

627
01:08:14.780 --> 01:08:17.820
and which new jobs to create in their place.

628
01:08:17.820 --> 01:08:22.540
As he points out, he says that under capitalism, the managers don't make the final decisions.

629
01:08:22.540 --> 01:08:28.620
They're completely constrained by the stock market, the credit markets and the commodities markets.

630
01:08:28.620 --> 01:08:33.380
But as he points out, these are what are absent under socialism.

631
01:08:33.380 --> 01:08:37.780
These markets, which control the flow of capital in a dynamic system.

632
01:08:37.780 --> 01:08:45.220
But, the response to Mises was,

633
01:08:45.220 --> 01:08:48.660
well, you know what, we'll have a socialist investment bank,

634
01:08:48.660 --> 01:08:53.900
and we'll have these funds that will be bid for by the socialist managers,

635
01:08:53.900 --> 01:08:56.220
or the industry heads, whatever,

636
01:08:56.220 --> 01:08:59.940
and they'll bid for it according to an interest rate,

637
01:08:59.940 --> 01:09:01.860
and we will then loan the money out.

638
01:09:01.860 --> 01:09:05.140
But Mises says, this is just playing a child's game.

639
01:09:05.140 --> 01:09:06.780
Because you still have what?

640
01:09:06.780 --> 01:09:10.700
one mind setting up the rules under which these people can bid.

641
01:09:11.900 --> 01:09:20.820
So it's a game. It's not real markets where you have real trade in various shares of stocks and in bonds and so on.

642
01:09:21.300 --> 01:09:25.100
And very interestingly, Rothbard points out that he once asked Mises,

643
01:09:27.020 --> 01:09:33.060
having in mind, for example, Sweden, people used to argue in the 60s, is Sweden a socialist economy?

644
01:09:33.060 --> 01:09:34.700
And if it is, it's operating very well.

645
01:09:34.700 --> 01:09:39.700
So Rothbard said, can you say an economy is a socialist economy?

646
01:09:39.700 --> 01:09:42.700
And Mises said, when it no longer has a stock market.

647
01:09:42.700 --> 01:09:49.700
So you can even have individual, like the Nazis did, allow individuals to continue to own their firms.

648
01:09:49.700 --> 01:09:56.700
But if there's no stock market, if the state is the investor, then there's a single will operating on the economy.

649
01:09:56.700 --> 01:09:59.700
And then there's not true prices in the economy.

650
01:09:59.700 --> 01:10:26.700
Okay, so let me sum up with Mises versus the Hayekians. According to Mises, calculation is a praxeological problem, okay, facing Crusoe and that faces Crusoe and, I'm sorry, does not face Crusoe because he can have direct valuations,

651
01:10:26.700 --> 01:10:37.700
He also says that socialism is a problem of means and not of ends, meaning that it's a problem of how to allocate goods to ends.

652
01:10:37.700 --> 01:10:51.700
Ends can be taken as data, whether they're the ends that the dictator or central planner tries to determine from consumer valuations.

653
01:10:51.700 --> 01:10:59.200
Dictator or central planner tries to determine from consumer evaluations or they're the dictator's own ends.

654
01:10:59.200 --> 01:11:10.200
Now, Kirzner, for example, claims that, and Hayek would too, one of the problems with socialism is that they can't get the dispersed knowledge of subjective ends from everyone.

655
01:11:10.200 --> 01:11:15.700
Well, Mises puts that problem aside. It doesn't matter. Let's just use the dictator's own ends.

656
01:11:15.700 --> 01:11:30.700
One example I give when I teach my undergraduates is, let's say you have, there's a Star Trek episode in which there's a woman on a planet and she's an empath, they call her.

657
01:11:30.700 --> 01:11:37.700
And anyone around her, she feels their needs and their reactions and their expectations.

658
01:11:37.700 --> 01:11:42.700
So let's say this dictator is an empath, so he can absorb everybody's value scales.

659
01:11:42.700 --> 01:11:51.700
And according to his own feelings of intensity of these needs, he can rank them.

660
01:11:51.700 --> 01:11:56.700
Even in that case, Mises points out, though he wasn't a Star Trek fan.

661
01:11:56.700 --> 01:11:58.700
He liked lost in space.

662
01:11:58.700 --> 01:12:09.700
Even in that case, Mises points out, they still couldn't calculate because there is no social appraisal process.

663
01:12:09.700 --> 01:12:16.700
He still couldn't figure out, in a world in which you have a multitude of multiple use resources,

664
01:12:16.700 --> 01:12:21.700
you still can't figure out prices. You can't trade with yourself and generate prices.

