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May 6, 2013

Socialist Calculation II: What’s a Good?

Socialism is not actually the reason why the socialist calculation debate is important.

What we term socialism today is only a family relation to the thing that the socialist calculation debate addressed, and I’m not all that interested in refuting (yet again!) a form of social organization that has only properly speaking existed on paper–namely, a calculating socialism that earnestly tries to solve the optimization problem.

In real-world socialist economies, and excluding those that aspire to full communism, the state segment of the economy is perhaps best thought of as a very large firm that enjoys–and suffers from–a number of exceptional privileges. That firm’s size causes it many difficulties. Its monopolization of certain markets brings the usual consequences of monopoly. And so on.

These are related to, but different from, the problems faced by a calculating socialism. The Austrian School finds the calculation debate interesting not primarily for its applications to real-world socialism, but because the debate helps explain what markets do, and what any social system must also do if it proposes to do better.

Consider what was to me the most arresting passage of this essay by Cosma Shalizi. Though very long, I encourage you all to read it:

That planning is not a viable alternative to capitalism (as opposed to a tool within it) should disturb even capitalism’s most ardent partisans. It means that their system faces no competition, nor even any plausible threat of competition. Those partisans themselves should be able to say what will happen then: the masters of the system will be tempted, and more than tempted, to claim more and more of what it produces as monopoly rents. This does not end happily.[1]

The possibility of a mathematically modeled socialism may be one of the closest things that the mixed-market economy has had to a competitor. It’s a paltry competitor, but even it tells us a lot. Which brings us to the second key facet of the socialist calculation debate.

II. What’s a Good?

As I mentioned in part I, finding equilibrium prices in Walras’s model requires an additional simultaneous equation for each additional good in the market. Supply and demand schedules for all goods are connected together in one way or another, and economists want to optimize for all of them at once. But how many goods are there, exactly?

This is not merely a technical question–not, in other words, just one of counting the different things for sale in all the stores. It is also to a high degree a question of subjective judgment, and it reveals some of the conceptual simplifications that make economic modeling both very powerful and yet distinctly limited.

Is a car a good? Yes, of course. But are all cars alike, such that we should think of them as only one type of good? Surely not. How many different types of cars shall we consider? Before, that is, we say “Ehh, close enough”?

Is a car in Florida the same good as a car in Alaska? Should it be considered as such? As a technical matter, and in modern capitalist economies, cars are often made to different specifications depending on the weather conditions they will likely meet. Pianos and lots of other goods are made this way too. And that’s just on the consumer side–capital goods likewise must be adapted to their environments.

Even a gram of gold in New York is a different good, in a certain sense, from a gram of gold in London. Economists conceptualize a “good” as being part of a uniform class of things, but goods are always differentiated somehow, even if it’s only by position. So when an economist solves an optimization problem for all of the goods in an economy, he or she has simplified tremendously–not only by creating fixed, a priori categories of goods, but also by ignoring the problem of their distribution.

(Shalizi concludes, by the way, that even the purely mathematical part of the socialist calculation problem is unworkable: Once we consider transportation, the difficulty goes from supercomputer to supernatural. That may or may not be so. I’m not a computer engineer, only a historian of ideas. But either way, the claim “this math problem will never ever be crackable” is not one I’d like to hang a social theory on!)

And there’s more. That’s because it’s always possible that individual actors will find themselves in new circumstances, or simply have a new idea, and a previously unappreciated difference within a lumped-together category of goods will suddenly open up. When that happens, something very interesting takes place–what we had all along conceptualized as one good now turns out to have been two. And all of the equations must now be redone.

This sounds weird, but it’s actually quite ordinary. It’s called “discovery” or “innovation.” As F.A. Hayek put it:

That the price-fixing process will be confined to establishing uniform prices for classes of goods and that therefore distinctions based on the special circumstances of time, place, and quality will find no expression in prices is probably obvious. Without some such simplification, the number of different commodities for which separate prices would have to be fixed would be practically infinite. This means, however, that the managers of production will have no inducement, and even no real possibility, to make use of special opportunities, special bargains, and all the little advantages offered by their special local conditions, since all these things could not enter into their calculations… [I]t would never be practicable to incur extra costs to remedy a sudden scarcity quickly, since a local or temporary scarcity could not affect prices until the official machinery had acted.

Although it disrupts the process of central planning, this type of local, spontaneous repurposing is still something we probably want to have in an economy. Sometimes increasing our well-being means not approaching a given economic equilibrium, but rather abandoning it in favor of a better one. And yet such opportunities for innovation are never knowable ex ante. They can never be subject to a plan.

What does this mean for economics? In the final analysis, the supply of a “good” is not really a class of things at all. It’s a conceptual crutch that allows economists to treat many ultimately very different things as if they were all alike. Why do they do that? Because that way, they can tell some very important stories about the economy–things like the supply and demand curves of Economics 101.

Those things are important as a first step to understanding what people do when they produce, exchange, and consume. But they aren’t the whole story. They are rather the backdrop before which the story takes place.


  1. This though may not be the case in the real world. As long as voluntary socialist or collectivist experiments can still be tried within the larger market order, one may argue, plausibly, that the system does face competition after all.  ↩

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