This is the debate on the Socialist Calculation Debate.
Socialist Calculation Debate raged in England in the 1930s and earlier in Germany in the 1920s.
And it was resurrected by Austrian economists who debated the meaning of the debate itself during the 1990s.
Okay, and it actually continues today, although I think the two sides have grown closer.
I have the infamy of having sort of started the second debate, the debate on the debate.
Though before my article had appeared in 1990, there was an article by Israel Kirzner in the late 80s on the Socialist Calculation Debate
pointing out that Austrians could learn quite a bit still from that debate, despite the fact that it had taken place 50 years earlier.
And so, in part, mine was a response to his article, though his article wasn't really controversial.
First, let's talk about what the calculation debate was all about, and then I'll give you my take on it,
which is not the take of others, but we've become, I think, closer as I'll show you.
Basically, the debate was started by Ludwig von Mises in the 1920s
in his famous article, Economic Calculation in the Socialist Commonwealth, which was published in 1920
and then was incorporated into a book that he wrote on socialism in 1922.
Basically, Mises' achievement in this article, I think this is one of the greatest articles of the 20th century, by the way,
was to destroy the intellectual foundations of the case for social central planning.
But secondly, it was really a revolutionary breakthrough in economic theory,
demonstrating the nature and necessity of the price system, and here I do agree with Israel Kirzner.
by Israel Kirzner. And thirdly, it was really the completion of the Mangerian Revolution.
What Mises did in this article was to show how subjective values were transformed into objective prices,
which could be used as meaningful cardinal numbers in economic calculation.
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.
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.
The word impossibility now has to be carefully parsed.
When Mises said that socialist calculation was impossible, or he sometimes says that socialist economy is impossible,
he did not mean that you couldn't have a group of people owning all the factors of production and producing something.
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.
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.
The reason is, without a price system, you could never find the costs of these various goods in which you had output.
Right, so Mises' thesis was as follows.
He said that the rational allocation of resources was impossible without monetary calculation.
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
and without knowing the cost of various goods you could never determine the most profitable line of production.
And he points out that there were three preconditions, institutional preconditions, real world preconditions for economic calculation.
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.
Secondly, there had to be a freedom to exchange.
If there was a system that existed in which people were allowed to own property but could not exchange it, and that system has existed in history at times,
where for example in the Middle Ages land couldn't be alienated from the families that owned it, it could only be passed on.
Without that freedom to exchange, the freedom to exchange was the second prerequisite of economic calculation.
And third, there had to be sound money, because all prices in the real world market economy are money prices.
Now what he points out is that socialism really abolishes all three.
It abolishes all three. It abolishes private property and all orders of goods because the capital goods are owned by the state.
And it abolishes the freedom to exchange because the state, being the monopolist of these goods, cannot trade with itself.
So, since there is no exchange possible in capital goods, there can be no price of these goods.
And without prices of these goods, there's no way to determine cost of production.
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.
I'll make sure I do this right.
Chad, I'm getting a shadow. Hit the lights. Okay, so I'll make sure I do everything.
Okay, good.
Okay, this is a production function for an automobile.
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.
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.
The Key is, is it worth producing that automobile?
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.
Are you using those goods in the most valuable way?
Meaning that they can be used to produce many other goods in an industrialized economy.
Are you using those goods in the most valuable manner from their own point of view?
And the answer, of course, is no, because the units in which these goods are specified are heterogeneous.
There's no way to add up kilowatt hours with square feet of factory space,
with hours of machine time, with tons of steel, and come up with one unitary cost figure.
There's no way to do that.
So that was Mises' main objection.
Now, we know that certain other problems arise once there are no objective prices for these things.
For example, should the production, would it be better to produce these automobiles with, let's say, more capital-intensive methods?
So, instead of just Q hours of machine time, would it be better to have Q plus A hours of machine time?
In other words, why not have more machines operating, maybe in the case of turning the factory into run by, mainly by robots,
with one or two people just manning the computers that control the robots, and reducing the amount of labor.
So, reducing the amount of unskilled labor to R minus B.
So they can't know, even if they decided somehow that this was the best use, that they wanted another automobile,
they don't know the cheapest way of producing that automobile.
Should they produce it in a more capital-intensive fashion or less capital-intensive fashion?
Also, let's assume now that they're producing a run of automobiles,
and that this factory that they have can be allocated to producing 20,000 automobiles
or the factors could produce 150,000 motorcycles or 500 houses.
Once again, without knowing costs, because each of these things would take different proportions of these factors, of these inputs,
they would not be able to determine what the output should be.
Again, remember, take the US economy and hold that in your mind.
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.
Now, entrepreneurs operating under a market economy can easily figure out the best use of the whole stock of steel.
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,
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.
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.
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.
How does the economy solve this problem of determining whether, the market economy, determining whether or not we should produce this automobile?
Well, under market economy, where the three preconditions of economic calculation are fulfilled,
where there is private ownership in the means of production, every single unit of every single input,
of the hundreds of thousands of different inputs and types of labor and so on, maybe millions,
has a market price, every single one.
So that any conceivable and technically feasible production project, or production process, can be, the cost of that process can be determined, okay?
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.
Now, that's not the current price, that's the expected price.
The current price might be less.
But next year, at the end of this process of assembling this course,
entrepreneurs, as we'll see, may expect that the price would go from 17,000 to 21,000.
So it's the future price that is important.
