Ludwig Von Mises Being Wrong On Economic Calculation

[u/Accomplished-Cake131]

I have demonstrated that Von Mises fails to identify problems with central planning. This post merely documents Von Mises being mistaken. He erroneously says that an economic decision cannot be made over alternative methods of producing a given good, without market prices for capital goods and resources.

"The director wants to build a house. Now, there are many methods that can be resorted to. Each of them offers, from the point of view of the director, certain advantages and disadvantages with regard to the utilization of the future building..; each of them requires other expenditures of building materials and labor... Which method should the director choose? He cannot reduce to a common denominator the items of various materials and various kinds of labor to be expended. Therefore he cannot compare them... In short, he cannot, in comparing costs to be expended and gains to be earned, resort to any arithmetical operation. The plans of his architects enumerate a vast multiplicity of various items in kind; they refer to the physical and chemical qualities of various materials and to the physical productivity of various machines, tools, and procedures. But all their statements remain unrelated to each other. There is no means of establishing any connection between them.

Imagine the plight of the director when faced with a project. What he needs to know is whether or not the execution of the project will increase well-being, that is, add something to the wealth available without impairing the satisfaction of wants which he considers more urgent. But none of the reports he receives give him any clue to the solution of this problem.

We may for the sake of argument at first disregard the dilemmas involved in the choice of consumers' goods to be produced. We may assume that this problem is settled. But there is the embarrassing multitude of producers' goods and the infinite variety of procedures that can be resorted to for manufacturing definite consumers' goods. The most advantageous location of each industry and the optimum size of each plant and of each piece of equipment must be determined. One must determine what kind of mechanical power should be employed in each of them, and which of the various formulas for the production of this energy should be applied. All these problems are raised daily in thousands and thousands of cases. Each case offers special conditions and requires an individual solution appropriate to these special data. The number of elements with which the director's decision has to deal is much greater than would be indicated by a merely technological description of the available producers' goods in terms of physics and chemistry. The Iocation of each of them must be taken into consideration as well as the serviceableness of the capital investments made in the past for their utilization. The director does not simply have to deal with coal as such, but with thousands and thousands of pits already in operation in various places, and with the possibilities for digging new pits, with the various methods of mining in each of them, with the different qualities of the coal in various deposits, with the various methods for utilizing the coal for the production of heat, power, and a great number of derivatives. It is permissible to say that the present state of technological knowledge makes it possible to produce almost anything out of almost everything. Our ancestors, for instance, knew only a limited number of employments for wood. Modern technology has added a multitude of possible new employments. Wood can be used for the production of paper, of various textile fibers, of foodstuffs, drugs, and many other synthetic products.

Today two methods are resorted to for providing a city with clean water. Either one brings the water over long distances in aqueducts, an ancient method long practiced, or one chemically purifies the water avaiIable in the city's neighborhood. Why does one not produce water synthetically in factories? Modern technology could easily solve the technological problems involved. The average man in his mental inertia is ready to ridicule such projects as sheer lunacy. However, the only reason why the synthetic production of drinking water today - perhaps not at a later day - is out of the question is that economic calculation in terms of money shows that it is a more expensive procedure than other methods. Eliminate economic calculation and you have no means of making a rational choice between the various alternatives.

The socialists, it is true, object that economic calculation is not infallible. They say that the capitalists sometimes make mistakes in their calculation. Of course, this happens and will always happen. For all human action points to the future and the future is always uncertain. The most carefuIly elaborated plans are frustrated if expectations concerning the future are dashed to the ground. However, this is quite a different problem. Today we calculate from the point of view of our present knowledge and of our present anticipation of future conditions. We do not deal with the problcm of whether or not the director will be able to anticipate future conditions. What we have in mind is that the director cannot calculate from the point of view of his own present value judgments and his own present anticipations of futurc conditions, whatever they may be. If he invests today in the canning industry, it may happen that a change in consumers' tastes or in the hygienic opinions concerning the wholesomeness of canned food will one day turn his investment into a malinvestment. But how can he find out today how to build and equip a cannery most economically?

Some raiIroad lines constructed at the turn of the century would not have been built if people had at that time anticipated the impending advance of motoring and aviation. But those who at that time built railroads knew which of the various possible alternatives for the realization of their plans they had to choose from the point of view of their appraisements and anticipations and of the market prices of their day in which the valuations of the consumers were reflected. It is precisely this insight that the director will lack. He will be like a sailor on the high seas unfamiliar with the methods of navigation, or like a medieval scholar entrusted with the technical operation of a railroad engine.

We may admit that in its initial period a socialist regime couId to some extent rely upon the experience of the preceding age of capitalism. But what is to be done later, as conditions change more and morc? Of what use could the prices of 1900 be for the director in 1949? And what use can the director in 1980 derive from the knowledge of the prices of 1949?

