David R. Henderson  

Robert Murphy on Economic Calculation

Krugman on monetary offset and... Aggregate demand is not consum...
In Mises' view (later elaborated by his follower Friedrich Hayek), a modern economy is far too complex to be centrally planned. Even putting aside concerns about dictatorship and shirking, a socialist system cannot implement an efficient use of society's scarce resources because the planners would have no way of evaluating their blueprint--even after the fact--from the standpoint of citizen preferences.

To be sure, engineers and chemists could accurately report how much steel, glass, rubber, and labor hours of various qualities went into (say) a particular automobile factory and how many cars came out at the other end. But without a way to translate these disparate quantities of heterogeneous items into a common unit, there would be no way of telling whether the factory's operations had been efficient during the period in question.

These two paragraphs are from the Econlib Feature Article for July. The article, by Robert P. Murphy, is titled "Monetary Calculation as a Scorecard."

Bob applies it also to a major lesson he learned in Haiti when he volunteered there after the horrendous earthquake:

We were all very motivated "to help," but beyond that, we didn't have much to guide us. At the end of each day, we could say with confidence that we had made the Haitians better off than if we had done nothing, but it wasn't at all obvious that we were helping them as much as we could have with the resources at our disposal.

For example, we all had to choose which team we would join during a given block of time, but there were rules so that nobody hogged the "cushy" jobs (like staying inside and assembling poles that would be used to prop up tents). Indeed, everybody had to sign up at least once for the disgusting job of cleaning the bathroom at our camp. Even though these rules made sense from the perspective of "fairness" and maintaining team morale, they probably stifled our overall "output." I noticed that I was very adept at assembling the poles for the tents, whereas I was unprepared for the heat of Haiti in April and therefore not particularly adept at breaking apart concrete blocks with a sledgehammer in the hot sun. (The earthquake had reduced many people's properties to a pile of rubble.) To be a "tough guy," I volunteered for "rubble crew" more than necessary, but I probably would have contributed more had I focused on pole assembly. Yet nobody but me (the professional economist in the group) was thinking like this. None of the team leaders had to provide an account of the resources (including the labor of the volunteers) used during a particular day and compare that to the amount of "help" (however quantified) their team had provided to the Haitians. In other words, there was no way for the team leaders to apply a cost/benefit test to their respective operations.

Read the whole thing.

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COMMENTS (4 to date)

I remember seeing a photograph in the news set in Haiti shortly after some devastation, perhaps it was that 2010 earthquake. The photo showed a few women and a few of their children, as I recall, sitting on a roadside with their possessions. They possessed only a few poor items. The caption on the picture and the accompanying news story emphasized how poor and desperate these people were as they waited for aid to arrive.

But in that picture and news story I saw something the news medium probably did not intend to convey. Behind the people were ruins: tumbled down houses and other wrecked assets. I saw clearly (please correct me if you think I am mistaken) that these people had no property rights in those wrecked assets, or property rights in their own labor which they could trade.

Because I can tell you for sure that if that were my house wrecked (as I feel I own my house in the US) I would not be sitting on my can waiting for aid to come. I would be working, picking up, starting to reorganize whatever I could. But these poor women evidently felt no property rights in anything more than what they had with them at the roadside.

Don't show me a photo of people who obviously could be working, sitting idle in front of a lot of work that needs to be done, and think that my heart will soften to an appeal for foreign aid. The problem is right there: between those idle but capable hands and work 25 feet away that cries out for hands. There must be institutional impediments. That's what advocates of foreign aid need to see. Find and erode those dignity-destroying institutional impediments.

Michael writes:


Compare this to pictures from Germany after 1945. There's even a term "Trümmerfrauen" (wreckage women -- many men were in PoW camps or dead, of course). I think it was a mix of culture and the right incentives

Thank you David, and Bob Murphy, for this refresher on socialist calculation. I read Bob's feature article for July twice.

Mises' argument is wonderful, and I believe Bob does it justice. But Mises' argument is far from easy to understand for one who has not spent a long time thinking in those directions. Twenty-five years ago I felt I gained a grasp of it — after I had listened three times to Mises' 1944 book Bureaucracy (on four audio cassettes produced by Classics On Tape).

The notes I took while reading the second time through Bob's current article spill onto three pages. Most of that should wait for another outlet. Here I will point out that I think Mises-Hayek-Murphy leave a puzzle: If oversight, including planning, of an economic organization works at some levels (examples: a department within a grocery store, and a company owning many grocery stores) why can't it possibly work at other levels, such as a small nation state? The smallest of nation states might be no bigger than the largest of commercial grocery store chains(?) If Austrian economists have analyzed this puzzle and shed some helpful light, I have yet to see it.

But fear not because, TA DA!, the Resource-Patterns Model of Life explains it all more simply, more clearly.

I should be more specific in my claim for the Resource-Patterns Model of Life (RPM). For one willing to accept RPM's basic assumptions, RPM goes on to show why planning of an entire economy must almost surely fail; RPM shows this more simply and clearly than the Austrians.

The organizational planning at which we humans can succeed is limited by the accuracy and time-durability of planners' perceptions of resource patterns from which the organization-plan must draw.

I remain poor at explaining this resource-patterns model. For any reader willing to try more of my explanation, after the paper linked above try the quiz and its answers. See Socialist Calculation and the Iron Ore Somewhere Behind Sally's Teepee and Perspectives in the Resource-Patterns Model of Life: A Search for Externalities and Who Can See Them.

Thank you.

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