In any case, then that is telling them that they are taking resources
that have a lower value in all other uses in the economy, at least a lower perspective value,
And they are redistributing this entrepreneur to a more highly valued use from the point of view of consumers, okay?
On the other hand, should the cost exceed the expected price?
Should the cost be maybe $22,000 per car for this bundle of resources that is needed to produce a car?
then the loss would indicate that it's not rational to produce that good
because you're misallocating resources, you're taking resources that could
produce goods worth about $22,000 on the market to consumers and using them to
produce a good that's worth only 21,000. Okay, now is that to say entrepreneurs
using economic calculation are infallible? Well, of course not, okay. In the first
In the first quarter of this year, GM lost $2 billion. They're laying off 25,000 workers.
That doesn't mean that economic calculation doesn't work.
What that means is that in the past, they've overestimated the demand for their products.
And therefore, they anticipated a higher selling price.
But at least they know that they're making mistakes.
And at least they know that they have to restrict production of these automobiles.
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.
And they're going to reduce their total capacity for producing vehicles from 6 million, I read, to 5 million.
So it tells you when you're doing something wrong.
Now, my opponents in the debate, Israel Kirzner, Pete Becky, Dean Horowitz, would say something like,
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.
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,
Aha! Once and for all we need fewer cars and that's what we're going to do.
In fact, things could turn around in 90 days,
you know, or things could turn around in two quarters.
They have to forecast that this trend will continue into the future
in order to make that decision to cut the number of automobiles.
If they believe that gasoline prices would dramatically drop,
if they have some information that indicates that gasoline prices will dramatically drop,
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.
In fact, they might actually expand.
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.
Let me mention something else that Mises makes clear, that there is a difference between what we call economic calculation and valuation.
Mises never denied that an individual or a small family, let's say living in isolation,
what we call in economics a household economy, couldn't figure out the cost of production without money.
Money is only needed in a complex industrial economy in which you have heterogeneous capital goods,
which can be used in different uses, where all capital goods only had one use.
If every resource only had one use, there would be no problem of monetary calculation.
If it couldn't be used anywhere else, and it could only be used to produce cars,
then all the resources that could be used to produce cars would produce cars,
because they can't be used anywhere else.
They have no opportunity costs, in other words.
But what Mises says is that in a household economy,
people can figure out opportunity costs.
So let's take the famous Robinson Crusoe, his value scale.
What do you mean to do that?
That's his value scale for allocating, let's say, 12 hours of labor a day.
Let's say he sleeps 12 hours a day, and he's going to do it in four-hour units.
And let's say that's his value scale, that he prefers four coconuts highest on his value scale,
then two fish, three pounds of mushrooms, one sack of berries.
But he only has 12 hours, and each of those alternatives absorbs three hours.
The question then becomes, what's the cost of producing one sack of berries?
Let's say it's 400 less.
Well, he could easily see since the natural resources aren't really scarce,
it's really his labor that's the scarce good here.
His labor in this situation has a cost of the expected utility of three pounds of mushrooms.
He will only engage in production processes which have a higher value than the utility of three pounds of mushrooms.
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.
Okay, and he says to himself, now wait a minute, now can I afford to hunt that rabbit?
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.
So, it's a matter of his value scale.
The current cost of labor is the expected utility from three pounds of mushrooms.
If he expects that rabbit will satisfy him more than the mushrooms, then what will he do?
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.
So what he will do then is to devote the resources to hunting the rabbit.
If the benefit from the rabbit is lower than the cost, then he will not.
So Mises says that, yes, you can run a socialist economy within a small household, or an individual can.
You can run it without calculation, but you cannot run it in a system in which you have a multitude of heterogeneous goods, capital goods, inputs,
which are non-specific, which can be used in many different, but not all, production processes.
Now, I think some people who have been at the Mises University have heard this story.
I have a friend in Montana who used to live in New Jersey and I grew up with her.
And in any case, she actually married a real cowboy, believe it or not, from Montana.
They live on a ranch.
And one day she called me up and we were talking and she says, you know, I've got a new house.
And I said, well, so you moved off the ranch?
She says, no, no, no, she says, we had the house shipped in.
So I said, what?
She said, well, here in Montana, since labor is so scarce in Montana
and therefore has a much higher value, you know, herding cattle,
which they actually do, they have cattle drives and everything,
it's very scarce and expensive, they don't build the houses on site.
In fact, her house was built in Nebraska and these huge trucks
haul the modular pieces of the house to the area where they're going to be built
and they put them together so it's very capital intensive it uses a lot of
capital because capital is relatively cheaper than than labor whereas in the
Northeast of course where labor isn't scarce you know no one in their right
mind would ever think of buying a house somewhere else and then having it shipped
to where to where it's going to be you know the residence now could a socialist
planner ever figure this out that you should build houses that are you know
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.
Alright, let me just mention a few conclusions that we get from Mises' analysis.
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.
Even the term socialist planning or socialist economy is an oxymoron. Now, why is it an oxymoron?
It's an oxymoron because not only do socialist planners make mistakes, but they can never know if they're making mistakes.
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.
So, in the same sense that Robinson Crusoe rationally allocates his resources, his labor, to the most highly valued consumer goods,
the market economy with cardinal prices generated through entrepreneurial bidding and entrepreneurial forecasts
can in effect allocate goods to their highest valued uses from the point of view of consumers.
So the market economy operates rationally in the same sense that Robinson Crusoe operates rationally.
