Economic planning

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https://en.wikipedia.org/wiki/Economic_planning 

 

Economic planning is an allocation mechanism based on a computational procedure for solving a constrained maximization problem and an iterative process to obtaining its solution. Planning is a mechanism for the allocation of resources between and within organizations contrasted with the market mechanism. As an allocation mechanism for socialism, economic planning replaces factor markets with a procedure for direct allocations of resources within an interconnected group of socially owned organizations which comprise the productive apparatus of the economy.

There are various forms of economic planning that vary based on their specific procedures and approach. The level of centralization in decision-making depends on the specific type of planning mechanism employed. As such, one can distinguish between centralized planning and decentralized planning. An economy primarily based on planning is referred to as a planned economy. In a centrally planned economy, the allocation of resources is determined by a comprehensive plan of production which specifies output requirements. Planning can also take the form of indicative planning within a market-based economy, where the state employs market instruments to induce independent firms to achieve development goals.

A distinction can be made between physical planning (as in pure socialism) and financial planning (as practiced by governments and private firms in capitalism). Physical planning involves economic planning and coordination conducted in terms of disaggregated physical units whereas financial planning involves plans formulated in terms of financial units.

In socialism

Different forms of economic planning have been featured in various models of socialism. These range from decentralized-planning systems which are based on collective decision-making and disaggregated information to centralized systems of planning conducted by technical experts who use aggregated information to formulate plans of production. In a fully developed socialist economy, engineers and technical specialists, overseen or appointed in a democratic manner, would coordinate the economy in terms of physical units without any need or use for financial-based calculation. The economy of the Soviet Union never reached this stage of development, so planned its economy in financial terms throughout the duration of its existence. Nonetheless, a number of alternative metrics were developed for assessing the performance of non-financial economies in terms of physical output (i.e. net material product versus gross domestic product).

In general, the various models of socialist economic planning exist as theoretical constructs that have not been implemented fully by any economy, partially because they depend on vast changes on a global scale (see mode of production). In the context of mainstream economics and the field of comparative economic systems, socialist planning usually refers to the Soviet-style command economy, regardless of whether or not this economic system actually constituted a type of socialism or state capitalism or a third, non-socialist and non-capitalist type of system.

In some models of socialism, economic planning completely substitutes the market mechanism, supposedly rendering monetary relations and the price system obsolete. In other models, planning is utilized as a complement to markets.

Concept of socialist planning

The classical conception of socialist economic planning held by Marxists involved an economic system where goods and services were valued, demanded and produced directly for their use-value as opposed to being produced as a by-product of the pursuit of profit by business enterprises. This idea of production for use is a fundamental aspect of a socialist economy. This involves social control over the allocation of the surplus product and in its most extensive theoretical form calculation-in-kind in place of financial calculation. For Marxists in particular, planning entails control of the surplus product (profit) by the associated producers in a democratic manner. This differs from planning within the framework of capitalism which is based on the planned accumulation of capital in order to either stabilize the business cycle (when undertaken by governments) or to maximize profits (when undertaken by firms) as opposed to the socialist concept of planned production for use.

In such a socialist society based on economic planning, the primary function of the state apparatus changes from one of political rule over people (via the creation and enforcement of laws) into a technical administration of production, distribution and organization; that is, the state would become a coordinating economic entity rather than a mechanism of political and class-based control and thereby ceasing to be a state in the traditional sense.

Planning versus command

The concept of a command economy is differentiated from the concepts of a planned economy and economic planning, especially by socialists and Marxists who liken command economies (such as that of the former Soviet Union) to that of a single capitalist firm, organized in a top-down administrative fashion based on bureaucratic organization akin to that of a capitalist corporation.

Economic analysts have argued that the economy of the Soviet Union actually represented an administrative or command economy as opposed to a planned economy because planning did not play an operational role in the allocation of resources among productive units in the economy since in actuality the main allocation mechanism was a system of command-and-control. As a result, the phrase administrative command economy gained currency as a more accurate descriptor of Soviet-type economies.

Decentralized planning

Decentralized economic planning is a planning process that starts at the user-level in a bottom-up flow of information. As such, decentralized planning often appears as a complement to the idea of socialist self-management (most notably by libertarian socialists and democratic socialists).

The theoretical postulates for models of decentralized socialist planning stem from the thought of Karl Kautsky, Rosa Luxemburg, Nikolai Bukharin and Oskar R. Lange. This model involves economic decision-making based on self-governance from the bottom-up (by employees and consumers) without any directing central authority. This often contrasts with the doctrine of orthodox Marxism–Leninism which advocates directive administrative planning where directives are passed down from higher authorities (planning agencies) to agents (enterprise managers), who in turn give orders to workers.

Two contemporary models of decentralized planning are participatory economics, developed by the economist Michael Albert; and negotiated coordination, developed by the economist Pat Devine.

Material balances

Material balance planning was the type of economic planning employed by Soviet-type economies. This system emerged in a haphazard manner during the collectivisation drive under Joseph Stalin and emphasized rapid growth and industrialization over efficiency. Eventually, this method became an established part of the Soviet conception of socialism in the post-war period and other socialist states emulated it in the latter half of the 20th century. Material balancing involves a planning agency (Gosplan in the case of the Soviet Union) taking a survey of available inputs and raw materials and using a balance-sheet to balance them with output targets specified by industry, thereby achieving a balance of supply and demand.

Lange–Lerner–Taylor model

The economic models developed in the 1920s and 1930s by American economists Fred M. Taylor and Abba Lerner and by Polish economist Oskar R. Lange involved a form of planning based on marginal cost pricing. In Lange's model, a central planning board would set prices for producer goods through a trial-and-error method, adjusting until the price matched the marginal cost, with the aim of achieving Pareto-efficient outcomes. Although these models were often described as market socialism, they actually represented a form of market simulation planning.

