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Monday, May 16, 2011

More on Caplan and Socialism

This is a continuation of my previous blog on the subject
1. In that same section, Caplan writes:
...Mises repeatedly insists that economic theory gives only qualitative, not quantitative laws...For example, in Human Action, Mises tells us that:

The impracticality of measurement is not due to the lack of technical methods for the establishment of measure. It is due to the absence of constant relations. If it were only caused by technical insufficiency, at least an approximate estimation would be possible in some cases. But the main fact is that there are no constant relations. Economics is not, as ignorant positivists repeat again and again, backward because it is not "quantitative." It is not quantitative because there are no constants. Statistical figures referring to economic events are historical data. They tell us what happened in a nonrepeatable historical case.
 If so, then how could he possibly know by economic theory alone that the negative effect of the lack of economic calculation would be severe enough to make socialism infeasible? Granted, the socialist economy would suffer due to the impossibility of economic calculation; but how, on his own theory, could Mises know that this difficulty to so severe that society would collapse? 

I assume he is asking the following. If you are a "normal" economist, up to the ears in mathematical formulas, you can plug in numbers to some formula that models a socialist economy, let the computers work out the answers, and you will find that the socialist economy will be, say, in the red 10 trillion dollars year after year. That is how you would prove that socialism is infeasible. But if you are Mises, making qualitative statements only, you may know that socialism is bad, but you cannot know HOW bad. How bad can only be measured in numbers, in dollars and cents. Maybe it loses a penny a year, for all you know, Mises. Which would certainly not make it infeasible, right?

I can't think of any other explanation of his words that avoid making them non sequitors.
And if that's the problem, here is the answer. Mises proves in his works that a socialist economy is, every step of the way, simply gambling. Such an economy can only decide what to do in every one of the thousands of steps of production by tossing a die with a twenty sides or more, only one of which wins. This is in contrast to a businessman, who has an automatic decision maker for him, prices. It's beyond the scope of this humble blog to go into why socialism is like that according to Mises. But that's what he claims.
Given that assumption, you don't have to be an Einstein, or come up with numbers to know that that gambler will lose, for sure.

Take a simple case. You go into a crap game, where two dice are rolled. If you roll a two, you win $10,000. If you roll any other of the 35 possible results, you  lose $10,000. And you play this game all day every day. Mises is saying that a socialist economy is just like that game, only with worse odds. Need he come up with numbers to show you it's a losing proposition? 

2. Caplan then has another attack on the economics is quality, not quantity, thesis. I will quote him in italics, and add my comments in brackets to explain what he's talking about:

The strength of this objection becomes even clearer when we consider the economic decision-making of Robinson Crusoe, alone on his island. As Mises explains, "Isolated man can easily decide whether to extend his hunting or cultivation. The processes of production he has to take into account are relatively short. The expenditure they demand and the product they afford can easily be perceived as a whole."[28] Crusoe's runs his one-man economy simply by using "calculation in kind" - mentally weighing his preferences and opportunities to make decisions. Mises concedes that this situation is conceivable, 
[Mises just told us one guy living alone could be a successful socialist. No calc problems for him].
adding only that this method is unworkable for a larger economy. "To suppose that a socialist community could substitute calculations in kind for calculations in terms of money is an illusion. In an economy that does not practice exchange, calculations in kind can never cover more than consumption goods. They break down completely where goods of higher order are concerned."[29]
[But a whole community will not make it. They will have a calc problem].

This suggests some obvious questions. Does Crusoe's one-man socialism become "impossible" when Friday shows up? Hardly. What if 100 people show up? 1000? Mises' distinction between a modern economy and Crusoe's, and why the economic calculation argument applies only to the former, again shows that Mises has underlying quantitative assumptions in spite of his strictures against them. He is making a quantitative judgment that the lack of calculation would not greatly worsen Crusoe's economy, but would devastate a modern economy. Perhaps Mises was right, but pure economic theory did not give him the answer.
[Aha! It works for one, and for two, right? But not for a whole community, hey? Then there must be a NUMBER, yes that baby you threw out the with the bath, which is the cut off line. Caught you with your hand in the cookie jar, Ludwig, using underlying quantitative assumptions. In other words, you are using numbers, which you yourself claim is a no-no].

