"Most people are in arrested development and cannot use logic." Jacob.
"Competition and capitalism are hated to-day because of their tendency to destroy poverty and privilege." William Hutt
"America is unique in that our economy is totally dependent on global charity." Peter Schiff

Saturday, August 11, 2012

Mises' Calculation Problem, in Simple Language.

Mises' Calculation Problem is the name for a problem Mises claimed will exist in any Socialist or Communist country that will spell the inevitable economic doom of that country.

Many have criticized Communism and Socialism from the psychological side. Why will anyone work if they don't get paid? How will you find the angels to run the country and not be cruel dictators? The Communists reply was a pretty lame one, that Socialism will breed a New Man, one free of the free market mentality, which is all about selfishness. Thanks to the fresh air of Socialism throughout the land, men will from the very cradle, or maybe after a few years of schooling, understand that selfishness is bad, and will live to serve their fellow men.

Lame as that sounds to me and to anyone familiar with the human condition, one cannot refute it with cold logic. Maybe Socialism will change the world. Who can prove otherwise [emphasis on "prove"]?

But Mises came along and claimed he had found proof, logical step by step mathematical proof, that even if all men were angels from the get go, even if they were all-wise and all-generous without a selfish or stupid bone in their body, Socialism and Communism were doomed. And the doom would be because they would be incredibly wasteful  in ways that it would be impossible to stop, from the one feature of Socialism that is its very definition. In other words, a Socialist country would throw all its wealth, all its food, all its clothing, all its housing, all its everything, into the sea, where it could never be retrieved. [Well not exactly. But it would be so wasteful of what it has, on such a grand scale, that the results would be the same as if they had tossed everything into the sea].

Pretty bold statement, no? But apparently Socialists who read his proof were stunned. He's right! What do we do now? Of course, after a while, they found a way. They just straw manned his argument to death. And you can find as many articles as you want on the internet refuting, supposedly, Mises' argument. All of them have no clue what the argument was, either from ignorance or by design, and disprove something else instead. Mises' argument stands triumphant, as the lucky readers of this humble blog will find out right now.

The very definition of Socialism is that all the means of production belong to the gov't. Spin it any way you want to, that they belong to everybody, or to nobody, or to the gov't, but the important point is that there is no buying and selling of means of production. Nobody can buy or sell steel or coal or a factory, because it is illegal for anyone to own them. That would be Capitalism, if a private person owned any means of production whatsoever and could do with it as he pleased.

OK, say the Socialists. Fair enough. That is indeed the very essence of Socialism. But so what? Where's the doom?

The doom, say Mises, is that if you are not allowed to buy and sell stuff, then, obviously, you cannot put a price tag on them. A price for something comes when a buyer and a seller do some preliminary haggling, and then agree on a price.

OK, say the Socialists. Fair enough. You cannot make up a price and pretend it has meaning, we admit that. That's why every time there is a govt decreed price for something, as in wage and price controls that were imposed on various countries at various times by their gov't, there was always a black market. Meaning there were huge numbers of people who did not accept the gov't phony price, and set up a different price behind the gov'ts back. Fine. We agree that if you can't buy and sell stuff, there is no such thing as a price. But so what? Where's the doom?

The doom, say Mises, is that if you have no price for the means of production, then you have no idea of costs when you make something. Even if you have prices for the final product, say $100 for an iPhone, if you don't have prices for the components of the iPhone, the things that went into making the iPhone, then you do not know if you have made a profit.

OK, say the Socialists. That's true. If there are no prices for the means of production, then the manufacturer cannot know if he made a profit. But that is so Capitalist. We Socialists are not about profit. We are about for each according to his needs. Looking for profits is what got the world into the mess it is in now, with all that greed running wild. Agreed, if the govt owns all means of production, there is no way of knowing if a manufacturer is making a so-called profit. But so what? Where's the doom?

The doom, say Mises, will be explained in Smiling Dave's very next article.

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