The Soviet Union does not, or the former Soviet Union or any other centrally planned economy cannot do that.
So in that sense they don't economize, there is no such thing as a socialist economy.
It's an oxymoron, an inconsistent use of words.
The reason being that they don't know how to allocate all these different resources with multiple uses among the most valuable uses.
Even if they themselves are going to determine as dictators the most valuable uses.
They can never know the trade-offs.
Because, think about it, in our economy today, resources, let's take the U.S. economy, the available stock of capital goods,
which approaches millions and millions and millions of units of capital goods, can be reallocated an infinite number of ways.
There's an infinitude of different economies that we could create out of existing resources.
In other words, there's a different number of different patterns of outputs that can be produced today.
How do we figure out the right one?
Well, we never know. There is a way of forecasting the right one, and that is through market prices and economic calculation.
What happened in the Soviet Union was that they used a system called gross output planning.
Okay, and there was the planning, Central Planning Board was a ghost plan.
And basically what they did was that they would specify quantitative targets for output, okay.
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.
So basically, they motivated the managers by giving them bonuses for meeting or exceeding the targets, okay.
And they got a trip to the gulag for not meeting the targets consistently, okay?
But what's interesting then, it turned into a system of mutual lying, of course.
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?
They raise the target, they say, aha, this factory can, you know, give us, has greater capacity.
So the manager will always lie and say, that target's way too high, he'll try to get it down.
And he'll make sure he maybe exceeds it a little bit, but not by much.
And on the other hand, they know, the commissars of each industry know that he's lying,
and so they'll raise it, so the information is completely distorted.
The incentive is that information is not accurate.
One of the interesting, funny, one of the jokes that was often made
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
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.
He would always make the nails in the easiest possible way.
That permits him to meet his target.
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.
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.
You've got to use more resources to make the smaller ones than the larger ones.
And there's stories about smaller sizes of women's clothing not being available,
everybody walking around in huge clothes, and so on.
Because you make things as large as possible.
Now, on the other hand, if they specify a number, then you make a lot of small nails,
and the large nails will disappear.
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,
because they were making these huge heavy chandeliers that were crashing down and killing some of the comrades in their dachas, you know, in their vacation homes.
Seriously, there was kind of like people saying, what are you talking about?
You know, Westerners didn't know what was going on here.
They're pulling ceilings down.
And of course, a big joke, the joke that went around in the 1970s was that
Khrushchev in the 50s had banged a shoe on the podium at the United Nations
and he said, you know, we will bury you, meaning economically, we will bury you.
And so the Soviet economists told their Western counterparts,
We'll bury all of you, except for Hong Kong, because we need to know prices, so we'll allow one small island where there are prices.
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.
But those prices were still inefficient because they didn't exactly reflect their local conditions.
Now, what about the very existence of the Soviet Union?
People later on said, well, Mises is obviously wrong, here it is, it's the 1930s and the Soviet Union hasn't collapsed yet.
Well, Mises' impossibility thesis was not undermined, but he pointed out, in his first article he said,
look, he said, real world socialist economies, such as the USSR, which was already in existence by 1920,
he said, are not inconsistent with my thesis.
He said, because they exist in a world of capitalist prices.
He said, it's just like the post office.
The post office, as inefficient as it is here in the United States,
can exist and can go on in a fashion by using the prices that are generated around it.
But Lenin, on the other hand, said that he wanted to turn the whole economy into a post office.
If you're turning the whole world into a post office, then you have the problem of economic calculation.
Now, it's not to say that using world prices that don't reflect scarcities in your area or in your economy
will allow you to be very, very productive, and the Soviet Union wasn't very productive, okay,
despite CIA statistics, and then Paul Samuelson and Galbraith, along with the CIA,
who claimed that the Soviet Union was catching us and that eventually there would be a convergence
and their rate of growth would eventually surpass us, and they'd be eventually a bigger absolute economy than us,
and also other nonsense, okay.
And also in the Soviet Union there were black markets and there was a system of bribes between social enterprises.
There was trade, even though it wasn't supposed to be.
If someone had an excess of nails and needed copper wiring, they would trade.
And there were brokers who would buy and sell, you know, who would broker the deals.
And so these were a system of bribes called BLAT, B-L-A-T.
Also, there was other black markets, the purchase of Beatle albums and jeans and so on in the Soviet Union.
Because of foreign hard currency, the Soviet authorities looked the other way.
Was there a true period of socialist economic planning? Yes, there was, war communism.
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.
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.
In any case, everything started to break down.
Lenin said, we are abolishing money, we're abolishing all accounting and money prices,
and we're going to just have accounting in natural units.
How can you have that? Natural units, as I showed, tons of steel, kilowatts, hours of electricity,
they're heterogeneous, you can't add them up.
You can't get a single figure for cost.
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.
That's what socialism leads to, a complete breakdown of the social division of labor.
Universal Brigandage, they're just forging and stealing, these small household groups or small bands fighting with one another for resources.
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.
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.
At least Lenin was moving in the right direction. He allowed some exchange and so on.
and so on.
Now let me just talk a little bit about the intellectual division of labor and what I think is one of my contributions here.
I mean it's really in Mises but I think I brought it out a little bit more.
And this is the social appraisal process.
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?
How is all of that information and knowledge translated into objective cardinal numbers that can be used meaningfully in economic calculation?
So, I call this a social appraisal process. Mises uses the word appraisement in two different senses.
