Home » Uncategorized » Can Demand Curves Solve Mises’s Calculation problem?

Can Demand Curves Solve Mises’s Calculation problem?

Some people over at the forum think they have some intricate formula which will solve Mises’ Calculation Problem.

It’s based on taking the demand curves for consumer goods, doing some math with them, and thus getting a number value for every factor of production.

Which is a big mistake right there. They think that somewhere in the drawer of someone or other, there is a piece of paper with the demand curve for, say, Toyota Corrolas, telling us how many people will buy Corrolas at price X, how many at price Y, etc. This demand curve has enough data points for to give us the general shape of the curve, enabling us to fill in the blanks.

But guys, there is no such demand curve in existence, not for Toyota Corrolas, or for anything else. I wrote about this before, but I’ll repeat the relevant stuff here.

Supply and demand curves are not made by gathering data from the real world. There is no actual data of how many units people actually bought or sold at, say, $1 a bushel, at $2 a bushel, etc. Doing this has inherent problems always, but especially for the Socialist economy. What are they going to do, sell every consumer good at one price for a month or two, to see what happens, then switch to a different price for a while, until they have enough data points to build a demand curve?

And will they do this for everything, all goods selling for $10 this month, and then all for $11 next month? Of course they cannot do it that way, because a change in other prices will change the number of people buying Toyotas. After all, if food, gasoline, everything, goes up, a lot more people will not buy the car, because they don’t have the money. So these Socialist statisticians will have to alter prices one item at a time. First they will determine the curve for Corollas. It might take them a few years. Then they can move on to other car makes and models. Then they can start with tomatoes, peppers, broccoli, and after a few million years, they will have their curves all drawn. I mean, seriously.

Not only that, the curves are not even meant to represent what happened in the real world, but rather what is going on in the minds of people. It represents what people are “willing and able” to buy and sell at various prices.  Henry Hazlitt spells this out:

All valuation begins in the minds of individuals. We are accus-
tomed to saying that market value is determined by supply and
demand, and this is as true of money as of other commodities. But
we should be careful not to interpret either supply or demand in
purely physical terms, but rather in psychological terms.
Demand
rises when people want something more than they did before. It
falls when they want it less. Supply is more often thought of in a
purely physical sense, but as an economic term it also refers to
psychic factors. It may vary with price. At a higher price producers
may make more of a commodity, or be ready to offer more of the
existing stock for sale.

Since nobody has learned to read minds yet, we see that every supply and demand curve in the world must be hypothetical. And indeed, that is what they are, teaching aids to explain hypothetical situations. They are intended to teach general principles, and most of them don’t use any numbers at all.

Supply and demand curves are not trying to summarize a historical event in the real world, nor to predict the numerical future of a real world.” They are perfect examples of what Mises was talking about when he wrote [quoted here] that true economics principles are qualitative, not quantitative.

 

 

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