A reply to this is simply to say that Caplan misunderstood Mises.
There was a school of economics which tried to find out the secret numbers that lurk in an economy. They were hoping that they could find a formula such as "Increasing the money supply by 10% will cause the price level to rise by 5%." They were hoping that there is a secret number waiting to be discovered, [it would be 1/2 if the above statement was right], that connects the money supply increase to the price increase. That's one example of what they were looking for. Their dream was to find many other such constants that they assumed connected economic entities to each other.

What Mises meant, if you read him in context, is "Forget it. You have no chance of finding those magic numbers, because they don't exist. Just because the numbers were a certain way today doesn't mean they will always be that way. They change all the time. We should be studying why they change, not what they are at a given point in time, and not to ever assume we have nailed down a number, like the inflation constant, that will be fixed forever."

Caplan misunderstood him to mean that every economics book can never have any numbers in it. Maybe Caplan reluctantly admits that Mises allowed page numbers in economics books, but that's it. No other numbers. Which is why he asks, "Hey there must be a cutoff population number at which an economy loses its ability to calculate. So you too, Mises have to use numbers."

Which is, I hope the reader sees by now, a sign that Caplan missed the boat once again. Yes there must be such a number, but it will be different for each situation. It, too, is not an eternal constant.

3. He continues:
Ever since Mises, Austrians have overused the economic calculation argument. In the absence of detailed empirical evidence showing that this particular problem is the most important one, it is just another argument out of hundreds on the list of arguments against socialism. How do we know that the problem of work effort, or innovation, or the underground economy, or any number of other problems were not more important than the calculation problem?

This is an easy one. And you should have known this on your own, Bryan. All the other problems can be solved by good will, in theory. Edifying speeches could, possibly, make people work hard, innovate, stay away from underground economies. But the calculation problem is a brick wall that cannot be solved ever. Thus its theoretical importance.

The collapse of Communism has led Austrians to loudly proclaim that "Mises was right." Yes, he was right that socialism was a terrible economic system - and only the collapse of Communism has shown us how bad it really was. However, current events do nothing to show that economic calculation was the insuperable difficulty of socialist economies. There is no natural experiment of a socialist economy that suffered solely from its lack of economic calculation. Thus, economic history as well as pure economic theory fails to establish that the economic calculation problem was a severe challenge for socialism.

I notice no footnote referencing the "overuse" or the "loud proclamations". In any case, think of a dead man with a thousand diseases caused by germs evident in his bloodstream, plus his head has been chopped off. The germs might have gotten to him first historically. But germs can be cured by antibiotics, missing heads cannot be cured at all.
So too, Russian Communism was sick many ways. Theory has not shown why it had to have any of the many diseases it suffered from. Mises showed that it did have one fatal illness. The head was chopped off. It could not calculate.


  1. Yes, the calc prob is inherent in the theory of socialism, and no practice may get around it. There are plenty of other pitfalls in the practice of socialism, but these are not necessarily inherent in the theory so we must assume a slight different practice may avoid them.

  2. "Need he come up with numbers to show you it's a losing proposition?"

    no, he does not, clearly a solution that doesn't involve chance is superior to one that does. but nit picking,

    "two dice are rolled. If you roll a two, you win $10,000. If you roll any other of the 35 possible results, you lose $10,000. And you play this game all day every day."

    has numbers in it. by his argument, all you can say is that you are gambling every day, not that you will necessarily lose in the long run.

    1. "has numbers in it."


      'by his argument, all you can say is that you are gambling every day, not that you will necessarily lose in the long run."

      No. All you can say is that you are gambling every day with the odds incredibly against you.

      Take another example. Mr A is very sick. He can only be cured by a Swedish doctor who specializes in A's illness. The doctor can only be reached by dialing his unlisted number. Mr A has no info whatever about Swedish phone numbers, but he figures, "I may as well dial some random number and maybe the Swedish doctor will pick up the phone."

      That's socialism.