665
01:12:27.700 --> 01:12:33.700
Capitalism has solved the problem of economic calculation using money prices, that's extremely important.

666
01:12:33.700 --> 01:12:37.700
The entrepreneur is at the center of this system of capitalism.

667
01:12:37.700 --> 01:12:47.700
He is the appraiser of future prices, and it's his bids for inputs that brings about a cost system for all inputs.

668
01:12:47.700 --> 01:12:55.700
And in order to make those bids for resources, he must have prior knowledge.

669
01:12:55.700 --> 01:12:57.700
He must have qualitative knowledge.

670
01:12:57.700 --> 01:13:01.700
Prices don't give him any knowledge except what prices are today.

671
01:13:01.700 --> 01:13:07.700
And that helps him determine, given his qualitative knowledge, how prices will change in the future.

672
01:13:07.700 --> 01:13:14.700
And he uses those future prices to determine his bids against other entrepreneurs for the inputs,

673
01:13:14.700 --> 01:13:20.700
which brings about the resource prices that gives you the basis for costs.

674
01:13:20.700 --> 01:13:28.700
And finally, as I said, past prices are not any kind of a direct guide to your production decisions today,

675
01:13:28.700 --> 01:13:36.860
as Hayek sometimes Lucy, when speaking, Lucy says, but in fact, they are really only a starting point,

676
01:13:38.260 --> 01:13:43.580
part of the experience of the entrepreneur that is necessary to figure out what future consumer prices will be.

677
01:13:44.780 --> 01:13:46.860
And I will stop there and take any questions.

678
01:13:49.220 --> 01:13:50.860
I don't want the George Mason line on this.

679
01:13:50.860 --> 01:14:19.860
Recognizing that Kirzner was addressing Schumpeter in his presentation on the discovery process of entrepreneurship over capitalization of money, he was trying to address that Schumpeter's conceptions generally were being misinterpreted, that entrepreneurship would obstructed people with money, but in other words, otherwise we would have characterized by equality.

680
01:14:19.860 --> 01:14:47.860
Well, then, I'm not sure if the placement of dismissing the role of knowledge and discovery in the context of socialization is well-focused because Kirzner wasn't necessarily talking about that issue, but rather talking about a similar issue of this kind of thing generally.

681
01:14:49.860 --> 01:15:01.860
I don't want to be misinterpreted and it's actually partly my own fault because when I wrote my first article on this there was so much focus on knowledge and not on monetary calculation that I may have overstated the case, believe it or not.

682
01:15:01.860 --> 01:15:12.860
But later on I developed this notion of the social appraisal process or at least I fleshed out Mises' something that was implicit in Mises.

683
01:15:12.860 --> 01:15:17.660
I've told Pete this and we've had arguments about this.

684
01:15:17.660 --> 01:15:22.060
I point out that there is an important role for knowledge,

685
01:15:22.060 --> 01:15:29.260
but it's knowledge that individual entrepreneurs must absorb themselves,

686
01:15:29.260 --> 01:15:31.560
from their experience of present market conditions,

687
01:15:31.560 --> 01:15:35.760
which will allow them then to formulate their understanding of future market conditions,

688
01:15:35.760 --> 01:15:37.260
that is their forecast.

689
01:15:37.260 --> 01:15:41.860
So what I'm saying is that prices don't give you this knowledge.

690
01:15:41.860 --> 01:15:43.980
Prices don't give you the knowledge of what to do.

691
01:15:43.980 --> 01:15:47.860
Prices that you see today do not give you the knowledge of what to do

692
01:15:47.860 --> 01:15:52.820
when you're oriented in producing towards the future, okay?

693
01:15:52.820 --> 01:15:59.220
So I didn't make that, in the original article, I maybe didn't make that as clear as I should have done.

694
01:15:59.220 --> 01:16:02.060
So I, you know, I...

695
01:16:02.060 --> 01:16:07.460
So would you still, in the sense that that aspect of knowledge is lacking from high-experimentational knowledge?

696
01:16:07.460 --> 01:16:15.460
I think this whole focus on, yeah, I don't think Hayek focuses enough, I think Steve even admits this,

697
01:16:15.460 --> 01:16:22.460
in economics and knowledge and use of knowledge in society, doesn't focus enough on monetary calculation.

