Wednesday, March 2, 2016

Rivalry and Central Planning (Modern Technology and the Calculation Debate Part 3)

This is an excerpt from a paper presented at ASSC 2016. Full Paper available here.

Not only can the information relevant to economic calculation not be collected by any agent by any means, the information that can be collected and used for central planning makes calculation more difficult, not less. Mateusz Machaj[1] writes of the fundamental difference between centrally planned “prices” and prices which emerge from free exchange. The “planners” in a free market, he argues, are the various entrepreneurs who attempt to make plans using price signals as clues and who then subject these plans to the judgement of profit or loss. In this way, productive enterprises are allowed to persist while those which are unproductive, and, thus, waste resources, are forced to shut down. In a centrally planned scheme, however, prices do not control the planners; planners control the prices. So production will be driven in the direction of the planners’ preferences regardless of economic reality because the forces which would constrain entrepreneurs are themselves under the control of the planners.

This critique is made more fully by Don Lavoie[2] who emphasizes the role of rivalry between competing production plans in the formation of prices that allow for rational economic calculation. Lavoie recounts the Austrian critique specifically toward the more recent proposal of so-called “market socialism.” Later in the calculation debate, proponents of central planning like Lange and Lerner retreated from full socialism and essentially conceded half the argument to the Austrians by defending, instead, market socialism. This model entailed allowing markets to allocate consumer goods and using the information generated by that process to centrally plan the production side of the market. The Austrians would agree that allowing the price mechanism to work on the consumer side does solve the calculation problem for that side of the market (that is merely a concession of the Austrian thesis), but they further held that free prices are necessary for all orders of goods on both sides of the market for rational economic calculation to occur throughout the whole economy. As Lavoie demonstrates, centrally planned production still does not work under the market socialist model; free capital markets are indeed necessary in addition to free markets for consumer goods.

This point is precisely where the modern socialist arguments about the use of technology may appear to function best. Perhaps, as noted above, consumer preferences are of a nature that they cannot be assimilated into a central plan by any technological means, but surely the producer side of the market does not suffer from this same shortcoming. The argument might go that planners could simply take the information from freely fluctuating prices in markets for consumer goods as sufficient to centrally plan production of those goods which consumers value if they also have access to the wealth of information produced by radically interconnected technologies like the Internet of Things. Are not these two sets of data sufficient to establish a rational allocation of higher order goods? To go back to Hayek’s tin, why would one need market prices to adjust exchange ratios in response to changes in the availability of tin if a computer can provide the information even more quickly? This position once again fails on a fundamental level, as Lavoie emphasizes, because the information bearing properties of prices in a free market are the result of rivalry between various plans.

Because factors of production are scarce and have alternative uses, producers have to bid them away from alternative production plans. This rivalrous bidding process is what makes factor prices the bearers of economic information that can be used to engage in economic calculation. Rivalry means that each producer has his own ends in mind and will judge potential production decisions by his expectations of how they will achieve his ends. His use of scarce factors is then judged based on its ability to satisfy others’ preferences, and this information is communicated as either a profit or a loss. The producer can then use the understandable unit of money prices to engage in economic calculation and determine his preferred course of future action. But if there is central planning, then there is one goal of production not many competing goals. In that case, the allocation of capital is directed toward the goal of the planners. Even if the planners set up some sort of exchange ratio between factors, these “prices” will not carry with them the information necessary to economic calculation. The old dream of mandating that price equal marginal cost fails because marginal cost is not given, and it is not a characteristic of the inputs themselves. All costs are opportunity costs and the opportunity cost of using particular inputs is discovered by the process of bidding factors away from alternative uses. Centrally planned exchange ratios for factors of production will not have encoded within them information about the alternative uses of factors because they acquire that property from being bid away from alternative uses of which there are none under central planning.

Conclusion

The crucial fact about the flaws in even the market socialist thesis is that it is not a technical problem but a fundamental flaw in the idea of central planning. Proposing to solve the calculation problem with ever more advanced and connected computers is, therefore, to misdiagnose the problem. It is quite likely that very interesting and useful innovations will be produced by solving technical problems with the IoT, block chains, and related technologies, but to set these phenomena as solutions to the socialist calculation problem gives the right answer to the wrong question.