In capitalism

Intra-firm and intra-industry planning

Large corporations use planning to allocate resources internally among their divisions and subsidiaries. Many modern firms also use regression analysis to measure market demand to adjust prices and to decide upon the optimal quantities of output to be supplied. Planned obsolescence is often cited as a form of economic planning that is used by large firms to increase demand for future products by deliberately limiting the operational lifespan of its products. Thus, the internal structures of corporations have been described as centralized command economies that use both planning and hierarchical organization and management.

According to J. Bradford DeLong, many transactions in Western economies do not pass through anything resembling a market, but are actually movements of value among different branches and divisions within corporations, companies and agencies. Furthermore, much economic activity is centrally planned by managers within firms in the form of production planning and marketing management (that consumer demand is estimated, targeted and included in the firm's overall plan) and in the form of production planning.

In The New Industrial State, the American economist John Kenneth Galbraith noted that large firms manage both prices and consumer demand for their products by sophisticated statistical methods. Galbraith also pointed out that because of the increasingly complex nature of technology and the specialization of knowledge, management had become increasingly specialized and bureaucratized. The internal structures of corporations and companies had been transformed into what he called a "technostructure". Its specialized groups and committees are the primary decision-makers and specialized managers, directors and financial advisers operate under formal bureaucratic procedures, replacing the individual entrepreneur's role. Galbraith stated that both the obsolete notion of entrepreneurial capitalism and democratic socialism (defined as democratic management) are impossible organizational forms for managing a modern industrial system.

Joseph Schumpeter, an economist associated with both the Austrian School and the institutional school of economics, argued that the changing nature of economic activity (specifically the increasing bureaucratization and specialization required in production and management) was the major cause for capitalism eventually evolving into socialism. The role of the businessman was increasingly bureaucratic and specific functions within the firm required increasingly specialized knowledge which could be supplied as easily by state functionaries in publicly owned enterprises.

In the first volume of Das Kapital, Karl Marx identified the process of capital accumulation as central to the law of motion of capitalism. The increased industrial capacity caused by the increasing returns to scale further socializes production. Capitalism eventually socializes labor and production to a point that the traditional notions of private ownership and commodity production become increasingly insufficient for further expanding the productive capacities of society, necessitating the emergence of a socialist economy in which means of production are socially owned and the surplus value is controlled by the workforce. Many socialists viewed these tendencies, specifically the increasing trend toward economic planning in capitalist firms, as evidence of the increasing obsolescence of capitalism and inapplicability of ideals like perfect competition to the economy, with the next stage of evolution being the application of society-wide economic planning.

State development planning

State development planning or national planning entails macroeconomic policies and financial planning conducted by governments to stabilize the market or promote economic growth in market-based economies. This involves the use of monetary policy, industrial policy and fiscal policy to steer the market toward targeted outcomes. Industrial policy includes government taking measures "aimed at improving the competitiveness and capabilities of domestic firms and promoting structural transformation".

In contrast to socialist planning, state development planning does not replace the market mechanism and does not eliminate the use of money in production. It only applies to privately owned and publicly owned firms in the strategic sectors of the economy and seeks to coordinate their activities through indirect means and market-based incentives (such as tax breaks or subsidies).

Around the world

While economic planning is mainly associated with socialism and the Soviet Union and the Eastern Bloc among others and in particular its administrative command form, government planning of the economy can also happen under other political philosophies to industrialise and modernise the economy. For instance, a different form of planned economy operated in India during the Permit Raj era from 1947 to 1990. The unusually large government sector in countries like Saudi Arabia means that even though there is a market, central government planning controls allocation of most economic resources. In the United States, the government temporarily seized large portions of the economy during World War I and World War II, resulting in a largely government-planned war economy.

East Asia

The development models of the East Asian Tiger economies involved varying degrees of economic planning and state-directed investment in a model sometimes described as state development capitalism or the East Asian Model. 

The economy in both Malaysia and South Korea were instituted by a series of macroeconomic government plans (First Malaysia Plan and Five-Year Plans of South Korea) that rapidly developed and industrialized their mixed economies. 

The economy of Singapore was partially based on government economic planning that involved an active industrial policy and a mixture of state-owned industry and free-market economy.

France

Under dirigisme, France used indicative planning and established a number of state-owned enterprises in strategic sectors of the economy. The concept behind indicative planning is the early identification of oversupply, bottlenecks and shortages so that state investment behavior can be quickly modified to reduce market disequilibrium so that stable economic development and growth can be sustained. France experienced its Trente Glorieuses (Thirty Glorious), years with economic prosperity.

Soviet Union

The Soviet Union was the first national economy to attempt economic planning as a substitute for factor market allocation. Soviet-type economic planning took form in the 1930s and largely remained unchanged despite mild reforms until the Soviet Union's dissolution. Soviet economic planning was centralized and organized hierarchically, with a state planning agency, Gosplan, establishing target rates for growth and Gossnab allocating factor inputs to enterprises and economic units throughout the national economy. The national plan was broken down by various ministries, which in turn used the plan to formulate directives for local economic units which implemented them. The system used material balance planning. Economic information, including consumer demand and enterprise resource requirements, were aggregated to balance supply from the available resource inventories, with demand based on requirements for individual economic units and enterprises through a system of iterations.

The economy of the Soviet Union operated in a centralized and hierarchical manner. The process used directives which were issued to lower-level organizations. Thus, the Soviet economic model was often referred to as a command economy or an administered economy as plan directives were enforced by inducements in a vertical power structure, with actual planning playing little functional role in the allocation of resources. Owing to difficulties in transmitting information in a timely fashion and disseminating information on demand throughout the whole economy, administrative mechanisms of decision-making and resource allocation played the dominant role in allocating factor inputs as opposed to planning.

