Economic calculation under socialism

From AIERvideo comes this video on economic calculation under socialism.

Let's assume socialist central planners have the best intentions. How will they decide what to produce, where to produce it, how to produce it, and for whom? These questions by Mises kicked off the "Socialist Calculation Debate".

The march of history: Mises vs. Marx - the definitive capitalism vs. socialism rap battle

Rosolino Candela interviews Peter Boettke on Hayekian ideas

Widely considered as one the most influential economists of the 20th century, F. A. Hayek continues to command the attention of scholars with his life and work. On this episode, Peter Boettke and Rosolino Candela sit down to discuss Boettke's new book F. A. Hayek: Economics, Political Economy and Social Philosophy (Palgrave, 2018). Boettke presents this new book as focusing less on Hayek as an individual and more on Hayekian ideas. Throughout the discussion Boettke and Candela examine Hayek's uniting theme of epistemic institutionalism, the competitive market process, and how Hayek's contemporaries picked up on his work. They also discuss the limitations of 'Big Data' to answer the important questions of social science. These Hayekian ideas, Boettke and Candela contend, are still as pressing and worthy of research today.

Economic action beyond the extent of the market by Per Bylund

The Murray N. Rothbard Memorial Lecture 2017, sponsored by Helio Beltrão, by Per Bylund. Bylund is an assistant professor of entrepreneurship and Records-Johnston Professor of Free Enterprise in the School of Entrepreneurship at Oklahoma State University. Presented at the Austrian Economics Research Conference at the Mises Institute in Auburn, Alabama, on 11 March 2017.

A dialogue on Israel Kirzner and his contributions to price theory and the competitive market process

From Peter Boettke at the Coordination Problem blog comes this bit of good news,

Liberty Matters this month features an essay by me on Kirzner with commentary by Mario Rizzo, Peter Klein, and Frederic Sautet. Please join the conversation once it opens to the public in a week or so.

Well worth taking the time to read.

Larry White on India’s demonetization and Austrian macroeconomics

From David Beckworth’s new podcast series, Macro Musings comes this audio of an interview with Larry White,

Larry White is a professor of economics at George Mason University and has written widely on monetary theory, free banking, and the Austrian School of Economics. Today, he joins the show to discuss the recent demonetization efforts in India to crack down on corruption. White argues that India’s efforts to end the circulation of large notes and begin the circulation of new notes is having pernicious effects on the Indian population. He and David also discuss Austrian Business Cycle Theory, how this theory was developed by great economists such as Ludwig von Mises, and how the theory may have played a role in the lead up to the Great Recession.

Why falling prices are good for business

Introduced by Murray Sabrin, Joseph Salerno spoke on "Why Falling Prices Are Good for Business" at Ramapo College in New Jersey on October 4.

Dr. Salerno's portion of the talk begins at 6:20. The lecture is followed at the one-hour mark by a panel discussion covering business cycles, the Fed, interest rates, and financial crises.

Latest issue of Econ Journal Watch

Volume 13, Issue 3, September 201

In this issue (.pdf):

• Instrument found flat: Stan Liebowitz criticizes an influential Journal of Political Economy article about music piracy’s impact on the sound recording industry.
• You get what you measure: Daniel Schwekendiek explains how South Korea followed a proven template of incentivizing exports to boost Web of Science publications and raise the rankings of its academic institutions.
• Now entering a Republican-free zone: Mitchell Langbert, Anthony J. Quain, and Daniel Klein report on the voter registration of faculty at 40 leading U.S. universities in Economics, History, Journalism, Law, and Psychology.
• Whither science in gender sociology? Charlotta Stern investigates whether gender sociologists blinker themselves from scientific findings about sex differences.
• Carl Menger on classical political economy in relation to the politics of his day: A first-ever English translation of Menger’s 1891 article calling for a recovery of the Smithian tradition, with an introduction by the translators Erwin Dekker and Stefan Kolev.
• How to Do Well by Doing Good! In this 1984 essay,Gordon Tullock counsels young economists that doing well and doing good go together. Some elements of the essay, if accurate once, are dated now, but others are timeless.

A couple of interesting audios from Econ Journal Watch

EJW Audios

Erwin Dekker on Carl Menger on Adam Smith

Erwin Dekker and Stefan Kolev have provided in EJW a first-ever English translation of a remarkable 1891 essay by Carl Menger. In this podcast Dekker discusses the essay, adding context drawn from his own studies (represented by his book The Viennese Students of Civilization: The Meaning and Context of Austrian Economics Reconsidered), to aid in understanding Menger’s times and his legacy.