698
01:16:22.460 --> 01:16:29.460
Now Steve and Pete, who also have come to agree with me about the appraisal process and the centrality of the entrepreneur

699
01:16:29.460 --> 01:16:34.460
and of money prices and all of that, they still go on to say,

700
01:16:34.460 --> 01:16:40.100
Well, prices are imperfect substitutes for knowledge of the future,

701
01:16:40.100 --> 01:16:42.740
or for knowledge you need for production.

702
01:16:42.740 --> 01:16:48.980
They lapse back into conflating future prices and present prices.

703
01:16:48.980 --> 01:16:51.060
They're not, okay?

704
01:16:51.060 --> 01:16:55.380
Prices do not give you knowledge of the future.

705
01:16:55.380 --> 01:16:59.260
Prices give you knowledge of what happened in the past, okay?

706
01:16:59.260 --> 01:17:04.140
If you see a price, it's either going to be a price that returns to the entrepreneur a profit or a loss.

707
01:17:04.140 --> 01:17:08.340
So, it means that he made a mistake or he was correct in the past, okay?

708
01:17:08.340 --> 01:17:14.640
The only reason why that price is good or is useful is because it's a starting point by which you can say,

709
01:17:14.640 --> 01:17:18.840
well, if demand goes up and supply changes, these things will happen to price.

710
01:17:18.840 --> 01:17:21.840
But to know if demand or supply are going to change in the future,

711
01:17:21.840 --> 01:17:28.340
that's where your experience of the market and your forecast of the future of consumer demand and so on,

712
01:17:28.340 --> 01:17:32.340
like Stephen Job's and so on, that's where that comes in.

713
01:17:32.340 --> 01:17:40.940
So that's where I still think there's a gap between Pete and Steve, the Hayek view, and what I take to be the Mises view, okay?

714
01:17:46.140 --> 01:17:47.040
Yes, yeah, Bob?

715
01:17:49.040 --> 01:17:53.040
First of all, I totally agree that there's a difference between Mises and Hayek.

716
01:17:55.440 --> 01:18:01.940
But this point that Dan touched on, I'm not so sure why you died by looking into it.

717
01:18:01.940 --> 01:18:05.900
Right, right, right.

718
01:18:19.220 --> 01:18:20.220
Right.

719
01:18:23.320 --> 01:18:24.780
Right, right, right, right.

720
01:18:31.940 --> 01:18:58.940
I don't think so. What I think is this, and at some point at the end of his discussion of Human Action, Mises says, talks about monetary calculation, and he says,

721
01:18:58.940 --> 01:19:09.940
And besides this fundamental criticism, there's a criticism brought forth by Hayek and Robbins about the fabulous number of equations you would need.

722
01:19:09.940 --> 01:19:21.940
And then in the article in which he does criticize Hayek, which was only in French, published in 1938, and then we translated it and had it published in the quarterly journal,

723
01:19:21.940 --> 01:19:26.940
there he says his critique is different from Hayek's and is the fundamental critique.

724
01:19:26.940 --> 01:19:41.940
So, I would agree that, see, Roy Cordato, a long time ago, when I wrote this article, I think, may have said what you were saying, and what he said was, well, aren't exchange ratios knowledge?

725
01:19:41.940 --> 01:19:55.940
You know, that is, prices? Aren't they knowledge? Well, yeah, I mean, I agree, sure. You know, anything that we learn, I mean, that is new, is knowledge, okay?

726
01:19:55.940 --> 01:20:08.940
The question, and maybe that isn't exactly what you said, but anyway, the reason why we hammer on this point, as you say, and we do, and we're hammering more lightly now, because I think people are, you know, we're coming together in some sense.

727
01:20:08.940 --> 01:20:16.940
But the reason we hammer on this point is because this is, social calculation is a fundamental criticism.

728
01:20:16.940 --> 01:20:24.940
So even if you had all the knowledge, which you can have, and Hayek's right, and things are dispersed, and there is, you know, entrepreneurs do discover new things and so on.

729
01:20:24.940 --> 01:20:31.940
and so on. All of that's correct. But even if you had all the knowledge, you could not calculate economically.

730
01:20:31.940 --> 01:20:39.940
So it's a question of what's fundamental and what's something that's additional to it.

731
01:20:39.940 --> 01:21:03.940
In other words, I was taking you guys spending a lot of time trying to argue that prices are not really the same now, but what if you can say that, because I just think it's not a knowledge problem in calculation, but I don't see why you guys spend so much time trying to argue that prices are not really the same now.