United Kingdom

The need for long-term economic planning to promote efficiency was a central component of Labour Party thinking until the 1970s. The Conservative Party largely agreed, producing the postwar consensus, nameley the broad bipartisan agreement on major policies.

United States

The United States used economic planning during World War I. The federal government supplemented the price system with centralized resource allocation and created a number of new agencies to direct important economic sectors, notably the Food Administration, Fuel Administration, Railroad Administration and War Industries Board. During World War II, the economy experienced staggering growth under a similar system of planning. In the postwar period, United States governments utilized such measures as the Economic Stabilization Program to directly intervene in the economy to control prices and wages, among other things, in different economic sectors.

Since the start of the Cold War, the federal government has directed a significant amount of investment and funding into research and development (R&D), often initially through the United States Department of Defense. The government performs 50% of all R&D in the United States, with a dynamic state-directed public-sector developing most of the technology that later becomes the basis of the private sector economy. As a result, Noam Chomsky has referred to the United States economic model as a form of state capitalism. Examples include laser technology, the internet, nanotechnology, telecommunications and computers, with most basic research and downstream commercialization financed by the public sector. That includes research in other fields including healthcare and energy, with 75% of most innovative drugs financed through the National Institutes of Health.

Criticism

The most notable critique of economic planning came from Austrian economists Friedrich Hayek and Ludwig von Mises. Hayek argued that central planners could not possibly accrue the necessary information to formulate an effective plan for production because they are not exposed to the rapid changes that take place in an economy in any particular time and place and so they are unfamiliar with those circumstances. The process of transmitting all the necessary information to planners is thus inefficient without a price system for the means of production. Mises also had a similar opinion. In his analysis of socialism in 1938, Oskar Lange addressed this theoretical issue by pointing out that planners could gain much of the information they required by monitoring changes in plant inventory levels. In practice, economic planners in Soviet-typed planned economies were able to make use of this technique in practice.

Proponents of decentralized economic planning have also criticized central economic planning. For example, Leon Trotsky believed that central planners, regardless of their intellectual capacity, operated without the input and participation of the millions of people who participate in the economy and so they would be unable to respond to local conditions quickly enough to effectively coordinate all economic activity.

Philosophy and economics

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Philosophy_and_economics 

Philosophy and economics, also philosophy of economics, studies topics such as rational choice, the appraisal of economic outcomes, institutions and processes, and the ontology of economic phenomena and the possibilities of acquiring knowledge of them.

It is useful to divide philosophy of economics in this way into three subject matters which can be regarded respectively as branches of action theory, ethics (or normative social and political philosophy), and philosophy of science. Economic theories of rationality, welfare, and social choice defend substantive philosophical theses often informed by relevant philosophical literature and of evident interest to those interested in action theory, philosophical psychology, and social and political philosophy.

Economics is of special interest to those interested in epistemology and philosophy of science both because of its detailed peculiarities and because it has many of the overt features of the natural sciences, while its object consists of social phenomena.

Scope

Definition and ontology of economics

The question usually addressed in any subfield of philosophy (the philosophy of X) is "what is X?" A philosophical approach to the question "what is economics?" is less likely to produce an answer than it is to produce a survey of the definitional and territorial difficulties and controversies. Similar considerations apply as a prologue to further discussion of methodology in a subject. Definitions of economics have varied over time from the modern origins of the subject, reflecting programmatic concerns and distinctions of expositors.

Ontological questions continue with further "what is..." questions addressed at fundamental economic phenomena, such as "what is (economic) value?" or "what is a market?". While it is possible to respond to such questions with real verbal definitions, the philosophical value of posing such questions actually aims at shifting entire perspectives as to the nature of the foundations of economics. In the rare cases that attempts at ontological shifts gain wide acceptance, their ripple effects can spread throughout the entire field of economics.

Methodology and epistemology of economics

An epistemology deals with how we know things. In the philosophy of economics this means asking questions such as: what kind of a "truth claim" is made by economic theories – for example, are we claiming that the theories relate to reality or perceptions? How can or should we prove economic theories – for example, must every economic theory be empirically verifiable? How exact are economic theories and can they lay claim to the status of an exact science – for example, are economic predictions as reliable as predictions in the natural sciences, and why or why not? Another way of expressing this issue is to ask whether economic theories can state "laws". Philosophers of science and economists have explored these issues intensively since the work of Alexander Rosenberg and Daniel M. Hausman dating to 3 decades ago.

Rational choice, decision theory and game theory

Philosophical approaches in decision theory focus on foundational concepts in decision theory – for example, on the natures of choice or preference, rationality, risk and uncertainty, and economic agents. Game theory is shared between a number of disciplines, but especially mathematics, economics and philosophy. Game theory is still extensively discussed within the field of the philosophy of economics. Game theory is closely related to and builds on decision theory and is likewise very strongly interdisciplinary.

Ethics and justice

The ethics of economic systems deals with the issues such as how it is right (just, fair) to keep or distribute economic goods. Economic systems as a product of collective activity allow examination of their ethical consequences for all of their participants. Ethics and economics relates ethical studies to welfare economics. It has been argued that a closer relation between welfare economics and modern ethical studies may enrich both areas, even including predictive and descriptive economics as to rationality of behavior, given social interdependence.

Ethics and justice overlap disciplines in different ways. Approaches are regarded as more philosophical when they study the fundamentals – for example, John Rawls' A Theory of Justice (1971) and Robert Nozick's Anarchy, State and Utopia (1974). 'Justice' in economics is a subcategory of welfare economics with models frequently representing the ethical-social requirements of a given theory. "Practical" matters include such subjects as law and cost–benefit analysis 

Utilitarianism, one of the ethical methodologies, has its origins inextricably interwoven with the emergence of modern economic thought. Today utilitarianism has spread throughout applied ethics as one of a number of approaches. Non-utilitarian approaches in applied ethics are also now used when questioning the ethics of economic systems – e.g. rights-based (deontological) approaches.

Many political ideologies have been an immediate outgrowth of reflection on the ethics of economic systems. Marx, for example, is generally regarded primarily as a philosopher, his most notable work being on the philosophy of economics. However, Marx's economic critique of capitalism did not depend on ethics, justice, or any form of morality, instead focusing on the inherent contradictions of capitalism through the lens of a process which is today called dialectical materialism.

Non-mainstream economic thinking

The philosophy of economics defines itself as including the questioning of foundations or assumptions of economics. The foundations and assumption of economics have been questioned from the perspective of noteworthy but typically under-represented groups. These areas are therefore to be included within the philosophy of economics.

• Praxeology: a deductive theory of human action based on premises presumed to be philosophically true (following the analytic–synthetic distinction of Immanuel Kant). Developed by Ludwig von Mises within the Austrian School, is a self-conscious opposition to the mathematical modeling and hypothesis-testing to validate neoclassical economics.
• Cross-cultural perspectives on economics, and economic anthropology: an example is the Buddhist-inspired Bhutanese "Gross National Happiness" concept (suggested as a better development measure than GNI/GDP). Amartya Sen is a renowned advocate for the integration of cross-cultural phenomena into economic thinking.
• Feminist perspectives on economics, or feminist economics.

Scholars cited in the literature

Aristotle Kenneth Arrow Roger E. Backhouse Ken Binmore Kevin Carson Milton Friedman Frank Hahn Friedrich Hayek

Martin Hollis Daniel M. Hausman Terence Wilmot Hutchison David Hume John Neville Keynes John Maynard Keynes Tony Lawson John Locke Uskali Mäki

Thomas Robert Malthus Karl Marx John Stuart Mill Ludwig von Mises Pierre-Joseph Proudhon John E. Roemer Murray Rothbard John Rawls Lionel Robbins Joan Robinson

Alexander Rosenberg Paul Samuelson E. F. Schumacher Amartya Sen Brian Skyrms Adam Smith Max Weber Carl Menger Bernard Williams

Related disciplines

The ethics of economic systems is an area of overlap between business ethics and the philosophy of economics. People who write on the ethics of economic systems are more likely to call themselves political philosophers than business ethicists or economic philosophers. There is significant overlap between theoretical issues in economics and the philosophy of economics. As economics is generally accepted to have its origins in philosophy, the history of economics overlaps with the philosophy of economics.

Degrees

Some universities offer joint degrees that combine philosophy, politics and economics. These degrees cover many of the problems that are discussed in Philosophy and Economics, but are more broadly construed. A small number of universities, notably the LSE, the Erasmus University Rotterdam, Copenhagen Business School and the University of Bayreuth offer master's degree programs specialized in philosophy and economics.

Praxeology

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Praxeology 

 

In philosophy, praxeology or praxiology (/ˌpræksiˈɒlədʒi/; from Ancient Greek πρᾶξις (praxis), meaning 'deed, action', and -λογία (-logia), meaning 'study of') is the theory of human action, based on the notion that humans engage in purposeful behavior, as opposed to reflexive behavior like sneezing and unintentional behavior.

French social philosopher Alfred Espinas gave the term its modern meaning, and praxeology was developed independently by two principal groups: the Austrian school, led by Ludwig von Mises, and the Polish school, led by Tadeusz Kotarbiński.

Origin and etymology

Coinage of the word praxeology (praxéologie) is often credited to Louis Bourdeau, the French author of a classification of the sciences, which he published in his Théorie des sciences: Plan de Science intégrale in 1882:

On account of their dual natures of specialty and generality, these functions should be the subject of a separate science. Some of its parts have been studied for a long time, because this kind of research, in which man could be the main subject, has always presented the greatest interest. Physiology, hygiene, medicine, psychology, animal history, human history, political economy, morality, etc. represent fragments of a science that we would like to establish, but as fragments scattered and uncoordinated have remained until now only parts of particular sciences. They should be joined together and made whole in order to highlight the order of the whole and its unity. Now you have a science, so far unnamed, which we propose to call Praxeology (from πραξις, action), or by referring to the influence of the environment, Mesology (from μεσος, environment).

However, the term was used at least once previously (with a slight spelling difference), in 1608, by Clemens Timpler in his Philosophiae practicae systema methodicum:

There was Aretology: Following that Praxiology: which is the second part of the Ethics, in general, commenting on the actions of the moral virtues.

It was later mentioned by Robert Flint in 1904 in a review of Bourdeau's Théorie des sciences.

The modern definition of the word was first given by Alfred V. Espinas (1844–1922), the French philosopher and sociologist; he was the forerunner of the Polish school of the science of efficient action. The Austrian school of economics was based on a philosophical science of the same kind.

With a different spelling, the word was used by the English psychologist Charles Arthur Mercier (in 1911), and proposed by Knight Dunlap to John B. Watson as a better name for his behaviorism. Watson rejected it. But the Chinese physiologist of behavior, Zing-Yang Kuo (b. 1898) adopted the term in 1935. It was also used by William McDougall (in 1928 and later).

Previously the word praxiology, with the meaning Espinas gave to it, was used by Tadeusz Kotarbiński (in 1923). Several economists, such as the Ukrainian, Eugene Slutsky (1926) used it in his attempt to base economics on a theory of action. It was also used by Austrian economist Ludwig von Mises (1933), Russian Marxist Nikolai Bukharin (1888–1938) during the Second International Congress of History of Science and Technology in London (in 1931), and Polish scholar Oscar Lange (1904–1965) in 1959, and later.

The Italian philosopher, Carmelo Ottaviano, was using the Italianised version, prassiologia, in his treatises starting from 1935, but in his own way, as a theory of politics. After the Second World War the use of the term praxeology spread widely. After the emigration of Mises to America his pupil Murray Rothbard defended the praxeological approach. A revival of Espinas's approach in France was revealed in the works of Pierre Massé (1946), the eminent cybernetician, Georges Théodule Guilbaud (1953), the Belgian logician, Leo Apostel (1957), the cybernetician, Anatol Rapoport (1962), Henry Pierron, psychologist and lexicographer (1957), François Perroux, economist (1957), the social psychologist, Robert Daval (1963), the well-known sociologist, Raymond Aron (1963) and the methodologists, Abraham Antoine Moles and Roland Caude (1965).

Under the influence of Tadeusz Kotarbiński, praxeology flourished in Poland. A special "Centre of Praxeology" (Zaklad Prakseologiczny) was created under the organizational guidance of the Polish Academy of Sciences, with its own periodical (from 1962), called at first Materiały Prakseologiczne (Praxeological Papers), and then abbreviated to Prakseologia. It published hundreds of papers by different authors, and the materials for a special vocabulary edited by Professor Tadeusz Pszczolowski, the leading praxeologist of the younger generation. A sweeping survey of the praxeological approach is to be found in the paper by the French statistician Micheline Petruszewycz, "A propos de la praxéologie".

Ludwig von Mises was influenced by several theories in forming his work on praxeology, including Immanuel Kant's works, Max Weber's work on methodological individualism, and Carl Menger's development of the subjective theory of value.

Philosopher of science Mario Bunge published works of systematic philosophy that included contributions to praxeology, and Bunge dismissed von Mises's version of praxeology as "nothing but the principle of maximization of subjective utility—a fancy version of egoism". Bunge, who was also a fierce critic of pseudoscience, warned that when "conceived in extremely general terms and detached from both ethics and science, praxiology has hardly any practical value".

Austrian economics

Austrian economics in the tradition of Ludwig von Mises relies heavily on praxeology in the development of its economic theories. Mises considered economics to be a sub-discipline of praxeology. Austrian School economists, following Mises, continue to use praxeology and deduction, rather than empirical studies, to determine economic principles. According to these theorists, with the action axiom as the starting point, it is possible to draw conclusions about human behavior that are both objective and universal. For example, the notion that humans engage in acts of choice implies that they have preferences, and this must be true for anyone who exhibits intentional behavior. 

Advocates of praxeology also say that it provides insights for the field of ethics.

Subdivisions

In 1951, Murray Rothbard divided the subfields of praxeology as follows:

A. The Theory of the Isolated Individual (Crusoe Economics)

B. The Theory of Voluntary Interpersonal Exchange (Catallactics, or the Economics of the Market)

1. Barter

2. With Medium of Exchange

a. On the Unhampered Market

b. Effects of Violent Intervention with the Market

c. Effects of Violent Abolition of the Market (Socialism)

C. The Theory of War – Hostile Action

D. The Theory of Games (e.g., von Neumann and Morgenstern)

E. Unknown

At the time, topics C, D, and E remained open research problems.

Criticisms

Thomas Mayer has argued that, because praxeology rejects positivism and empiricism in the development of theories, it constitutes nothing less than a rejection of the scientific method. For Mayer, this invalidates the methodologies of the Austrian school of economics. Austrians argue that empirical data itself is insufficient to describe economics; that consequently empirical data cannot falsify economic theory; that logical positivism cannot predict or explain human action; and that the methodological requirements of logical positivism are impossible to obtain for economic questions. Ludwig von Mises in particular argued against empiricist approaches to the social sciences in general, because human events are unique and "unrepeatable," whereas scientific experiments are necessarily reproducible.

However, economist Antony Davies argues that because statistical tests are predicated on the independent development of theory, some form of praxeology is essential for model selection; conversely, praxeology can illustrate surprising philosophical consequences of economic models.

Economic calculation problem

From Wikipedia, the free encyclopedia

https://en.wikipedia.org/wiki/Economic_calculation_problem 

 

The economic calculation problem is a criticism of using economic planning as a substitute for market-based allocation of the factors of production. It was first proposed by Ludwig von Mises in his 1920 article "Economic Calculation in the Socialist Commonwealth" and later expanded upon by Friedrich Hayek.

In his first article, Mises describes the nature of the price system under capitalism and describes how individual subjective values are translated into the objective information necessary for rational allocation of resources in society. He argues that economy planning necessarily leads to an irrational and inefficient allocation of resources. In market exchanges, prices reflect the supply and demand of resources, labor and products. In the article, Mises focused his criticism on the inevitable deficiencies of the socialisation of capital goods, but he later went on to elaborate on various different forms of socialism in his book Socialism.

Mises and Hayek argued that economic calculation is only possible by information provided through market prices and that bureaucratic or technocratic methods of allocation lack methods to rationally allocate resources. Mises's analysis centered on price theory while Hayek went with a more feathered analysis of information and entrepreneurship. The debate raged in the 1920s and 1930s and that specific period of the debate has come to be known by economic historians as the socialist calculation debate. Mises's initial criticism received multiple reactions and led to the conception of trial-and-error market socialism, most notably the Lange–Lerner theorem.

In the 1920 paper, Mises argued that the pricing systems in socialist economies were necessarily deficient because if a public entity owned all the means of production, no rational prices could be obtained for capital goods as they were merely internal transfers of goods and not "objects of exchange", unlike final goods. Therefore, they were unpriced and hence the system would be necessarily irrational as the central planners would not know how to allocate the available resources efficiently. He wrote that "rational economic activity is impossible in a socialist commonwealth". Mises developed his critique of socialism more completely in his 1922 book Socialism, arguing that the market price system is an expression of praxeology and can not be replicated by any form of bureaucracy.

Theory

Comparing heterogeneous goods

Since capital goods and labor are highly heterogeneous (i.e. they have different characteristics that pertain to physical productivity), economic calculation requires a common basis for comparison for all forms of capital and labour.

As a means of exchange, money enables buyers to compare the costs of goods without having knowledge of their underlying factors; the consumer can simply focus on his personal cost-benefit decision. Therefore, the price system is said to promote economically efficient use of resources by agents who may not have explicit knowledge of all of the conditions of production or supply. This is called the signalling function of prices as well as the rationing function which prevents over-use of any resource.

Without the market process to fulfill such comparisons, critics of non-market socialism say that it lacks any way to compare different goods and services and would have to rely on calculation in kind. The resulting decisions, it is claimed, would therefore be made without sufficient knowledge to be considered rational.

Relating utility to capital and consumption goods

The common basis for comparison of capital goods must also be connected to consumer welfare. It must also be able to compare the desired trade-off between present consumption and delayed consumption (for greater returns later on) via investment in capital goods. The use of money as a medium of exchange and unit of account is necessary to solve the first two problems of economic calculation. Mises (1912) applied the marginal utility theory developed by Carl Menger to money.

Marginal consumer expenditures represent the marginal utility or additional consumer satisfaction expected by consumers as they spend money. This is similar to the equi-marginal principle developed by Alfred Marshall. Consumers equalize the marginal utility (amount of satisfaction) of the last dollar spent on each good. Thus, the exchange of consumer goods establishes prices that represent the marginal utility of consumers and money is representative of consumer satisfaction.

If money is also spent on capital goods and labor, then it is possible to make comparisons between capital goods and consumer goods. The exchange of consumer and capital/labor goods does not imply that capital goods are valued accurately, only that it is possible for the valuations of capital goods to be made. These first elements of the calculation critique of socialism are the most basic element, namely economic calculation requires the use of money across all goods. This is a necessary, but not a sufficient condition for successful economic calculation. Without a price mechanism, Mises argues, socialism lacks the means to relate consumer satisfaction to economic activity. The incentive function of prices allows diffuse interests, like the interests of every household in cheap, high quality shoes to compete with the concentrated interests of the cobblers in expensive, poor quality shoes. Without it, a panel of experts set up to "rationalise production", likely closely linked to the cobblers for expertise, would tend to support the cobblers interests in a "conspiracy against the public". However, if this happens to all industries, everyone would be worse off than if they had been subject to the rigours of market competition.

The Mises theory of money and calculation conflicts directly with Marxist labour theory of value. Marxist theory allows for the possibility that labour content can serve as a common means of valuing capital goods, a position now out of favour with economists following the success of the theory of marginal utility.

Entrepreneurship

The third condition for economic calculation is the existence of genuine entrepreneurship and market rivalry. 

According to Kirzner (1973) and Lavoie (1985), entrepreneurs reap profits by supplying unfulfilled needs in all markets. Thus, entrepreneurship brings prices closer to marginal costs. The adjustment of prices in markets towards equilibrium (where supply and demand equal) gives them greater utilitarian significance. The activities of entrepreneurs make prices more accurate in terms of how they represent the marginal utility of consumers. Prices act as guides to the planning of production. Those who plan production use prices to decide which lines of production should be expanded or curtailed.

Entrepreneurs lack the profit motive to take risks under socialism and so are far less likely to attempt to supply consumer demands. Without the price system to match consumer utility to incentives for production, or even indicate those utilities "without providing incentives", state planners are much less likely to invest in new ideas to satisfy consumers' desires.

Coherent planning

The fourth condition for successful economic calculation is plan coordination among those who plan production. The problem of planning production is the knowledge problem explained by Hayek (1937, 1945), but first mentioned and illustrated by his mentor Mises in Socialism (1922), not to be mistaken with Socialism: An Economic and Sociological Analysis (1951). The planning could either be done in a decentralised fashion, requiring some mechanism to make the individual plans coherent, or centrally, requiring a lot of information.

Within capitalism, the overall plan for production is composed of individual plans from capitalists in large and small enterprises. Since capitalists purchase labour and capital out of the same common pool of available yet scarce labor and capital, it is essential that their plans fit together in at least a semi-coherent fashion. Hayek (1937) defined an efficient planning process as one where all decision makers form plans that contain relevant data from the plans from others. Entrepreneurs acquire data on the plans from others through the price system. The price system is an indispensable communications network for plan coordination among entrepreneurs. Increases and decreases in prices inform entrepreneurs about the general economic situation, to which they must adjust their own plans.

As for socialism, Mises (1944) and Hayek (1937) insisted that bureaucrats in individual ministries could not coordinate their plans without a price system. If decentralized socialism cannot work, central authorities must plan production. However, central planners face the local knowledge problem in forming a comprehensive plan for production. Mises and Hayek saw centralization as inevitable in socialism. Opponents argued that in principle an economy can be seen as a set of equations. Thus, there should be no need for prices. Using information about available resources and the preferences of people, it should be possible to calculate an optimal solution for resource allocation. Friedrich von Hayek responded that the system of equations required too much information that would not be easily available and the ensuing calculations would be too difficult. This is partly because individuals possess useful knowledge but do not realise its importance, may have no incentive to transmit the information, or may have incentive to transmit false information about their preferences. He contended that the only rational solution is to utilize all the dispersed knowledge in the market place through the use of price signals. The early debates were made before the much greater calculating powers of modern computers became available but also before research on chaos theory. In the 1980s, Alec Nove argued that even with the best computers, the calculations would take millions of years. It may be impossible to make long-term predictions for a highly complex system such as an economy.

Hayek (1935, 1937, 1940, 1945) stressed the knowledge problem of central planning, partly because decentralized socialism seemed indefensible. Part of the reason that Hayek stressed the knowledge problem was also because he was mainly concerned with debating the proposal for market socialism and the Lange model by Oskar R. Lange (1938) and Hayek's student Abba Lerner (1934, 1937, 1938) which was developed in response to the calculation argument. Lange and Lerner conceded that prices were necessary in socialism. Lange and Lerner thought that socialist officials could simulate some markets (mainly spot markets) and the simulation of spot markets was enough to make socialism reasonably efficient. Lange argued that prices can be seen merely as an accounting practice. In principle, claim market socialists, socialist managers of state enterprises could use a price system, as an accounting system, in order to minimize costs and convey information to other managers. However, while this can deal with existing stocks of goods, providing a basis for values can be ascertained, it does not deal with the investment in new capital stocks. Hayek responded by arguing that the simulation of markets in socialism would fail due to a lack of genuine competition and entrepreneurship. Central planners would still have to plan production without the aid of economically meaningful prices. Lange and Lerner also admitted that socialism would lack any simulation of financial markets, and that this would cause problems in planning capital investment.

However, Hayek's argumentation is not only regarding computational complexity for the central planners. He further argues that much of the information individuals have cannot be collected or used by others. First, individuals may have no or little incentive to share their information with central or even local planners. Second, the individual may not be aware that he has valuable information; and when he becomes aware, it is only useful for a limited time, too short for it to be communicated to the central or local planners. Third, the information is useless to other individuals if it is not in a form that allows for meaningful comparisons of value (i.e. money prices as a common basis for comparison). Therefore, Hayek argues, individuals must acquire data through prices in real markets.

Financial markets

The fifth condition for successful economic calculation is the existence of well functioning financial markets. Economic efficiency depends heavily upon avoiding errors in capital investment. The costs of reversing errors in capital investment are potentially large. This is not just a matter of rearranging or converting capital goods that are found to be of little use. The time spent reconfiguring the structure of production is time lost in the production of consumer goods. Those who plan capital investment must anticipate future trends in consumer demand if they are to avoid investing too much in some lines of production and too little in other lines of production.

Capitalists plan production for profit. Capitalists use prices to form expectations that determine the composition of capital accumulation, the pattern of investment across industry. Those who invest in accordance with consumers' desires are rewarded with profits, those who do not are forced to become more efficient or go out of business.

Prices in futures markets play a special role in economic calculation. Futures markets develop prices for commodities in future time periods. It is in futures markets that entrepreneurs sort out plans for production based on their expectations. Futures markets are a link between entrepreneurial investment decisions and household consumer decisions. Since most goods are not explicitly traded in futures markets, substitute markets are needed. The stock market serves as a ‘continuous futures market’ that evaluates entrepreneurial plans for production (Lachmann 1978). Generally speaking, the problem of economic calculation is solved in financial markets as Mises argued:

The problem of economic calculation arises in an economy which is perpetually subject to change [...]. In order to solve such problems it is above all necessary that capital be withdrawn from particular undertakings and applied in other lines of production [...]. [This] is essentially a matter of the capitalists who buy and sell stocks and shares, who make loans and recover them, who speculate in all kinds of commodities.

The existence of financial markets is a necessary condition for economic calculation. The existence of financial markets itself does not automatically imply that entrepreneurial speculation will tend towards efficiency. Mises argued that speculation in financial markets tends towards efficiency because of a "trial and error" process. Entrepreneurs who commit relatively large errors in investment waste their funds over expanding some lines of production at the cost of other more profitable ventures where consumer demand is higher. The entrepreneurs who commit the worst errors by forming the least accurate expectations of future consumer demands incur financial losses. Financial losses remove these inept entrepreneurs from positions of authority in industry. 

Entrepreneurs who commit smaller errors by anticipating consumer demand more correctly attain greater financial success. The entrepreneurs who form the most accurate opinions regarding the future state of markets (i.e. new trends in consumer demands) earn the highest profits and gain greater control of industry. Those entrepreneurs who anticipate future market trends therefore waste the least amount of real capital and find the most favorable terms for finance on markets for financial capital. Minimal waste of real capital goods implies the minimization of the opportunity costs of capital's economic calculation. The value of capital goods is brought into line with the value of future consumer goods through competition in financial markets, because competition for profits among capitalist financiers rewards entrepreneurs who value capital more correctly (i.e. anticipating future prices more correctly) and eliminates capitalists who value capital least correctly. To sum things up, the use of money in trading all goods (capital/labor and consumer) in all markets (spot and financial) combined with profit driven entrepreneurship and Darwinian natural selection in financial markets all combine to make rational economic calculation and allocation the outcome of the capitalist process.

Mises insisted that socialist calculation is impossible because socialism precludes the exchange of capital goods in terms of a generally accepted medium of exchange, or money. Investment in financial markets determines the capital structure of modern industry with some degree of efficiency. The egalitarian nature of socialism prohibits speculation in financial markets. Therefore, Mises concluded that socialism lacks any clear tendency towards improvement in the capital structure of industry.

Example

Mises gave the example of choosing between producing wine or oil, making the following point:

It will be evident, even in the socialist society, that 1,000 hectolitres of wine are better than 800, and it is not difficult to decide whether it desires 1,000 hectolitres of wine rather than 500 of oil. There is no need for any system of calculation to establish this fact: the deciding element is the will of the economic subjects involved. But once this decision has been taken, the real task of rational economic direction only commences, i.e., economically, to place the means at the service of the end. That can only be done with some kind of economic calculation. The human mind cannot orient itself properly among the bewildering mass of intermediate products and potentialities of production without such aid. It would simply stand perplexed before the problems of management and location.

Such intermediate products would include land, warehouse storage, bottles, barrels, oil, transport, etc. Not only would these things have to be assembled, but they would have to compete with the attainment of other economic goals. Without pricing for capital goods, essentially, Mises is arguing, it is impossible to know what their rational/most efficient use is. Investment is particularly impossible as the potential future outputs cannot be measured by any current standard, let alone a monetary one required for economic calculation. The value consumers have for current consumption over future consumption cannot be expressed, quantified or implemented as investment is independent from savings.

Criticism

Efficiency of markets

One criticism is that the claim that a free market is efficient at resource allocation is incorrect. Alec Nove argues that in his "Economic Calculation in the Socialist Commonwealth", Mises "tends to spoil his case by the implicit assumption that capitalism and optimum resource allocation go together". Economist Joan Robinson also argued that many prices in modern capitalism are effectively "administered prices" created by "quasi monopolies", thus challenging the connection between capital markets and rational resource allocation. The economist Robin Hahnel has argued that free markets are in fact systematically inefficient because externalities are pervasive and because real-world markets are rarely truly competitive or in equilibrium.

Milton Friedman agreed that markets with monopolistic competition are not efficient, but he argued that in countries with free trade the pressure from foreign competition would make monopolies behave in a competitive manner. In countries with protectionist policies, foreign competition cannot fulfill this role, but the threat of potential competition, namely that as companies abuse their position new rivals could emerge and gain customers dissatisfied with the old companies, can still reduce the inefficiencies.

Other libertarian capitalist analysts believe that monopolies and big business are not generally the result of a free market. Rather, they say that such concentration is enabled by governmental grants of franchises or privileges. They adamantly oppose any distortion of market structure by the introduction of government influence, asserting that such interference would be a form of central planning or state capitalism, insofar as it would redirect decision making from the private to the public sector.

Joseph Schumpeter argued that large firms generally drive economic advancement through innovation and investment and so their proliferation is not necessarily bad.

Equilibrium

It has also been argued that the contention that finding a true economic equilibrium is not just hard but impossible for a central planner applies equally well to a market system. As any universal Turing machine can do what any other Turing machine can, a central calculator in principle has no advantage over a system of dispersed calculators (i.e., a market), or vice versa.

In some economic models, finding an equilibrium is hard. For instance, finding an Arrow–Debreu equilibrium is PPAD-complete. If the market can find an equilibrium in polynomial time, then the equivalence above can be used to prove that P=PPAD. Don Lavoie makes the same point in reverse. The market socialists pointed out the formal similarity between the neoclassical model of Walrasian general equilibrium and that of market socialism. Simply replace the Walrasian auctioneer with a planning board. However, this emphasizes the shortcomings of the model. According to Lavoie, by relying on this formal similarity the market socialists must adopt the simplifying assumptions of the model. The model assumes that various sorts of information are "given" to the auctioneer or planning board. However, without a capital market, this information does not exist; and if it does exist, it exists in a fundamentally distributed form, unavailable to the planners. If the planners somehow captured this information, it would immediately become stale and relatively useless unless reality somehow imitated the changeless monotony of the equilibrium model. The existence and usability of this information depends on its creation and situation within a distributed discovery procedure.

Scale of problem

One criticism is that proponents of the theory overstate the strength of their case by describing socialism as impossible rather than inefficient.

Steady-state economy

Joan Robinson argued that in a steady-state economy there would be an effective abundance of means of production and so markets would not be needed. Mises acknowledged such a theoretical possibility in his original tract when he said the following:

The static state can dispense with economic calculation. For here the same events in economic life are ever recurring; and if we assume that the first disposition of the static socialist economy follows on the basis of the final state of the competitive economy, we might at all events conceive of a socialist production system which is rationally controlled from an economic point of view.

However, he contended that stationary conditions never prevail in the real world. Changes in economic conditions are inevitable; and even if they were not, the transition to socialism would be so chaotic as to preclude the existence of such a steady-state from the start.

Some writers have argued that with detailed use of real unit accounting and demand surveys a planned economy could operate without a capital market in a situation of abundance. The purpose of the price mechanism is to allow individuals to recognise the opportunity cost of decisions. In a state of abundance, there is no such cost; which is to say that in situations where one need not economize, economics does not apply, e.g. areas with abundant fresh air and water.

Use of technology

In Towards a New Socialism's "Information and Economics: A Critique of Hayek" and "Against Mises", Paul Cockshott and Allin Cottrell argued that the use of computational technology now simplifies economic calculation and allows central planning to be implemented and sustained. Len Brewster replied to this by arguing that Towards a New Socialism establishes what is essentially another form of a market economy, making the following point:

[A]n examination of C&C's New Socialism confirms Mises's conclusion that rational socialist planning is impossible. It appears that in order for economic planners to have any useful data by which they might be guided, a market must be hauled in, and with it analogues of private property, inequality and exploitation.

In response, Cockshott argued that the economic system is sufficiently far removed from a capitalist free-market economy to not count as one, saying:

Those that Hayek was arguing against like Lange and Dickinson allowed for markets in consumer goods, this did not lead Hayek to say : Oh you are not really arguing for socialism since you have conceded a market in consumer goods, he did not, because there remained huge policy differences between him and Lange even if Lange accepted consumer goods markets. It is thus a very weak argument by Brewster to say that what we advocate is not really socialist calculation because it is contaminated in some way by market influences.

Cosma Shalizi articulated the problems that come with central planning using supercomputers in a 2012 essay. He cited the sheer complexity of the problem as well as the difficulty of negotiating between preferences as being the central problems with such a system.

Leigh Phillips and Michal Rozworski released a book in 2019 that argues that multinational corporations like Walmart and Amazon already operate centrally planned economies larger than the Soviet Union, proving that the economic calculation problem is surmountable.