Frank Machovec on Perfect Competition

Apropos Friedrich Hayek’s essay “The Meaning of Competition,” Frank M. Machovec discusses his book Perfect Competition and the Transformation of Economics (Routledge, 1995).

Learning across disciplines and perspectives

In this conversation Jayme Lemke and Peter Boettke discuss the commonalities between three approaches to understanding the social world: Austrian economics, public choice economics, and the Bloomington School’s multiple-methods, real-world approach to institutional analysis.

The Consequences of Keynes

is the title of a new essay by Peter J. Boettke (George Mason University - Department of Economics) and Patrick Newman (George Mason University).

The abstract reads:

This paper discusses the consequences of John Maynard Keynes for the science of political economy, or the fields of economics, economic policy, and politics. It argues that the consequences of Keynes in all three fields were negative and resulted in a significant retrogression. For economics, a macroeconomic theory of an unstable capitalist economy supplanted the theory of the market process which concentrated on the individual actions of entrepreneurs and their effects on relative prices and production. For economic policy, activist tinkering on behalf of policy advisors replaced the theory of limited and hands off governments. For politics, unrestricted politicians and continual deficits and inflation replaced restrained politicians who adhered to balanced budgets and sound money.

I'm guessing not a paper that will be to everyone's taste!

Economic calculation and the theory of the firm

Ludwig von Mises is famous for pointing out that even in theory socialism cannot work. Checkout the current state of the Soviet Union and Eastern Europe or Cuba or Venezuela for empirical evidence on this matter, if you need it. Mises’s argument on ‘economic calculation’ can be summarised as follows (Boettke 1998):

“1 Without private property in the means of production, there will be no market for the means of production.
2 Without a market for a means of production, there will be no monetary prices established for the means of production.
3 Without monetary prices, reflecting the relative scarcity of capital goods, economic decision-makers will be unable to rationally calculate the alternative use of capital goods.”

In short, to be able to rationally decide on how to allocate scare capital resources among the many possible uses they can be put to, market prices are a necessary informational input. That is, entrepreneurs need prices to decide what to produce and how to produce it. Without prices an entrepreneur cannot compare the many possible goods to produce and the multitude of ways to produce them.

This shows us that any institutional regime, eg socialism, which attempts to abolish private ownership of the means of production cannot work. While it is clear that this is so for the economy as a whole, it is not so clear that the argument has important implications for institutions that are just part of the economy, in particular firms. Or it has at least two important implications for the theory of the firm.

First it highlights the need to include the entrepreneur into models of the firm. A point to keep in mind is that the neoclassical model is one in which Mises’s argument is effectively sidestepped. The model has market prices but without (real) ownership of the means of production. This is why the market socialists could use the model in response to Mises. This point is particularly relevant for the textbook, neoclassical, theory of the firm. An implication of Mises’s argument is that models that without genuine markets for the means of production, the model has no role for the entrepreneur. The entrepreneur is the one who carries out the economic calculations, she is the one who combines the factors of production together in such a way as to satisfy consumers’ current or future demands. It is also the entrepreneur who forms firms (and via them markets (Spulber 2009)). In models with ‘passive’ markets for inputs there is no genuine role for an entrepreneur. The neoclassical model in such a framework. In it the firms (and markets) are simply assumed into existence, there is no explanation for where it comes from or who forms it or why it is necessary to have it. There is no consideration of the role of the entrepreneur since there is no need of one. Inputs are simply combined via the market by the owners of the means of production responding to market prices and interaction via elaborate complete contracts.

More than 40 years ago William Baumol noted that the entrepreneur has no place in formal neoclassical theory.

“Contrast all this with the entrepreneur’s place in the formal theory. Look for him in the index of some of the most noted of recent writings on value theory, in neoclassical or activity analysis models of the firm. The references are scanty and more often they are totally absent. The theoretical firm is entrepreneurless−the Prince of Denmark has been expunged from the discussion of Hamlet” (Baumol 1968: 66).

Baumol notes that the reasons for this are not hard to find. Within the formal model the ‘firm’ is a production function or production possibilities set, it is simply a means of creating outputs from inputs. Given input prices, technology and demand, the firm maximises profits subject to its production plan being technologically feasible. The firm is modelled as a single agent who faces a set of relatively uncomplicated decisions, e.g. what level of output to produce, how much of each input to utilise etc. Such ‘decisions’ are not decisions at all, they are simple mathematical calculations, implicit in the given conditions. The ‘firm’ can be seen as a set of cost curves and the ‘theory of the firm’ as little more than a calculus problem. In such a world there is a role for a ‘decision maker’ (manager) but no role for an entrepreneur.