And here's what we have. You have the entrepreneur at the center here.
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.
So, what the entrepreneur starts off as doing is the following, he has experience of what present prices are.
Now, the prices that exist right at this moment have now become past prices.
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.
And entrepreneurs have experience of immediately past prices, which Mises calls present prices.
And they have experience of present market conditions.
They have experience of what goods consumers are demanding,
or that are in heavy demand by consumers, and what goods aren't being demanded.
That is, they have experience of profits and losses that are currently occurring.
Now, that has no direct relevance, and here's where I think Mises and Hayek differ.
has no direct relevance, present prices and profits and losses,
to what decisions entrepreneurs are going to make in producing today.
Why? Because production today is always for a future market, okay?
To produce an American car used to take, from the drawing board to the dealer's showroom, seven years.
So, you, when you decide to begin to build equipment and invest in producing a line of automobiles,
that's seven years before the fact.
You're not interested in what the price of an automobile is today.
You're interested in it as a starting point, okay?
And then what you have to do is to forecast,
and Mises used the word understanding, based on your experience,
You apply your understanding or forecast of how consumer tastes, resources, and technology will change over the course of the production period.
All right. But that's still qualitative. We still don't have prices.
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.
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.
So in that sense, present prices are not a guide to actions that are oriented towards the future.
And here's, I think, one of the biggest sticking points in the debate, the current debate over the debate.
Now, based on their appraisements,
okay, now, what entrepreneur appraisement means,
to put a cardinal number, a price,
based on qualitative information on a good.
So, individual entrepreneurs all begin to appraise the prices of the goods
that they're going to produce in the future.
So, for example, it could be a good that doesn't even exist.
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?
He's sitting in his garage, or so the story goes.
IBM has developed, late 70s, early 80s, the technology for PC.
President of IBM at the time, appraises the future very wrongly,
says that PCs will only be household toys to play games on.
They'll never have a widespread use in the business world.
So, I think his name is Watson at the time,
goes on with production decisions to continue to produce huge mainframe computers.
Stephen Jobs appraises prices of personal computers differently.
He believes that, in fact, they will be used in business, okay?
They'll be more than just gadgets for kids to play video games on or whatever.
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.
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.
and that is social appraisement, okay? No one mind determines what those resource prices will be.
It's the hundreds of thousands of entrepreneurs bidding on the basis of their individual visions of what future market conditions will be,
of what future prices will be, who determine, given the supplies of the various resources and decisions made by resource owners,
that bidding determines the prices of resources.
So now, every single resource right now, every ton of steel, any input into any process, has a price.
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.
So, the existing resources go to the most highly valued uses as anticipated by entrepreneurs.
They don't know for sure. They anticipate it.
And this changes. Changes not just from year to year, but from day to day.
It's continual change. Continual revision of decisions.
So, unlike Hayek and Kirzner who claim that present prices give us knowledge,
No, present prices don't give us any knowledge.
In fact, you have to know, there's this famous tin example by Hayek, he says,
look, he says, no one has to know the conditions in the tin market.
Let's say that there's a strike in Bolivia and it's impending.
In a month or two, unions are threatening to go on strike, supply of tins is going to decrease,
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.
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.
The demand for plastic goes up. Price of plastic goes up.
Well, the users of plastic don't have to know why that happens, they have to economize.
So, they produce fewer skateboards, let's say, because they're made of plastic.
Or they substitute other composite materials for plastic.
And then, so that the demand for something else goes up.
And this ripples through the economy, and isn't this nice, the way all this knowledge is spread through the economy,
simply by prices, people don't have to know anything else.
Well, if you're an entrepreneur and you forecast market conditions, you have qualitative knowledge, you're a user of TIN and you say,
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,
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.
Or, if you're a producer, you immediately start buying plastic at a lower price today,
because you know you're going to have to shift to it, rather than use the TIN.
And you earn profits.
So even in Hayek's TIN example, there is a mistake, I believe, that somehow present prices are all that is needed.
Now, Roger Garrison has disagreed with me and said, well, you know, prices are guides, they're not marching orders.
Hayek says that somewhere. Hayek does say that. But if you read Hayek's work, it works very closely.
He keeps lapsing back into this terminology that somehow prices...
He points out that in the market economy, prices do their job because they're always very close to equilibrium.
Which, according to Mises, of course, they're not, in fact, the prices that are relevant for today don't even exist yet.
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.
So, it's expectations of the future that determine present prices of resources, which are relevant to entrepreneurial decisions.
But the point is entrepreneurs have to have a lot of other information besides prices to make their forecast of the future.
So present prices depend on information.
Not the other way around.
It's not that you don't need information or knowledge because present prices give them to you,
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.
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.
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.
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.
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,
A re-emphasis of the monetary roots of the Mises critique enables us to view the calculation debate through a fresh lens.
Meaning Mises always, always focused on money prices.
That's another reason why the general equilibrium criticisms of von Mises later on didn't hold water.
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.
You don't have money prices in general equilibrium. You have only barter prices.
A few other things that Horowitz said. He says that Mises' elaboration of this point centered around the use of money prices.
And again, Hayek doesn't stress money prices like Mises does. But now Steve is doing that.
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,
and society when applied its most famous articles and its other very famous article, Economics and Knowledge.
So he says as accurate as these arguments were and as much as they were crucial to the recent revival of Austrian economics,
they largely neglected the original monetary themes that pervaded Mises's 1920 article.