732
01:21:09.940 --> 01:21:17.140
Some good things on the web on this, but prices that we see, any prices that are realized,

733
01:21:17.140 --> 01:21:22.340
realized prices, which means prices that are in the past, only convey, to the extent they

734
01:21:22.340 --> 01:21:27.380
do convey knowledge, they convey knowledge about past decisions.

735
01:21:27.380 --> 01:21:33.780
Prices, future forecast prices, are based on our knowledge of past conditions.

736
01:21:33.780 --> 01:21:38.180
In other words, we have to have the knowledge before we can forecast these prices.

737
01:21:38.180 --> 01:21:58.180
And then when we bid for the resources, those prices are, I guess you could say they convey knowledge of how far any particular entrepreneur should go in buying the services of those resources.

738
01:21:58.180 --> 01:22:04.180
But that becomes almost trivial, right? I mean that's just another, I mean we're talking about calculation in a different way.

739
01:22:04.180 --> 01:22:06.180
Hayek didn't mean knowledge in that sense.

740
01:22:06.180 --> 01:22:07.780
I guess that's my...

741
01:22:07.780 --> 01:22:12.480
Hayek meant knowledge of particular circumstances of time and place.

742
01:22:12.480 --> 01:22:17.480
That somehow, you know, local entrepreneur knows those things,

743
01:22:17.480 --> 01:22:22.080
but he needs some idea of what's going on in the rest of the economy,

744
01:22:22.080 --> 01:22:24.780
and so present prices give him that.

745
01:22:24.780 --> 01:22:31.080
So they take knowledge to the decentralized producer who knows local things,

746
01:22:31.080 --> 01:22:33.780
and allows him to make reasonable decisions.

747
01:22:33.780 --> 01:22:41.380
And Hayek does say that to the extent that the economy works, it's because prices are very near the equilibrium levels.

748
01:22:41.380 --> 01:22:47.180
There are a number of quotes, and I've gone over this, and Steve and Pete refused to answer me on that basis.

749
01:22:49.180 --> 01:22:52.580
Okay, so that might clarify matters a little bit.

750
01:22:53.780 --> 01:22:54.980
Any other questions? Yeah.

751
01:22:54.980 --> 01:23:01.980
This process of the experience of present prices is in the forecast that it's going to take a long time.

752
01:23:01.980 --> 01:23:03.980
I mean, this is logical induction.

753
01:23:03.980 --> 01:23:07.980
Has anyone done anything with this concept of the world to be able to use it?

754
01:23:07.980 --> 01:23:11.980
Not that I know, but I'd like to see something like that.

755
01:23:11.980 --> 01:23:15.980
When you say logical induction, what do you actually mean?

756
01:23:15.980 --> 01:23:17.980
I never heard...

757
01:23:17.980 --> 01:23:22.980
And although we don't know for sure what's going to happen, we make a good guess.

758
01:23:22.980 --> 01:23:25.980
Attempts to determine what kind of happens.

759
01:23:26.980 --> 01:23:28.980
It's not absolute.

760
01:23:31.980 --> 01:23:32.980
It's not empirical.

761
01:23:33.980 --> 01:23:34.980
You make a good guess.

762
01:23:35.980 --> 01:23:37.980
So there can be better or worse guesses.

763
01:23:38.980 --> 01:23:39.980
There's a criterion in you for better or worse guess.

764
01:23:40.980 --> 01:23:41.980
Well, that's very interesting.

765
01:23:42.980 --> 01:23:43.980
I'm not a philosopher, but I like to see somebody work.

766
01:23:44.980 --> 01:23:46.980
I think there has to be more work on this.

767
01:23:47.980 --> 01:23:48.980
I don't think this is the final word by any means.

768
01:23:52.980 --> 01:23:57.980
There's been a number of papers. I gave you just the basics, but there's been a number of papers.

769
01:23:57.980 --> 01:24:14.980
There's another paper in the QJAE, our journal, by Odd Stalbrink, who attempts to sort of reconcile my view and Rothbard's view and Jeff Herbner's view with Kirzner and Pete Becky.

770
01:24:14.980 --> 01:24:19.980
So you might want to look at that. I don't completely agree with it, but I'm the editor of the journal and I think it is a contribution.

771
01:24:19.980 --> 01:24:29.980
I'm happy to have it there. So if anybody has different takes on it, that's good. I'd be happy to obtain it.

772
01:24:29.980 --> 01:24:32.980
One or two more questions? Yes, go ahead.