Market socialists could utilise this model when responding to Mises’s attack since in the neoclassical model, given it is a zero transaction cost world of complete contracts, there is no role for ownership as contracts cover every state of the world. There is no situation to be faced or decision to be made that is not included in the terms of the contract and thus there is nothing for an owner to do, the contract does it all. This is as true of the markets for the factors of production as for output markets and so such markets react passively to prices without the need of serious decision making by an entrepreneur. The manager just sets marginal benefits equal to marginal costs in both input and output markets. In fact, the model can be seen as one without entrepreneurs or firms.

As there is no role for ownership in such a world and any organisational structure can mimic any other, it’s not hard to see that a centrally planned economy can mimic a market economy, which was basically the market socialists’ claim. The market socialist argument works, in part, because the neoclassical model suppresses the role of the entrepreneur.

What this highlights is the need for the inclusion of the entrepreneur into economic theory and, in particular, the integration of the entrepreneur with the theory of the firm. This is a process that has started within mainstream economics with works such as Spulber (2009) and Foss and Klein (2012).
In his essay “Ludwig von Mises and Economic Calculation Under Socialism” Murray N. Rothbard make a second point about how Mises’s argument is relevant to the theory of the firm. Rothbard argues that Mises's point about the impossibility of socialism can be applied to the problem of the size of firms. Rothbard writes that

“There is one vital but neglected area where the Mises analysis of economic calculation needs to be expanded. For in a profound sense, the theory is not about socialism at all! Instead, it applies to any situation where one group has acquired control of the means of production over a large area - or, in a strict sense, throughout the world. On this particular aspect of socialism, it doesn't matter whether this unitary control has come about through the coercive expropriation brought about by socialism or by voluntary processes on the free market”.

In other words, it can apply to a firm.

Rothbard continues

“[ … ] Mises analysis also supplies us the answer to the age-old criticism leveled at the unhampered, unregulated free-market economy: what if all firms banded together into one big firm that would exercise a monopoly over the economy equivalent to socialism? The answer would be that such a firm could not calculate because of the absence of a market, and therefore that it would suffer grave losses and dislocations. Hence, while a Socialist Planning Board need not worry about losses that would be made up by the taxpayer, One Big Firm would soon find itself suffering severe losses and would therefore disintegrate under this pressure. We might extend this analysis even further. For it seems to follow that, as we approach One Big Firm on the market, as mergers begin to eliminate capital goods markets in industry after industry, these calculation problems will begin to appear, albeit not as catastrophically as under full monopoly. In the same way the Soviet Union suffers calculation problems, albeit not so severe as would be the case were the entire world to be absorbed into the Soviet Union with the disappearance of the world market. If, then, calculation problems begin to arise as markets disappear, this places a free-market limit, not simply on One Big Firm, but even on partial monopolies that eradicate markets. Hence, the free market contains within itself a built-in mechanism limiting the relative size of firms in order to preserve markets throughout the economy”.

Rothbard then notes that this argument is related to Coase's argument about the size of firms.

“This point also serves to extend the notable analysis of Professor Coase on the market determinants of the size of the firm, or of the relative extent of corporate planning within the firm as against the use of exchange and the price mechanism. Coase pointed out that there are diminishing benefits and increasing costs to each of these two alternatives, resulting, as he put it, in ah " 'optimum' amount of planning" in the free market system. Our thesis adds that the costs of internal corporate planning become prohibitive as soon as markets for capital goods begin to disappear, so that the free market optimum will always stop well short not only of One Big Firm throughout the world market but also of any disappearance of specific markets and hence of economic calculation in that product or resource. Coase stated that the important difference between planning under socialism and within business firms on the free market is that the former "is imposed on industry while firms arise voluntarily because they represent a more efficient method of organizing production." if our view is correct, then, this optimal free-market degree of planning also contains within itself a built-in safeguard against eliminating markets, which are so vital to economic calculation”.

So we can think of Mises’s argument as giving an upper bound to the size of firms.

Refs.:

• Baumol, William J. (1968). ‘Entrepreneurship in Economic Theory’, American Economic Review, 58(2) May: 64–71.
• Boettke, P. J. (1998). “Economic Calculation: The Austrian Contribution to Political Economy,” Advances in Austrian Economics 5: 131–58.
• Foss, Nicolai J. and Peter G. Klein (2012). Organizing Entrepreneurial Judgment: A New Approach to the Firm, Cambridge: Cambridge University Press.
• Rothbard, Murray N. (1976). "Ludwig von Mises and Economic Calculation Under Socialism," in Lawrence Moss, The Economics of Ludwig won Mises, pp. 67–77.
• Spulber, Daniel F. (2009). The Theory of the Firm: Microeconomics with Endogenous Entrepreneurs, Firms, Markets, and Organizations, Cambridge: Cambridge University Press.