And he also says it was to the process of actual exchanges against money that competing entrepreneurs endowed prices
with their own appraisals of existing and expected market conditions.
So the prices aren't something that are automatically there telling entrepreneurs what to do.
It's the entrepreneurs themselves who I call the social appraisal process.
By the way, Mises says that the problem of socialism isn't a problem of knowledge.
He says it's a problem of one will acting.
Very stark statement.
What does that mean, the problem of one will acting?
What it means is, if you, instead of the entrepreneur there,
if you have one monopolist who owns all the factors of production,
he owns all of those things, then there's no bidding process.
Then there's no way of generating prices.
So, where there's one will, and Murray Rothbard, by the way, expanded that to say,
you couldn't have one big cartel in a market economy that owns everything for the same reason.
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.
Because it's the same problem as socialism.
So one last point that is made by Steve Horowitz.
He says, monetary calculation is intricately linked with Mises' conception of the entrepreneur.
Salerno has rightly called attention to Mises' very important discussion of valuation and appraisement.
What entrepreneurship is for Mises is the formulation of an expectation of the future constellation of prices,
as I've shown here, and the attempt to see opportunities within that vision that others do not currently notice.
So Steve Jobs sees something that others did not notice,
is that, in fact, PCs will be widely demanded in the future by businesses, and he was correct.
IBM, on the other hand, loses $13 billion in 1990-1991 because of the decisions they make in the early 1980s
and continuing to produce mainframes.
So, the largest loss in industrial history, I think GM's loss of $2 billion last quarter
is something like the third-largest loss or something like that, because they have made mistakes.
So this is what Mises calls the intellectual division of labor.
It has nothing to do with dispersion of knowledge.
Hayek talks about the division of knowledge.
Mises talks about the intellectual division of labor.
What does that mean?
It means this, that every one of us are involved in the social appraisal process
as consumers bidding for consumer goods against existing stocks,
which gives consumer prices to the entrepreneurs,
and as owners of labor and other resources who are reacting to bids by the entrepreneurs
and of course the entrepreneurs themselves.
Every human being in a market society is involved in the social appraisal process.
And that's what Mises means by the intellectual division of labor.
I stress that point because others have claimed, well, he's talking about the division of knowledge.
And, you know, he really is not, okay.
Okay, we have a few more minutes. I'll talk a little bit about what the socialist response to Mises was,
what Mises' response to the socialists were,
or responses to the socialists were, and what Hayek's later responses to the socialists were.
What Mises,
When he first wrote the article, it was written in German, and it was German Marxists, basically, that tried to respond to him.
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.
And he said, what's the problem? What is Mises talking about?
He says, under socialism we'll abolish money and we'll have what he called innatura calculation.
That is, we'll have accounting in kind.
Of course, this dismisses the whole idea that you can't add apples and oranges, which we all learn in first grade.
That the heterogeneity of goods, when you have the heterogeneity of goods, there is no common denominator.
To add up these units of goods. You can't add up, as I said, tons of steel, labor, and so on.
So Mises had already disposed of that criticism in the original article.
Secondly, other Marxists said, well, you know, we'll have calculation in terms of labor hours.
Labor is homogeneous. We'll just add up the number of labor hours it takes to produce goods.
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.
Well, first of all, of course, labor itself is heterogeneous, Mises said, and of different quality.
Just, for example, watch the NBA championship game tonight between the Spurs and the Pistons.
You'll see, they're all basketball players, they're all working for the same amount of time, but their skills are tremendously different.
Even in the same industry, labor is not homogeneous, let alone between industries.
How do you compare an hour of labor of the ditch digger to an hour of labor of the brain surgeon, and so on.
So he immediately, he already responded to that.
Secondly, that answer leaves out of account the fact that you have to take into account or account for the value of capital goods.
Obviously, we have more capital goods producing a good. The hours of labor that you need are going to be lower.
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.
So capital goods are scarce, they must be economized.
Third answer is a little bit more, I wouldn't say sophisticated, but a little more clever.
The socialist says, wait a minute, you claim capitalism works well, that under capitalism,
there's a tendency to produce the correct goods that are demanded by consumers and to use the correct technical methods.
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?
You just keep producing the same goods, use the same methods. We don't need accounting, we don't need prices.
Well, of course, what's wrong with that?
The market economy's dynamic is a continuous change in technology, in consumer demand, in resources.
Some resources are becoming completely depleted, where new sources of resources are being opened up.
So to make a long story short, that only applies that argument to a static or stationary economy where there is no change.
And in general equilibrium, in a static economy, no one would need to know prices.
keep doing the same things over and over again.
That's what Mises called the evenly rotating economy.
It's the same things every year.
There's no need to change because there is no exogenous change.
No one changes, their preferences, technology remains static and so on.
It's precisely in a dynamic economy where every minute things are changing
and you want to make sure that there's a way of continually reshuffling resources
so that you're producing the most highly valued
and not producing something that has a lower value than something that you're not producing.
It's only in that situation where economic calculation is important.
So that was Mises' responses to the more naive Marxist replies to his original article.
All right, now in the 1930s then, this socialist debate breaks out in Great Britain and the United States.
And there's a number of neoclassically trained economists, in a neoclassical sense, very good economists, that respond to Mises.
Oskar Lange, who eventually went back to Poland and became an apparatchik in Poland, but was trained at the University of Chicago.