[1] Machaj, M. (2014). Market socialism and economic calculation. Argumenta Oeconomica, 1(32).
[2] Lavoie, D. (1985). Rivalry and central planning. Arlington, VA: Mercatus Center at George Mason University.

Tuesday, March 1, 2016

Central Planning and Consumer Valuation (Modern Technology and the Calculation Debate Part 2)

This is an excerpt from a paper presented at ASSC 2016. Full Paper available here.

The impossibility of economic calculation within socialism does not derive merely from the volume or complexity of information. As Hayek put it, the information necessary to calculation does not just happen to be dispersed among various individuals in a way that makes aggregating it difficult. Rather, information is “essentially dispersed.” [1]  The usefulness of information derives exactly from the fact that it is not in in the hands of a central planner, be it a person or computer, but in the hands of Hayek’s “man on the spot.” [2]

Even if all relevant information could be aggregated to a central computer in real time, there is still no way for an algorithm of any complexity to produce a superior order than that which emerges from the market process making use of the price mechanism. “Superior” is obviously a value laden term, but when its definition is carefully considered, the first fatal flaw in computer driven socialism is revealed: a system of pricing and allocating resources must be judged by the subjective preferences of those within the system. An algorithm may be able to set exchange ratios between goods which would resemble those generated by the price mechanism in a free market, but they must be directed toward an end which is designed by a minority of individuals or emerges from the program itself. The ends pursued by a computer program, therefore, are not based on the subjective preferences of all individuals in the economy, and this massive piece of data, by its very nature, can never be assimilated into an objective algorithm. As Mises puts it, “It is impossible that there should ever be unit of subjective use-value for goods. Marginal utility does not posit any unit of value. Judgements of value…do not measure; they merely establish grades and scales.”[3] The market prices of goods reflect not only how rare or abundant they are in absolute terms but also the subjective value of those goods in alternative uses. A good may be extremely rare but have a very low price if no one values it. The same good, however, may obtain a very high price if many individuals strongly prefer it to available alternatives. The process of bidding up the price of a good is the product of human action pursuing individual preferences, and no amount of data about the state of the world can allow one to accurately predict each person’s value scale prior to their action. As James Buchanan[4] put it, a central planning scheme, even when it possesses all available information, only works if we disregard the fact that humans make genuine choices. He writes,
The potential participants do not know until they enter the process what their own choices will be. From this it follows that it is logically impossible for an omniscient designer to know unless, of course, we are to preclude individual freedom of will. [Emphasis in original]
So a hyper-advanced computer or Internet system possessing all information about the state of all goods in real time still cannot account for the very engine that drives the emergence of a spontaneous order, namely human action. It must substitute some set of objective preferences for the numerous subjective valuations of each potential market participant, and this fact puts central planning at large disadvantage compared to the market price mechanism. The coordination facilitated by the price mechanism is not the result of objective information transmission only – that is, bare facts about the world – but the use of that information in exchanges which themselves rely upon the inversely ordered subjective preferences of acting individuals. In order to achieve a “price” under central planning which contains the same richness of information as a price set on the free market, the planner, be he man or machine, must possess the necessary data before making a determination. But the existence of that data depends not only on information about a good but also on information about individuals’ value scales which are revealed by action and, thus, cannot be known prior to the action. Therefore, the data necessary to make the determination of economically useful price via central planning does not exist to be known.


[1] Hayek, F., & Bartley, W. (1989). The fatal conceit: The errors of socialism (University of Chicago Press ed.). Chicago: University of Chicago Press.
[2] Hayek, F. (1945). The use of knowledge in society. Menlo Park, CA: Institute for Humane Studies.
[3] Mises, L. V. (1920). Economic calculation in the socialist commonwealth. Auburn, Ala.: Ludwig Von Mises Institute, Auburn University.
[4] Buchanan, J. (1983). Order defined in the process of its emergence.