Lesson 1 of 7
How would a planner know
Strip the politics out and a hard question remains: with no prices for the means of production, what says which way of building something is cheaper.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
Who writes thisEditorial processLinkedIn (opens in a new tab)X (opens in a new tab)
In one minute
- The question is not whether planners are clever or honest. Assume they are both, and assume they know exactly what people want.
- A decision between two production methods needs the quantities compared in one unit. Physical quantities of steel, coal and labour do not add.
- Mises's claim was that the unit only exists where the means of production are exchanged, because that is what produces a money price for them.
Before any of the argument, the problem. It is easiest to see if every political question is set aside and the planner is granted everything a planner could want.
Two ways to build the same thing, and the comparison that decides
Counting in kind
- Method A: 400 tonnes of steel, 900 labour hours, two years.
- Method B: 250 tonnes of steel, 1,400 labour hours, three years.
- A uses more steel, B uses more labour and more time.
- No arithmetic turns this into a preference.
Counting in money
- Every input carries a price set where it was bought and sold.
- Both methods become a single figure in the same unit.
- The comparison is now subtraction.
- The prices came from somewhere, and that is the whole question.
The physical facts are identical in both columns. Only the second column supports a choice.
The planner is given everything except one thing
Grant the planner perfect knowledge of what people want. Grant honesty, energy and the best statistical office ever assembled. Grant the technical data: every engineer's manual, every input requirement, every yield.
What remains is a choice between technically possible methods. Mises's 1920 paper argues in its second section that this choice cannot be made in physical units, because the relevant magnitudes are not commensurable: the human mind cannot orient itself among intermediate products and possible processes without an aid that reduces them to one common expression.
His example is a railway. Should a new line be built, and if so which of several routes. In a money economy the answer is a calculation: the saving in transport costs against the cost of building and maintaining the line. Without a common unit there is no way to weigh hours of labour, iron, coal and building material against one another, so the decision is made, but it is not calculated.
Why a consumer good is the easy case
Mises grants that valuation in kind works for consumption goods. A person can rank a coat above a pair of shoes without any arithmetic, because ranking is what choosing is.
The difficulty starts one step back, with goods that are not consumed but used to produce other goods. Nobody wants a blast furnace for itself. Its value is entirely derived from the value of what it eventually helps produce, and the chain from a furnace to a finished good runs through dozens of stages and alternative uses. Ranking cannot reach that far. Something has to carry the information back down the chain.
The claim, stated narrowly
The claim in the 1920 paper is that money prices for the means of production are that something, and that such prices arise only where the means of production are owned and exchanged. Remove exchange in higher-order goods and the prices go with it, and with the prices goes the ability to test whether a plan used resources well.
That is a claim about what information a decision needs, not a claim about motives, effort or intelligence. Read it that way and the reply that occupied the next twenty years makes sense: the socialist economists who answered Mises did not dispute that the calculation is needed. They argued that it could be performed another way.
Check yourself
What does the calculation problem assume about the planner?
- That planners are badly informed about what people want
- That the planner has the technical data and knows what people want, and still faces a comparison problem
- That planners act in their own interest rather than the public interest
Show the answer
Answer: B.
Mises's 1920 paper poses the problem after granting the planner the ends and the technical facts. Motive and competence are separate arguments made by other people.Why does valuation in kind fail for goods of a higher order?
- Because they are physically larger
- Because their value is derived through long chains of production and cannot be reached by ranking
- Because they are traded internationally
Show the answer
Answer: B.
Section two of the 1920 paper allows that calculation in kind can handle consumption goods and argues it breaks down as soon as goods of a higher order are involved.What did Mises say monetary calculation supplies?
- A measure of how much people enjoy a good
- A common unit in which otherwise incommensurable inputs can be compared
- A guarantee that production decisions will be correct
Show the answer
Answer: B.
The railway example in section two turns on reducing labour, iron, coal and materials to one expression. He also writes that monetary calculation has serious defects of its own.Sources
- Mises, 'Economic Calculation in the Socialist Commonwealth', published in German in 1920 and printed in English in Hayek (editor), Collectivist Economic Planning, 1935, section two: the failure of calculation in kind for goods of a higher order, the railway example, and the argument that monetary calculation supplies a common unit while having defects of its own.
- Hayek (editor), Collectivist Economic Planning, 1935, chapter one, section one: the editor's framing that discussion of socialism had turned almost entirely on ethical and psychological questions, and that the economic problem of whether planning could achieve its aim even in the ideal case had not been recognised.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- The two production methods and the supplier choice are invented to show the shape of the comparison. Neither describes a real project.
- Stating the problem is not settling it. The three lessons after the next one give the reply, and the reply is a serious piece of economics.