Austrian School of Political Economy

From the The Vienna Circle comes a series of brief interviews with Chris Coyne, Associate Professor of Economics at George Mason University on Austrian Economics. The discussion is about that analytic framework developed by economists associated with the Austrian school of economics and its relevance for past and present research in political economy.

Austrian School of Political Economy I: Value, Prices, & Economic Calculation


Austrian School of Political Economy II: Knowledge & Institutions


Austrian School of Political Economy III: The Continuing Relevance of Austrian Economics

New Austrian Economics book series

There is a new Austrian Economics book series being edited by Per Bylund which is looking for book proposals and suggestions for authors.

Checkout the series web page at Agenda Publishing.

Series Description

This book series publishes new scholarship within the Austrian school of economics. Although considered outside of mainstream economics since the 1930s, the Austrian school has continued to thrive as an alternative position that traces back to the marginalist revolution.

The Austrian approach provides unique insight into market processes and offers a powerful framework for understanding major economic events such as the fall of socialist economies in the early 1990s and the financial crisis of 2007–08. Thanks to this promise, and to the limitations of mainstream economics, the Austrian tradition of social thought has recently attracted increasing interest from a new generation of economists, social scientists, and related scholars.

The series seeks to capture this renewed interest by publishing original research within the modern Austrian tradition: contributions that make new theoretical advances – building on the work of Mises, Hayek, Rothbard, Kirzner, Lachmann and others – or that offer fresh and novel applications of this work. The series publishes research that advances or relates to the Austrian tradition from scholars in economics, management, philosophy, political science, sociology, and related fields.

The series invites contributions from both new and established scholars and welcomes proposals ranging from multi-authored collections of essays to single-authored monographs. Junior scholars are especially encouraged to submit their work.

For further details, or to discuss submitting a proposal, please contact the series editor per.bylund@okstate.edu or publisher steven.gerrard@agendapub.com.

Hayek's "The Use of Knowledge in Society" - a summary

For all of you out there who have not read Hayek's "The Use of Knowledge in Society", and you all should have, Steve Horwitz comes to your rescue. Horwitz gives a summary of Hayek's argument that stresses that both private property and the price system are necessary for economic coordination.

1. Knowledge IS decentralized in that each of us has our own personal knowledge of time and place (and that is often tacit).
2. Therefore, planning and control over resources SHOULD BE decentralized so that people can take advantage of those forms of knowledge.
3. HOWEVER, decentralization of control over resources (what Hayek calls "several property") is necessary BUT NOT SUFFICIENT for social coordination.
4. Effective decentralized planning also requires that people have access, in some form, to the bits of knowledge that other people have so that they can form better plans and have better feedback as to the success and failure of those plans.
5. Providing that knowledge is the primary function of the price system. Prices serve as knowledge surrogates to enable people's individual knowledge and "fields of vision" to sufficiently overlap so that our plans get COORDINATED.
6. In other words: decentralized control over resources is NECESSARY BUT NOT SUFFICIENT for a functioning economy. Such decentralization requires some process that actually ensures that separately made decisions are, to a signifcant degree, based on as much knowledge as possible so that economic coordination can be achieved. That is what the price system enables us to do. [EDIT: and the prices in question are not, and need not be, equilibrium prices.]

Decentralized decision making without a price system will produce very little coordination and prosperity. Centralized decision making will render a price system useless for economic coordination.

The fact of decentralized knowledge requires that an economy capable of producing increased prosperity for all has both decentralized decision-making (private/several property) and a price system to coordinate those decisions.

The Austrian tradition in economics

From the Free Thoughts series at Libertarianism.org comes this interview with Professor Peter J. Boettke of George Mason University in which he talks about "The Austrian Tradition in Economics".

Boettke traces the school’s history from Carl Menger through Eugen Böhm-Bawerk and Joseph Schumpeter, Ludwig von Mises, Friedrich Hayek, and Murray Rothbard to contemporary economists such as Israel Kirzner, Vernon Smith, and Mario Rizzo. He explains what Austrian economics does and does not do, and distinguishes between what he calls “mainline” economics and “mainstream” economics.