773
01:24:32.980 --> 01:24:50.980
If I've understood you correctly, it seems like the nature of the basic approach to economic theory is crucial in regards to this question of the need to take the praxeological approach and not take the general equilibrium approach, and that you have to approach the critique a little bit differently if you're working in one of those two paradigms.

774
01:24:50.980 --> 01:24:52.980
I think that's true.

775
01:24:52.980 --> 01:25:07.980
The question would be then, if we say we want to take some of Hayek's, what we might consider Hayek's insight and bring it into a praxeological paradigm, how might we do that? What would be his role, if in other words, from a praxeological viewpoint, what would be his role in the Hayek prison?

776
01:25:22.980 --> 01:25:28.580
and that, in fact, it would take, and it's not in the form that can be easily communicated.

777
01:25:28.580 --> 01:25:32.980
I mean, those types of things are important additional critiques of socialism,

778
01:25:32.980 --> 01:25:35.780
but they're not the basic critique, okay?

779
01:25:35.780 --> 01:25:38.180
I haven't thought much about what you're saying,

780
01:25:38.180 --> 01:25:45.580
but I think there is scope there to develop that further.

781
01:25:45.580 --> 01:25:50.780
David Gordon has, in a review of something, I don't remember exactly where he wrote that.

782
01:25:50.780 --> 01:25:54.260
Well, you know, just because Mises is correct doesn't mean Hayek's not correct.

783
01:25:54.260 --> 01:25:57.900
It simply means that Mises is more fundamental.

784
01:25:58.100 --> 01:26:01.460
Oh, one thing I did want to say is that I don't think...

785
01:26:02.180 --> 01:26:08.340
Hayek did try to break away from general equilibrium that he had learned from Wieser in his 1937 article and 45 article.

786
01:26:08.500 --> 01:26:15.220
But the way he did so was not to make things more dynamic, but to simply say, well, knowledge isn't given.

787
01:26:15.220 --> 01:26:16.500
It isn't in one place.

788
01:26:17.180 --> 01:26:20.060
So if it was, we would have general equilibrium.

789
01:26:20.060 --> 01:26:39.060
Okay, whereas Mises would deny that, but it's not. So we need the price system to more or less allow us to allocate resources and he uses this as one mind would if it had all the information and that's a direct contradiction of what Mises would say.

790
01:26:39.060 --> 01:26:49.060
I'm a little bit confused, but let me start with the confusion. You said there's a debate, and it's a debate about the debate.

791
01:26:49.060 --> 01:26:57.060
And what you're talking about is the debate after the debate. Is the debate over or is that still being debated, the original debate?

792
01:26:57.060 --> 01:27:02.060
No, actually I should have mentioned that because that's a very good question.

793
01:27:02.060 --> 01:27:12.060
And really briefly, everyone thought that Mises and Hayek lost the debate, all neoclassical economists, I should say, and the intelligentsia.

794
01:27:12.060 --> 01:27:19.060
They thought, well, you can look at the Soviet Union and the Lerner and Langer won the debate,

795
01:27:19.060 --> 01:27:27.060
because the neoclassical paradigm is one in which general equilibrium plays a central role and what they said accorded with general equilibrium.

796
01:27:27.060 --> 01:27:42.060
equilibrium. But when the Soviet Union collapsed, even a socialist like Robert Heilbronner came out, I don't know if he was a New Yorker, admitted that Mises was right.

797
01:27:42.060 --> 01:27:56.060
So, in the post-World War II period, until the collapse of the Soviet Union, or until the day there began to be a fall in these collectivized economies,

798
01:27:56.060 --> 01:28:03.660
It was thought that the debate had ended in the 1930s, and that the Austrians had been the losers.

799
01:28:03.660 --> 01:28:15.260
In fact, Oskar Lange sarcastically said we ought to erect a statue in the Ministry of the Economy to Ludwig von Mises in Poland.

800
01:28:15.260 --> 01:28:21.660
Because he did bring up a problem that did affect socialism, that of economic calculation, but we solved it.

801
01:28:21.660 --> 01:28:26.660
So he brought up a problem. So Langer and Langer solved the problem.

802
01:28:26.660 --> 01:28:31.660
What was interesting, when Langer went back to Poland to become an economic commissar,

803
01:28:31.660 --> 01:28:35.660
he didn't use any mathematical solution, he didn't use any trial and error method.

804
01:28:35.660 --> 01:28:46.660
He says we don't need a computer. He said that the way we operate is akin to that of a computer.

805
01:28:46.660 --> 01:28:53.660
But anyway, I'll end there, but the debate over the base is still going on. Thank you.