Abba Lerner, who was trained at the London School of Economics.
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.
And when we solve this system of equations, we will get the equilibrium prices and equilibrium quantities, including the equilibrium input and output combinations.
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.
But, in fact, Barone and Pareto, two general equilibrium theorists, Barone was Pareto's student who wrote before Mises,
pointed out that even a very small economy would take thousands and thousands and thousands of equations which could not be solved.
This is the era before computers.
But that's not Mises' critique.
A second socialist response to Mises is the trial and error method.
This is the Lange-Leuner solution.
Also an American economist named Fred M. Taylor advanced this sort of a solution.
Here you tell the Central Planning Board, directs the managers and firms of industries to follow some very simple rules.
They say one, make sure input and output decisions are based on prices.
And we, the Central Planning Board, are going to set these prices.
So you simply take the prices as, they use the word parametric.
They're parameters.
You don't question these prices, these consumer goods prices and these input prices.
You simply take them as parametric and then in each firm you minimize the average cost of producing any particular good.
You don't try to maximize profit, you simply minimize cost.
And in the industry you tell the commissar of the industry that he is to allocate output produced up to the point where
where the last unit of output produced has a marginal cost equal to price, okay?
So you allocate the output among the various industries or various firms in your industry
so that price equals marginal cost, which they claim is what happens in perfect competition,
as does the minimization of loan on average cost.
Finally, prices in all consumer goods markets and all producer goods markets would be set
by the Central Planning Board using trial and error, that's what's called a trial and error method.
What does that mean? That means that if they set a price of steel, let's say $400,
and at that price there's a surplus of steel,
then what they're going to do in the next period is lower the price until the surplus is wiped out.
And they'll find the equilibrium price in that fashion. They'll find the right price.
And eventually competitive equilibrium will be established.
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.
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.
All right. Now, Hayek and Robbins were the first to answer this.
They answered these criticisms with articles written in the 1930s.
And basically, they focused on a dispersion of knowledge in the economy.
So, in response to the mathematical solution, Hayek said,
well, socialism is possible in some sense, but it's highly impractical.
He admitted, being a student of Wieser,
that theoretically, if you had all the data, you could solve the calculation problem.
But, practically it's impossible because first of all, the economic data are widely scattered and they're subjective in nature.
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.
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.
And finally, Hayek points out, even if the system of equations could be solved once, the data are continually changing.
We live in a changing world.
So in a dynamic economy, you have to repeatedly collect new data and resolve the equations.
So, it would not permit a very good solution of the economic calculation problem.
Secondly, in response to the trial and error method, which came to be called market socialism,
and by the way, these 1930 responses, especially this trial and error method, is conceding me to this point.
at this point, the fact that you do need prices, whether they're generated mathematically
or they're generated by some sort of what we call a competitive solution of market socialism,
you need prices.
So they were already agreeing that you have to have economic calculation.
So Hayek's critique is pretty insightful of the market socialism and the trial and error
method.
He says, all right, again, there's a dispersion of knowledge throughout society, which is
is one of many problems facing the central planning board.
And this would lead to great inefficiency for the following reasons.
Number one, the central planning board could not change prices as rapidly as the market.
How long would it take them to change the price of steel?
The market can change the price of steel from moment to moment.
Commodities markets change the prices of commodities from second to second.
But it would take time to change all prices from the center.
So you could change prices, but they would be always on a monthly basis or quarterly basis, whatever it would be.
It would be much slower than it would be in the market economy.
Secondly, Hayek pointed out, since you couldn't get all the local information to the central planning board,
the price changes would not embody all the information that they do under a market economy,
where the entrepreneur knows the local conditions and can change them immediately.
Okay, so basically Hayek's argument stressed a lack of means of communication for knowledge.
Okay, and it concluded that socialism was very, very inefficient and, but not impossible, right?
Alright, socialism would calculate a day late, or a month late, or two months late, but there would be some sort of calculation.
Now, what about the critique of Mises? Mises said, even if the director knew all the information,
so he immediately puts aside Hayek's problems, he says, let's assume they know all the information,
though he doesn't deny that Hayek's right in saying that they wouldn't, but let's assume they do.
He said, he would still not be able to use mathematical equations to find the competitive equilibrium,
the competitive prices and quantities, because, think about it, today's capital, today's machinery,
Today's machinery and factories and so on, are not the right ones.
They embody all errors that have been made by entrepreneurs in forecasting the future.
So they have to be continually changed.
So these are not true data.
You have to continually change, even if you knew the future was going to be certain, it
wasn't going to change for another three or four years, whatever it was, you still have
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.
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?
No. So, as railroads wear out, you don't replace them with the same thing,
which is what a general equilibrium solution would do, okay?
You don't replace them with the same thing, you need new and different and better capital goods.
And you can only, the only way to do this, the only way to know how to change your inputs
and make new inputs, different inputs, is through profits and losses, everyday profits and losses.
and an equilibrium mathematical solution, there are no profits and losses.
Everybody gets their marginal revenue product.
Everything is completely adjusted. There are no profits, there are no losses.
So, you could not ever reach the equilibrium state.
And the second point that Mises makes is,
let's assume you know everything about the equilibrium state.
Not what exists today, but you know exactly what capital should look like.
You know exactly which goods, you know, how many airplanes you should have,
how many railroads you should have in the future, where they should go,
how many highways should be built, where laborers, you know, housing patterns,
how that should be changed or where they will be in the future.