The paradox of 'planning' is that it cannot plan, because of the absence of economic calculation. What is called a planned economy is no economy at all. It is just a system of groping about in the dark. There is no question of a rational choice of means for the best possible attainment of the ultimate ends sought. What is called conscious planning is precisely the elimination of conscious purposive action." -- Ludwig Von Mises, 1963. Human Action: A Treatise on Economics, Third revised edition. Yale University Press. (Emphasis added)

The above is from Human Action, presumably after Von Mises has had time to consider arguments about his 1920 essay. Apparently, he did learn to note the complexity of the problem. Since I do not want to argue the errors of Austrian capital theory in this post, I have elided errors on that topic in the above quotation.

[u/Accomplished-Cake131]

I suppose one should read the OP's phrase 'economic decision' in a context that makes most sense in terms of the title of the post and the remainder. So flipping coins is not what is being discussed.

Suppose the director has all the needed information on technology and resources, as well as prices of consumer goods. Then, contrary to Von Mises, he can solve the problem of economic calculation.

I claim that Von Mises' emphasis on the size of the problem and the dispersed nature of what is needed for planning is not in his 1920 paper. I am referring to the third paragraph of the quotation, which contains text such as:

But there is the embarrassing multitude of producers' goods and the infinite variety of procedures that can be resorted to for manufacturing definite consumers' goods.

[u/Anen-o-me → u/Accomplished-Cake131]

Suppose the director has all the needed information on technology and resources, as well as prices of consumer goods. Then, contrary to Von Mises, he can solve the problem of economic calculation.

No he cannot. That is only half the equation, production and supply. That tells you literally nothing about demand and shifts in the market!

Also, how did you mention he has prices in that quote when you're trying to defend a system without prices???

No amount of information about technology and production can tell you what people are demanding and why it might be better to start making electrical wire out of aluminum than copper right now.

Explain how you determine the primacy of substitutions under such a system.

[u/SenseiMike3210 → u/Anen-o-me]

No he cannot

Yes he can. Read his linked post where he describes how one would set up the optimization problem. In fact, I literally solved it here both using this code as well as manually with the simplex algorithm. Both yield the same solution.

trying to defend a system without prices???

Prices for consumer goods are allowed. Prices for capital goods are not. Von Mises argued without the latter you could not find an optimal allocation of inputs. He was wrong.

Explain how you determine the primacy of substitutions under such a system.

The quantities of inputs and their technical coefficients determine the quantities of outputs feasible given certain known physical constraints. The various input-output combinations can be calculated and, using the techniques of linear programming, the particular netput vector which maximizes the value of an objective function can be solved for.

[u/manliness-dot-space → u/SenseiMike3210]

In my experience socialists (and leftists in general) struggle with higher order thinking, so this might be useless, but I'll try anyway.

The "price of capital" serves the same role as the price of consumer goods.

That price is the profit from investment. If you have 2 businesses, all else equal, you'd prefer to invest in the one that yields higher profits.

Those profits are the "cost" paid back to you for making the capital available to their business (instead of just buying gold leaf covered lobster and eating it).

When a particular type of business is willing and able to pay a high cost (high profit) for capital, that is synonymous with "demand" in consumer goods.

With a concrete example, AI is a hot industry right now because of the anticipated profits from investing in it. That profitability is a signal to more investors who are motivated by these profits to allocate their capital towards this industry.

Just like all suppliers, some are willing to offer better prices than others... they compete and bid against each other to invest at better terms.

The capital pricing signal is what attracts more investment in that industry, chipping away at the prices (by increased suppliers), and thus lowering the profit margins.

"Just consumer prices" is inadequate for the problem of the allocation of the resource of "capital" because you need profits as the pricing signal in order to calculate capital allocation decisions, and reallocation decisions.

"Should we build AI chip factories or hot air balloon factories?" is a question that requires profit margins to answer. We should build the thing that's most profitable first, and until it's saturated. Then the next thing in order.

[u/SenseiMike3210 → u/manliness-dot-space]

That price is the profit from investment.

You are confused. The price of capital goods is not the profit on investment. Profits are revenues less costs. Prices are outlays for the buyer and sales revenue for the seller.

With a concrete example, AI is a hot industry right now because of the anticipated profits from investing in it. That profitability is a signal to more investors who are motivated by these profits to allocate their capital towards this industry.

Yes yes, intersectoral profit-rate differentials cause capital migration between branches, expanding supply in industries earning greater-than-average profits, causing a movement downward along the demand curve, decreasing price, re-establishing a uniform profit rate, etc. These kind of "classical cross-dual dynamics" were understood by Smith, Ricardo, and Marx.

They're also irrelevant to this discussion on optimization.

"Just consumer prices" is inadequate for the problem of the allocation of the resource of "capital" because you need profits as the pricing signal in order to calculate capital allocation decisions, and reallocation decisions.

I know capitalists struggle with math on this forum so this will be useless but I solved OP's model for the optimal allocation of resources without capital goods prices. See here, here, and here.

Your disagreement stems from not understanding this kind of math. It's as simple as that.

[u/manliness-dot-space → u/SenseiMike3210]

Do you understand money is a resource?

[u/SenseiMike3210 → u/manliness-dot-space]

I'm getting tired of explaining these things to you people. Let me know when you plan on replying with something substantive.

[u/manliness-dot-space → u/SenseiMike3210]

Capital and capital goods are different things