More comments on Mises's paper
August 19, 2009
– Comments (16)
Mises's paper (http://mises.org/pdf/econcalc.pdf) is rather long, so one cannot refute all of his objections in a single post. Still, it is worth trying becuase the erroneous postulates of Mises seem to hold sway over a substantial segment of the economist community. As a disclaimer, this is NOT intended an as apology of Marxism, which is yet another erroneous theory that has failed the reality test; having said that, it was still a mistake on Mises's part to attack Marx where Marx was right. Let us now look at Ch. 2, entitled "The nature of economic calculation in the socialist commonwealth".
In his opening salvo, Mises claims, correctly, that exact valuation of goods relative to one another is unfeasible except in the simplest situations. To quote Mises:
"But it is quite a different matter when the choice lies between the utilization of a water-course for the manufacture of electricity or the extension of a coal mine or the drawing up of plans for the better employment of the energies latent in raw coal."
To a religious mind, that should seem sufficient. Those with the analytical mindset, however, will not be so easily convinced. The fact that planning involves a margin of error does not by itself tell us anything. Indeed, margin of error is part of any human activity, but that does not mean that every endeavor is destined to fail. For example, Newtonian Mechanics has a margin of error, but that doesn't prevent us from using it. Instead of pointing out the obvious, the honest critic should answer the following questions: how big is the margin of error? Is it tolerable? How does it compare against the alternatives? Can it be reduced and how? This the ultimate test that one uses to distinuish an honest economist from a dilettante. Where the honest economist provides numerical estimates, the dilettante simply cites a mantra becuase he is unaware that the mantra must be supported by numbers.
Unfortunately, Mises fails this test. He does, to be sure, mention what he feels are the advantages of capitalism:
"In an exchange economy the objective exchange value of commodities enters as the unit of economic calculation. This entails a threefold advantage. In the first place, it renders it possible to base the calculation upon the valuations of all participants in trade. The subjective use value of each is not immediately comparable as a purely individual phenomenon with the subjective use value of other men. It only becomes so in exchange value, which arises out of the interplay of the subjective valuations of all who take part in exchange. But in that case calculation by exchange value furnishes a control over the appropriate employment of goods. Anyone who wishes to make calculations in regard to a complicated process of production will immediately notice whether he has worked more economically than others or not; if he finds, from reference to the exchange relations obtaining in the market, that he will not be able to produce profitably, this shows that others understand how to make a better use of the goods of higher order in question. Lastly, calculation by exchange value makes it possible to refer values back to a unit. For this purpose, since goods are mutually substitutable in accordance with the exchange relations obtaining in the market, any possible good can be chosen. In a monetary economy it is money that is so chosen."
Alas, this attempt falls short because it is impossible to determine from it how important these advantages are to Mises. Meanwhile, upon a closer look, all 3 advantages prove mostly fictitious. In the first place, Mises is mistaken to assume that the sum of individual subjective valuations will somehow produce an objective valuation. If you ask a bunch of chimps how much is 2+2, and then average their answers, you certainly WON'T get 4. By dismissing the opinion of an individual chimp as subjective, you also dismiss the possibility of an objective valuation. By the way, if you are a believer in the wisdom of crowds, it won't work here. Know why? Because chimps don't have the concept of a negative number...their answers will range from 0 to +infinity...On the average, chimps believe that 2+2 is an infinite number.
The second advantage perceived by Mises is also a fiction. "Anyone who wishes to make calculations in regard to a complicated process of production will immediately notice whether he has worked more economically than others". That Mises' "anyone" would be using a wrong standard that has nothing "objective" about it is only part of the problem. Even if that standard were accurate, it would still show only the situation at the current moment. There is no predictive power to it, and therefore it cannot be used as an accurate planning tool. We now have supercomputers and a hundred years of data at our disposal, and yet no one in the whole world will tell you how much oil is going to cost 6 months from today. As of this writing, the sum of subjective valuations is putting the price of oil at 67 dollars a barrel, but that doesn't tell you whether or not drilling the Arctic shelf will be justified by the future prices. "But oil companies are still making such decisions, don't they?" - you might ask. Yes, they do, and they do it by putting some arbitrary number into their computer, and then if their analyst's guess was not too far off, they make money, and if the analyst was wrong, they lose money, but in either case, their model was just as "objective" as a coin's toss. In the case of the most conservatively run companies, the practice is to base their model on a low price, then earn an extra profit if they are lucky. The state planning agency does exactly the same: plan conservatively and keep large reserves to handle any future accidents.
Finally, the last advantage that "calculation by exchange value makes it possible to refer values back to a unit " is just a trivial observation that it's nice to have some reference point. But if there is nothing special about exchange value that would make it "objective", this reference point will be as good as any other. For example, by the exchange value of the S&P index has just changed from 1500 to 666 and then back to 1000. Referring if back to the unit chosen by Mises gives us a margin of error that will make Gosplan's planning practises seem rational in comparison. And yet we are talking about the same index, the same companies, and the same economy whose GDP has only changed by a couple of percentage points.
The next page of Mises' essay offers a disappointing repetition of the points already made, so after skipping it, we arive to his next contention about socialism piggybacking on the success of its rival. Here I think he is wrong again, but let's leave it for another post.
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