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Mises’ Calculation Problem, in Simple Language.

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Mises’ Calculation Problem is the name for a problem Mises claimed will exist in any Socialist or Communist country that will spell the inevitable economic doom of that country.

Many have criticized Communism and Socialism from the psychological side. Why will anyone work if they don’t get paid? How will you find the angels to run the country and not be cruel dictators? The Communists reply was a pretty lame one, that Socialism will breed a New Man, one free of the free market mentality, which is all about selfishness. Thanks to the fresh air of Socialism throughout the land, men will from the very cradle, or maybe after a few years of schooling, understand that selfishness is bad, and will live to serve their fellow men.

Lame as that sounds to me and to anyone familiar with the human condition, one cannot refute it with cold logic. Maybe Socialism will change the world. Who can prove otherwise [emphasis on “prove”]?

But Mises came along and claimed he had found proof, logical step by step mathematical proof, that even if all men were angels from the get go, even if they were all-wise and all-generous without a selfish or stupid bone in their body, Socialism and Communism were doomed. And the doom would be because they would be incredibly wasteful  in ways that it would be impossible to stop, from the one feature of Socialism that is its very definition. In other words, a Socialist country would throw all its wealth, all its food, all its clothing, all its housing, all its everything, into the sea, where it could never be retrieved. [Well not exactly. But it would be so wasteful of what it has, on such a grand scale, that the results would be the same as if they had tossed everything into the sea].

Pretty bold statement, no? But apparently Socialists who read his proof were stunned. He’s right! What do we do now? Of course, after a while, they found a way. They just straw manned his argument to death. And you can find as many articles as you want on the internet refuting, supposedly, Mises’ argument. All of them have no clue what the argument was, either from ignorance or by design, and disprove something else instead. Mises’ argument stands triumphant, as the lucky readers of this humble blog will find out right now.

The very definition of Socialism is that all the means of production belong to the gov’t. Spin it any way you want to, that they belong to everybody, or to nobody, or to the gov’t, but the important point is that there is no buying and selling of means of production. Nobody can buy or sell steel or coal or a factory, because it is illegal for anyone to own them. That would be Capitalism, if a private person owned any means of production whatsoever and could do with it as he pleased.

OK, say the Socialists. Fair enough. That is indeed the very essence of Socialism. But so what? Where’s the doom?

The doom, say Mises, is that if you are not allowed to buy and sell stuff, then, obviously, you cannot put a price tag on them. A price for something comes when a buyer and a seller do some preliminary haggling, and then agree on a price.

OK, say the Socialists. Fair enough. You cannot make up a price and pretend it has meaning, we admit that. That’s why every time there is a govt decreed price for something, as in wage and price controls that were imposed on various countries at various times by their gov’t, there was always a black market. Meaning there were huge numbers of people who did not accept the gov’t phony price, and set up a different price behind the gov’ts back. Fine. We agree that if you can’t buy and sell stuff, there is no such thing as a price. But so what? Where’s the doom?

The doom, say Mises, is that if you have no price for the means of production, then you have no idea of costs when you make something. Even if you have prices for the final product, say $100 for an iPhone, if you don’t have prices for the components of the iPhone, the things that went into making the iPhone, then you do not know if you have made a profit.

OK, say the Socialists. That’s true. If there are no prices for the means of production, then the manufacturer cannot know if he made a profit. But that is so Capitalist. We Socialists are not about profit. We are about for each according to his needs. Looking for profits is what got the world into the mess it is in now, with all that greed running wild. Agreed, if the govt owns all means of production, there is no way of knowing if a manufacturer is making a so-called profit. But so what? Where’s the doom?

The doom, say Mises, will be explained in Smiling Dave’s very next article.


6 Comments

  1. […] The above is just a sparse outline of what the Calculation Problem is, to make sure we get it is not the same thing at all as the Knowledge Problem But of course that sparse outline can use some filling out, in simple language, Smiling Dave style. So mosey on over to https://smilingdavesblog.wordpress.com/2013/08/06/calculation-problem-all-in-one-place/. A great place to start is here: https://smilingdavesblog.wordpress.com/2012/08/11/mises-calculation-problem-in-simple-language/ […]

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  2. […] have written at length about Mises’ Calculation Problem, the problem he proved will doom communism and socialism. […]

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  3. Mabel says:

    Hi,

    I am prepared to defend the premise that the calculation problem was solved by 1970.

