"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, Part Three.

Welcome back, faithful readers. Let's talk a little more about Mises' Calculation Problem. Even though we have laid out the argument in full in the previous two articles [here and here], we want to go into the nitty gritty a bit more.

The heart of Mises' argument is that

1. There are no prices for the means of production under Socialism. [Obvious].
2. With no prices for means of production, they will be wasted. [Deep stuff, which we will go into a bit more in this humble article].

Let's look a bit more at how things work in a free market. Mr A is a successful businessman. He comes up with a great new idea, say laptops that glow in the dark. He does his market research, and finds that customers will pay an extra 50 bucks for a glow-in-the-dark laptop. [Yes, I am making this all up, and I'm going to make up all the prices involved, too.]

So he opens up his catalogue of Shines in the Dark Plastics, and he is very surprised to find that that stuff is pricey. In fact, it will cost him 60 bucks per laptop to coat them. He will not make any more money on those planned shine-in-the-dark laptops, in fact he will lose 10 bucks per laptop.

Not wanting his dream of great fortune to go up in smoke, he calls up Mr B, CEO of Shines in the Dark Plastics, and asks him for a discount. "I can't do it," says Mr B. Mr C is buying up all my stuff like there's no tomorrow, and paying full price. So he's going to get it all, unless you outbid him. I certainly can't give you a discount."

Intrigued at this point, Mr A calls up Mr C. "How can you possibly afford to pay B's outrageous prices for his Shine in the Dark Plastic™?"

"Simple," says C. "I make glow in the dark skeletons, and people love them. Every Halloween they pay a cool hundred bucks per skeleton. Sixty bucks for the plastic, a few more for other expenses, and I make about twenty dollars a skeleton. And it's become a tradition to buy a new skeleton every year. I'm a rich man."

Mr A hangs up indignantly, and decides to move to a Socialist country, where he thinks he might have better luck. Comrade Marx, leader of the country, welcomes the talented and experienced Mr A with open arms, and appoints him head of a newly opened laptop factory, with carte blanche to do as he pleases.

"This is more like it," says Mr A, rubbing his hands together. "To each according to his needs. Well, my factory needs some Glow in the Dark Plastic, and Comrade Plastic, who runs the factory that makes the stuff, has agreed to give me as much as I want."

The glow-in-the-dark laptops hit the shelves. People are pretty pleased with the cute little novelty laptops, which sell at a very reasonable price, until Halloween comes around. They go to their shops to get some skeletons, but there are none on the shelves. When word leaks out about what happened, that all the plastic went to coating their laptops, they go home disappointed, cursing their stupid laptops, and look yearningly over the border at Freemarketville's homes, all gloriously decorated with shiny, scary, skeletons.

You see what happened. The free market, with its price system, made sure that the shiny plastic was used for what people wanted most. The Socialist country, by contrast, had no clue about how to use its supply of glow-in-the-dark plastic.

Of course, this story is not just about novelty plastic. The exact same thing will happen to all the resources at the Socialist country's disposal. Lacking a price system, they will have absolutely no idea how best to use them. Result: Suffering for all.


  1. That was three well written articles sir.

    Best regards from the socialist country of Norway.

  2. Of course the story could go slightly differently.

    Mr. B after doing his market research realizes that indeed today, people would only be willing to pay a mere fifty bucks. He goes to a bar, drinks a bit, then meets Mr. C. After telling Mr. C his problem, Mr.C chuckles, "Do you not understand how modern day capitalism works? I work in C&D marketing firm, and for a mere cost of two dollars per unit I will be able to convince everyone that glow and the dark laptops are the best thing since apple. They will easily pay 75 bucks more for one after I am done."

    They created an add campaign title "just do it" which works wonders, they time roll out for December when people will least likely be thinking about there budget for Halloween. They create debt plans to help the consume even more not consider there future.

    Sure enough come Halloween, they find the supply of skeletons has dwindled, which is for the best because they can not afford it anyways.

    And Mr. B is now a wealthy man. But this is capitalism, and unlike the first story he now has a huge vested interest in seeing the company thrive.

    So one day, when a univerisity scientist realizes that the increase rates of cancer are a result of all these glowing laptops being used o so often, Mr. B must act. He gives huge grants to the university, he testifies before congress with his own data, he spends money on Super Pac which give money to politicians. And of course all the cost must come from somewhere.

    The truth is a system that truly utilizes human potential to the fullest to create the best environment for us all, has yet to be articulated. I am not a socialist, that system has obvious issues but if you study Austrian economics and not realize the giant fallacies, well then you are human.

  3. Very interesting few articles. I've always wondered what will encourage people to work productively in a Socialist market, but I never thought to the more important question of how does the market determine the important decisions of What, How Much and How to produce goods.

  4. It's not obvious that there are no prices for the means of production under Socialism. The "market socialists" thought that by having the various managers PRETEND to be entrepreneurs, buying and selling, they would have "prices" for everything, so there was no issue.

    What is your response to that objection?

    1. Mises addressed that one in his book, Human Action. Takes him less than 5 pages to expose the folly of such a scheme.

      Here's a link to chapter and verse: