Economic Calculation is Possible Without Prices

I argue three key points in this article. First, there are parameters which can substitute for prices to make any economic problem solvable. Second, prices themselves cannot emerge without these priors, so the priors are logically superior in necessity. Third, it’s possible for a single mind to plan the economy of a group in a way superior to a market.

A key distinction in economics is the difference between an economic problem and a technical problem. A technical problem is solvable by a mere system of equations, but an economic problem requires judgement, or human preferences and values, as an input. Mises argued that economic calculation depends on the use of the price system, but this article disputes that claim. To do this, I’ll first discuss so-called market priors and then market-superior planning.

Market Priors

One issue in Austrian literature is the equivocation of economics and catallaxy. Wikipedia even mistakenly claims that catallaxy is another word for economy. As good Austrians know, however, catallaxy is the study of exchange, and exchange is but a subset of economic activity. Robinson Crusoe has an economy but no market, exchange, or catallactic system.

A key topic in catallaxy is the determination of monetary or nominal prices, but Crusoe has no nominal prices. A catallactic system includes prices by definition. That’s how Austrians set the game. So choice in a catallactic system is necessarily impossible without prices, but it’s a false equivocation to say this means economic calculation is impossible.

Dr. Coyne, one of the two most brilliant Austrians I have personally interacted with, has another understanding of Mises’ claim that economic calculation without prices is impossible. I’ll pick up that conversation in the section on Market-Superior Planning. Tangentially, the other brilliant Austrian I know is the sometimes-maligned father dehomoginization theory, Dr. Salerno.

How can economic calculation occur without prices? I recently wrote about market priors which both determine prices and can in principle stand in for prices. Such priors are not constrained to the narrow window of exchange, but they apply to human action and the economy writ large, including Crusoe’s concerns.

tldr: the precursors are human capital and level of effort which substitute for income and prices, respectively. Preferences are a required in any case. These three factors allow someone to solve an economic problem without prices, and prices themselves emerge from exchange based on these market priors.

Market-Superior Planning

Coyne states that central planning is not impossible in the sense that such ordering cannot be implemented, but it is impossible in the sense that such ordering can never produce outcomes superior to an alternative arrangement.

Austrians, Coyne included, take a realistic view of the world in that they do not require a free market or unhampered market to be the alternative arrangement. In my opinion the ideal alternative would be distributed or polycentric governance. Some Austrians, however, prefer a minimal state or a night watchman state as the alternative arrangement.

Now, I would easily grant the point if Mises were trying to indicate that large-scale economic ordering, like the aims of his socialist foes, is incredibly difficult without prices. Indeed, I would grant it was infeasible at that time and remains so today. However, Mises and the Austrians have insisted on strong wording of impossibility, not infeasibility. They have insisted there is an economic problem, not a technical problem. I think the calculation problem is obvious, and obviously technical.

To be clear: I’m not arguing there is no calculation problem. I am simply arguing the calculation problem is a technical problem rather than an economic problem. I am arguing in favor of that futurist-technologist proposition which is that it is possible for a single mind or central entity to optimize an entire economy with the aid of sufficient technological advancement.

On a smaller scale, and more forcefully on the basis of personal experience, I am also arguing that sometimes it is efficient to coordinate group activity through a leader or manager rather than flat-structured decision making.

I agree that a single mind which considers only its own preferences will likely not maximize the welfare of a collection of minds, except by wild chance. At the same time, I propose that an individual can benefit a separated mind to a sufficient or maximal degree. It’s obviously possible, and in fact usual, that a given mind benefits a foreign mind to an insufficient degree.

  • Insufficient degree: B benefits B better than A benefits B
  • Sufficient degree: A benefits B as well as B benefits B
  • Maximal degree: A benefits B better than B benefits B

Where A is the planner, B is the foreign mind, and benefit is the degree of satisfaction which is actually obtained. A few key points:

  • The moment of purchase is separate from the moment of consumption.
  • It’s possible for preferences to change simultaneously with consumption. Think about what happens when you begin to taste a gulp of rotten milk.
  • Pleasant surprise is possible, particularly in cases of asymmetric information.
  • Experts and technologies may obtain information from signals which even the emitter doesn’t understand. You know that feeling where you kind of feel tired and have a headache, but you’re not sure why? A doctor with/or some cool technology can determine if you are malnourished, sleep deprived, ill, or something else, and suggest an optimized remedy.
  • Preferences can be measured by experts with/or cool technology. Surveys, observation, and access to large data, information technology, theoretical models, etc.
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