    I know that is a challenging premise, so I request that you click over to http://www.sfecon.com and ask yourself: could these arrays of numbers be regenerating themselves if the calculation problem were not solved? The software generating this demonstration is freely available for you to run on your own desktop.

    I would like to address the premise that economic calculation is impossible because only free markets can generate the prices needed to guide economic order into the general optimum. All this tells me is that a true science of macroeconomics would present an understanding of how free markets generate such prices – hence macroeconomics is not yet a science. We all knew that.

    All the Austrians tell me is they cannot fathom how anyone might map out the complexity behind how markets compute prices, and that this is supposed to be a sufficient proof that no else can possibly penetrate that complexity, ergo: anyone’s demonstration of the ‘swarm intelligence’ creating the ‘information-carrying particles’ of money prices is ipso factor a fraud. Invincible argument, but utterly trite.

    As a partisan of the free market, I am not upset by a mathematically determined solution to the calculation problem. On the contrary, I wish to develop that solution into educational software that extolls the virtues of the freest possible markets. We would likely agree that the self-interested disposition of private property is, first and foremost, an aspect of liberty. If liberty is the objective, the we should choose markets even if they were not efficient.

    I am afraid the Austrian’s insistence on merely verbal argumentation to the exclusion of objective demonstrata will ultimately be used to discredit liberty along with their harebrained economic commentaries. Anyone care to discuss a separation of these issues?

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  4. Smiling Dave says:

    0. Thank you for the link to that little matrix. It helps show exactly what the calculation problem is, once we grasp why that whole matrix is null and void in a socialist economy.

    1. The boo-boo is in the very first column of green numbers. That whole first column, all of it, is a blunder, when applied to a socialist economy. In a socialist economy, there are no Expenditures. The State owns all factors of production. They pay no one for them. So where are all those green numbers going to come from, which represent Expenditures on means of production? On the other hand, you can’t say Expenditures are actually zero, because means of production are being used up. There are Expenditures, but no way to calculate what they are. That’s the calculation problem.

    Naturally, when that whole first column is filled with question marks, the rest of that beautiful little matrix becomes useless. No data to input means no output, obviously.

    2. The humble article did not say the problem was complexity of something or other. Notice that the example it used was not complex at all. There is no mention of “information carrying particles of money”, either. All it had was one factor of production, phosphorescent plastic, and two possible products, skeletons and laptops. And yet, there was an unsolvable calculation problem.

    3. I don’t know whether the complexity/information carrying argument is invincible, or utterly trite. I do know that bringing it up in a comment about my humble article, and about Mises’s calculation problem, is like the bride wearing a football helmet at her wedding. Out of place.

    4. Do you know why Austrians insist on verbal argumentation? What is your rebuttal of their reasoning?

    5. Do you know why they claim objective demonstrata are useless in predictive economics? What is your rebuttal of their reasoning?
    Have you read America’s Great Depression, by Rothbard? Have you noticed how full it is of objective demonstrata? How do you reconcile that book with your presumption that Austrians exclude objective demonstrata?

    I’ll give away the secret. In fact I already have, right here: https://smilingdavesblog.wordpress.com/2014/01/31/thoughts-on-ae-and-interpreting-data/

    6. Can you please give examples of what you consider harebrained economic commentaries? What is your rebuttal of their reasoning?

    7. Liberty and Austrian Economics have been separated on the Internet, with many people waving the liberty flag, but lacking the intellectual capacity, or honesty, or energy, to grasp AE.

    Liked by 1 person

  5. […] lovely young lady named Mabel Placed a comment on my Calculation Problem Article, saying it’s a fable. I took no offense, Did not say, […]

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  6. […] her comment on my previous article, [which is comments on a previous article, if you want to be thorough], hot off the […]

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