Let's say you know that, that 10 years out of line, everything should be this way.
So you know the equilibrium.
Mises points out, but in that case, you're now here with this equilibrium stock of everything.
How do you change it in a way that uses the goods that exist today
in their best uses.
He says without profit and losses, once again, you can't do it.
And since you don't have a market, he says you don't have profits and losses.
So you'll never get to that equilibrium.
And Mises points out, that's just assuming that you know all this stuff.
In a real market economy where things are changing every day,
the equilibrium that you're aiming at changes every moment.
There's a new equilibrium that the market economy is aiming at.
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.
So the equilibrium position is changing moment to moment.
So even if you knew it, you still need profits and losses, it's changing.
So you always want to make the best possible use of your resources today and you need profits and losses.
and an equilibrium solution never gives you profits and losses.
It doesn't tell you, today, you have too much of this and too little of that, all right?
Finally, now, Mises' critique of competitive socialism, or I'm sorry, of market socialism,
and the trial and error method, is completely different from Hayek's.
He says that the distinctive mark of socialism is the oneness and indivisibility of the will directing all production activities.
Now, keep that in mind.
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?
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,
and you tell them to go about minimizing costs and producing up to the point where marginal cost is equal to price.
He says, this completely misconceives the nature of capitalism. Capitalism isn't a static managerial system. Capitalism is an entrepreneurial system.
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.
So Mises says, they're just playing market. Capitalism is not a managerial system, it's an entrepreneurial system.
For example, as I pointed out, GM is now cutting back its capacity by 18 percent.
It's firing 25,000 workers, closing down plants, okay?
There's no, with these rules given by the trial and error method, there is no way of doing that.
So Mises points out that the key is the capital markets,
that you're going to have to have investors who will shift their funds out of industries
that are losing into industries in which there are prospective profits.
So to use Schumpeter's term, capitalism is a process of creative destruction.
You have to have profits and losses, which you're not given by any sort of equilibrium method,
to know which industries to destroy, which jobs to destroy,
and which new industries to put in their place,
and which new jobs to create in their place.
As he points out, he says that under capitalism, the managers don't make the final decisions.
They're completely constrained by the stock market, the credit markets and the commodities markets.
But as he points out, these are what are absent under socialism.
These markets, which control the flow of capital in a dynamic system.
But, the response to Mises was,
well, you know what, we'll have a socialist investment bank,
and we'll have these funds that will be bid for by the socialist managers,
or the industry heads, whatever,
and they'll bid for it according to an interest rate,
and we will then loan the money out.
But Mises says, this is just playing a child's game.
Because you still have what?
one mind setting up the rules under which these people can bid.
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.
And very interestingly, Rothbard points out that he once asked Mises,
having in mind, for example, Sweden, people used to argue in the 60s, is Sweden a socialist economy?
And if it is, it's operating very well.
So Rothbard said, can you say an economy is a socialist economy?
And Mises said, when it no longer has a stock market.
So you can even have individual, like the Nazis did, allow individuals to continue to own their firms.
But if there's no stock market, if the state is the investor, then there's a single will operating on the economy.
And then there's not true prices in the economy.
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,
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.
Ends can be taken as data, whether they're the ends that the dictator or central planner tries to determine from consumer valuations.
Dictator or central planner tries to determine from consumer evaluations or they're the dictator's own ends.
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.
Well, Mises puts that problem aside. It doesn't matter. Let's just use the dictator's own ends.
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.
And anyone around her, she feels their needs and their reactions and their expectations.
So let's say this dictator is an empath, so he can absorb everybody's value scales.
And according to his own feelings of intensity of these needs, he can rank them.
Even in that case, Mises points out, though he wasn't a Star Trek fan.
He liked lost in space.
Even in that case, Mises points out, they still couldn't calculate because there is no social appraisal process.
He still couldn't figure out, in a world in which you have a multitude of multiple use resources,
you still can't figure out prices. You can't trade with yourself and generate prices.
Capitalism has solved the problem of economic calculation using money prices, that's extremely important.
The entrepreneur is at the center of this system of capitalism.
He is the appraiser of future prices, and it's his bids for inputs that brings about a cost system for all inputs.
And in order to make those bids for resources, he must have prior knowledge.
He must have qualitative knowledge.
Prices don't give him any knowledge except what prices are today.
And that helps him determine, given his qualitative knowledge, how prices will change in the future.
And he uses those future prices to determine his bids against other entrepreneurs for the inputs,
which brings about the resource prices that gives you the basis for costs.
And finally, as I said, past prices are not any kind of a direct guide to your production decisions today,
as Hayek sometimes Lucy, when speaking, Lucy says, but in fact, they are really only a starting point,
part of the experience of the entrepreneur that is necessary to figure out what future consumer prices will be.
And I will stop there and take any questions.
I don't want the George Mason line on this.
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.
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.
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.
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.
I've told Pete this and we've had arguments about this.
I point out that there is an important role for knowledge,
but it's knowledge that individual entrepreneurs must absorb themselves,
from their experience of present market conditions,
which will allow them then to formulate their understanding of future market conditions,
that is their forecast.
So what I'm saying is that prices don't give you this knowledge.
Prices don't give you the knowledge of what to do.
Prices that you see today do not give you the knowledge of what to do
when you're oriented in producing towards the future, okay?
So I didn't make that, in the original article, I maybe didn't make that as clear as I should have done.