What distinguishes Austrian economics from other schools of thought in economics? How did the Austrian school come to be known as the free market school?

Mathematical Austrian economics

The idea of "mathematical Austrian economics" would seem to many Austrian economists, especially those of the older generation, to be an oxymoron. One of the things Austrians hate about the neoclassicals is the use of mathematics. For many mathematics has no place in economics. But is this view changing?

Today my copy of the recently published book "The Next Generation of Austrian Economics: Essays in Hono[u]r of Joseph T. Soalerno" (edited by Per Bylund and David Howden, Auburn: Mises Institute, 2015) turned up and chapter 7 defends the indefensible: it argues for a mathematical Austrian economics. The chapter is ""Mises and Hayek Mathematized": Toward Mathematical Austrian Economics" by Marek Hudik.

Hudik argues that

At first glance, mathematization of Austrian economics may seem to be contradiction in terms. Yet, at a closer inspection, the idea turns out to be not paradoxical at all [...].

Hudik makes the point that there is a communication gap between Austrian economists and the rest of the economics profession. This gap can be narrowed if Austrian economics were to become more mathematised. There are clearly dangers to mathematisation but it must be remembered that maths is just a tool and whether it is good or bad depends not on the tool but on the use of the tool.

While there are dangers to the (over)use of maths, it must also be remembered that there are benefits to the proper use of it as well. Often times people concentrate on the negatives and ignore the positives.

So lets look at the Hudik's plus side. Mathematics can act as a common language helping communication between economists of different "schools". It is a language that most economists speak and thus coordinating on it as a language will help reduce the communication problems between Austrian and other economists. Maths is also a more precise language. Its use forces us to formulate our ideas precise thereby helping reduce any misunderstanding that the verbal presentation of ideas could give rise to. Maths can act as a more efficient language. If is often more efficient than verbal language for both the "producers" of economic ideas and the "consumers" of those ideas. For producers it economises on effort, laborious thought processes can be "embodied' in simple rules for manipulation of mathematical symbols. One can see maths as a "capital good" increasing the productivity of the economist's "labour". As consumers of economics ideas maths can help us economise on time and effort. There is much to be said for condensing wordy volumes into a few precise and understandable pages.

Assessing Böhm-Bawerk's contribution to economics

A good weekend read. 2014 was the 100th anniversary of the death of the economist Eugen von Böhm-Bawerk (1851-1914). From the Online Library of Liberty at Liberty Fund comes this Liberty Matters debate on:

"Assessing Böhm-Bawerk’s Contribution to Economics after a Hundred Years"
The aim is to evaluate von Böhm-Bawerk contributions as one of the founders of the Austrian school of economic theory with his theoretical work at the University of Vienna, a leading critic of Marxism, and a the Minister of Finance in the Austro-Hungarian Empire.

The Debate

Lead Essay: Richard M. Ebeling, “Eugen von Böhm-Bawerk: Leading Austrian Economist and Finance Minister of Fiscal Restraint” [Posted: April 1, 2015]

Responses and Critiques

1. Joseph T. Salerno, "Eugen von Böhm-Bawerk: Pioneer of Causal-Realist Price Theory" [Posted: April 3, 2015]
2. Roger W. Garrison, “Böhm-Bawerk as Macroeconomist” [Posted: April 6, 2015]
3. Peter Lewin, "Eugen von Böhm-Bawerk – A man for his time, and ours" [Posted: April 7, 2015]

The Conversation

1. Richard M. Ebeling, "Böhm-Bawerk’s Enduring Legacy: The Pricing Process, the Savings-Investment Nexus, and the Capital Structure in the Context of Time" [Posted: April 9, 2015]

Presentations on F. A. Hayek and the Nobel Prize

In a followup to the previous posting on the talk by Israel Kirzner, the other presentations given that day are embedded below.

Dr. Peter Boettke Introduces F. A. Hayek Nobel Laureate Panel

Dr. Eric Maskin's Presentation on F. A. Hayek and the Nobel Prize

Dr. Vernon Smith's Presentation on F. A. Hayek and the Nobel Prize and Q&A

Dr. Israel Kirzner's keynote address on F. A. Hayek and the Nobel Prize

To reflect on the significance of Hayek’s Nobel Prize and the various strands of influence his work has had in subsequent decades of scholarship, the Mercatus F .A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics hosted a keynote speech and panel discussion by some of Hayek’s most prominent colleagues and interlocutors. They discussed the breadth of Hayek’s vision, his contribution, and its influence on the research of other elite economic thinkers. The keynote address was by Dr. Israel Kirzner.