So I, you know, I...
So would you still, in the sense that that aspect of knowledge is lacking from high-experimentational knowledge?
I think this whole focus on, yeah, I don't think Hayek focuses enough, I think Steve even admits this,
in economics and knowledge and use of knowledge in society, doesn't focus enough on monetary calculation.
Now Steve and Pete, who also have come to agree with me about the appraisal process and the centrality of the entrepreneur
and of money prices and all of that, they still go on to say,
Well, prices are imperfect substitutes for knowledge of the future,
or for knowledge you need for production.
They lapse back into conflating future prices and present prices.
They're not, okay?
Prices do not give you knowledge of the future.
Prices give you knowledge of what happened in the past, okay?
If you see a price, it's either going to be a price that returns to the entrepreneur a profit or a loss.
So, it means that he made a mistake or he was correct in the past, okay?
The only reason why that price is good or is useful is because it's a starting point by which you can say,
well, if demand goes up and supply changes, these things will happen to price.
But to know if demand or supply are going to change in the future,
that's where your experience of the market and your forecast of the future of consumer demand and so on,
like Stephen Job's and so on, that's where that comes in.
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?
Yes, yeah, Bob?
First of all, I totally agree that there's a difference between Mises and Hayek.
But this point that Dan touched on, I'm not so sure why you died by looking into it.
Right, right, right.
Right.
Right, right, right, right.
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,
And besides this fundamental criticism, there's a criticism brought forth by Hayek and Robbins about the fabulous number of equations you would need.
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,
there he says his critique is different from Hayek's and is the fundamental critique.
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?
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?
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.
But the reason we hammer on this point is because this is, social calculation is a fundamental criticism.
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.
and so on. All of that's correct. But even if you had all the knowledge, you could not calculate economically.
So it's a question of what's fundamental and what's something that's additional to it.
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.
Some good things on the web on this, but prices that we see, any prices that are realized,
realized prices, which means prices that are in the past, only convey, to the extent they
do convey knowledge, they convey knowledge about past decisions.
Prices, future forecast prices, are based on our knowledge of past conditions.
In other words, we have to have the knowledge before we can forecast these prices.
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.
But that becomes almost trivial, right? I mean that's just another, I mean we're talking about calculation in a different way.
Hayek didn't mean knowledge in that sense.
I guess that's my...
Hayek meant knowledge of particular circumstances of time and place.
That somehow, you know, local entrepreneur knows those things,
but he needs some idea of what's going on in the rest of the economy,
and so present prices give him that.
So they take knowledge to the decentralized producer who knows local things,
and allows him to make reasonable decisions.
And Hayek does say that to the extent that the economy works, it's because prices are very near the equilibrium levels.
There are a number of quotes, and I've gone over this, and Steve and Pete refused to answer me on that basis.
Okay, so that might clarify matters a little bit.
Any other questions? Yeah.
This process of the experience of present prices is in the forecast that it's going to take a long time.
I mean, this is logical induction.
Has anyone done anything with this concept of the world to be able to use it?
Not that I know, but I'd like to see something like that.
When you say logical induction, what do you actually mean?
I never heard...
And although we don't know for sure what's going to happen, we make a good guess.
Attempts to determine what kind of happens.
It's not absolute.
It's not empirical.
You make a good guess.
So there can be better or worse guesses.
There's a criterion in you for better or worse guess.
Well, that's very interesting.
I'm not a philosopher, but I like to see somebody work.
I think there has to be more work on this.
I don't think this is the final word by any means.
There's been a number of papers. I gave you just the basics, but there's been a number of papers.
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.
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.
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.
One or two more questions? Yes, go ahead.
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.
I think that's true.
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?
and that, in fact, it would take, and it's not in the form that can be easily communicated.
I mean, those types of things are important additional critiques of socialism,
but they're not the basic critique, okay?
I haven't thought much about what you're saying,
but I think there is scope there to develop that further.
David Gordon has, in a review of something, I don't remember exactly where he wrote that.
Well, you know, just because Mises is correct doesn't mean Hayek's not correct.
It simply means that Mises is more fundamental.
Oh, one thing I did want to say is that I don't think...
Hayek did try to break away from general equilibrium that he had learned from Wieser in his 1937 article and 45 article.
But the way he did so was not to make things more dynamic, but to simply say, well, knowledge isn't given.
It isn't in one place.
So if it was, we would have general equilibrium.
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.
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.
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?
No, actually I should have mentioned that because that's a very good question.
And really briefly, everyone thought that Mises and Hayek lost the debate, all neoclassical economists, I should say, and the intelligentsia.
They thought, well, you can look at the Soviet Union and the Lerner and Langer won the debate,
because the neoclassical paradigm is one in which general equilibrium plays a central role and what they said accorded with general equilibrium.
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.
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,
It was thought that the debate had ended in the 1930s, and that the Austrians had been the losers.
In fact, Oskar Lange sarcastically said we ought to erect a statue in the Ministry of the Economy to Ludwig von Mises in Poland.
Because he did bring up a problem that did affect socialism, that of economic calculation, but we solved it.
So he brought up a problem. So Langer and Langer solved the problem.
What was interesting, when Langer went back to Poland to become an economic commissar,
he didn't use any mathematical solution, he didn't use any trial and error method.
He says we don't need a computer. He said that the way we operate is akin to that of a computer.
But anyway, I'll end there, but the debate over the base is still going on. Thank you.