Economic Calculation in a Resource Based Economy
INTRODUCTION AND DISCLAIMER [1]
The ideas of Ludwig von Mises, an economist of the Austrian School, have been resurrected by critics of a RBE in an attempt to show that a moneyless economy is impossible. Despite numerous attempts to disprove the criticism, the spectre of von Mises still hangs over the social movements that support a RBE. But my defence here is not merely yet another attempt at disproving von Mises, but emerges also from the frequency of misunderstandings and misuse of his critique, and some issues regarding the proposed solutions from RBE supporters. I wish to set the record straight on what the true challenge of von Mises’s ‘calculation problem’ is, but also offer internal critique against some rebuttals against von Mises by RBE, such as the idea that computation solves the calculation problem.
It must first of all be pointed out that the general idea of a moneyless economy is not new, and that versions of it have been presented and criticised before, most often in connection to some version socialism. This is an unfortunate consequence of the constrained way in which the debate on the issue has been held since the 1920’s. The Venus Project and Zeitgeist Movement in fact, to my knowledge, represent the first attempts to have the discussion outside of that particular box. Yet the situation creates the potential for misunderstandings, and since the last thing I wish to do is add to the accusations of ‘secret socialism’ against the organisations, there is a need to clarify a few things.
The main opponents of my article, von Mises and to an extent von Hayek, where critics of the idea of a moneyless economy and involved in what was to become known as the ‘Socialist Calculations Debates’, after von Mises’s main book on the subject, ‘Economic Calculation in the Socialist Commonwealth‘ which he wrote with the USSR in mind. Getting rid of money and markets was, at the time that the Debates began, the avowed goal of many who called themselves socialists. History has of course shown us that no serious effort to do so was ever attempted, and that no iteration of ‘actually existing socialism’ ever came even close to ridding itself of the need of money[2].
Nonetheless, I wish to make it very clear that my use of such sources is in no way an implication that the Zeitgeist movement, or Venus Project for that matter, is any kind of socialist endeavour – and most certainly not something reminiscent of the USSR! It just so happens that some of the points raised by von Mises and von Hayek, and their opponents, can in general be directed at any society that wishes to rid itself of markets and money. This is precisely what has been done by critics of the RBE. Rather than ignoring the challenge due to its roots, I intend to re-deploy it in an updated way such that it is relevant to the RBE.
My intent is to show that von Mises’s challenge is surmountable and his criticism ultimately futile – that a moneyless society can indeed become a reality. What stands in our way is no ‘real and true and literal impossibility’ of the sort that von Mises and his ilk imagined (Salerno, in von Mises, 1990:49), but merely politics and ideology, and the inability of some minds to think outside the box.
THE CALCULATION PROBLEM & VON MISES’S PROPOSED SOLUTION
The way that von Mises presents the calculation problem in his classical text on the matter is as one of choices in production. It is not, as is sometimes misunderstood, a problem of distribution of that which is produced, or deciding exactly what to produce. Even scholars who are positive to the idea of a moneyless or non-market economy sometimes misunderstand this. David McNally (1993, 2010), for example, attempts to argue against von Mises by pointing out how there is no difficulty in the absence of market prices to determine how many schools or hospitals a society needs. While McNally in entirely right about this, that fact does not contradict von Mises. Even von Mises acknowledges that a moneyless economy could estimate the approximate needs of the population (1990:5), such as “whether it desires 1,000 hectolitres of wine rather than 500 of oil” (1990:16). Nor is it challenging to conclude “that 1,000 hectolitres of wine are better than 800” (ibid.).
Rather, von Mises’s critique deals with the possibility of rational decision-making regarding the allocation of resources in the production process, when faced with limited resources. This limitation of resources should not be confused with the artificial scarcity and misuse of resources under the current economic paradigm, and is thus not solved by the concept of “abundance” that is sometimes referred to by supporters of a RBE. Instead it is the practical fact that we do not have an infinite amount of resources, space or time – and likewise face other constraints such as not wanting to damage the environment or waste resources for future generations. We simply have not world enough to realise all potential goods we can possibly imagine, and therefore we are forced to make choices and prioritise. As has been covered, the issue is not insurmountable in the realm of deciding what to produce, even according to von Mises – the choice can be made based on need, and need can be determined by simply asking or observing people. Yet in the realm of production, the hurdle becomes more challenging. It can be illustrated by the following example:
Let us say that we are manufacturing a product, and that we can produce it in three different ways, all of which require differing amounts of the particular resources x, y, z. We assume in this case that the result is otherwise the same, i.e. that the outcome of production has the same qualities regardless of what resources are used or in what combination.
| Method 1: | Method 2: | Method 3: | Method 4: |
| 5x | 10x | 10x | 4x |
| 10y | 5y | 10y | 4y |
| 3z | 3z | 5z | 2z |
As stated before, even von Mises admits that a moneyless economy can conclude that Method 4 is superior. Let us therefore discard it, as it cannot illustrate the issue at hand, and assume that we only have the methods 1, 2 and 3 available to us. Again, even von Mises admits that a moneyless economy can clearly see that Method 3 is inferior and should not be used. The problem von Mises wanted to show is in the choice between Methods 1 and 2. How does one choose which one is better, without a way to compare the value of x and y? Of determining how many x each y is worth, and vice versa, so that their total cost can be expressed as a single number? In a market economy we can easily make a decision, because we can compare the price of x and y. The price is determined by supply and demand, and thus the cheaper of the two will be the one that there is the most supply of, or least demand for. Nor does the individual person or firm need to have any other information than the price; by selecting the cheapest method they will choose the best allocation of resources, and this without doing anything other than just trying to maximise their own profits – this is known as economising on information (see Hayek, 1945: 6).
In other words, von Mises argues firstly that rational decision-making requires commensurability; a single unit of value by which different options can be compared. Choice must be reduced to a matter of calculation in order to be exact, and is otherwise just an estimation (von Mises, 1990:22). Secondly, he argues that market prices are the best such unit, since they contain in a sense all the information needed by being the result of the aggregation of many individual decisions, and hence carry objective information on resource availability.
THE FLAWS OF THE “SOLUTION”
Concerning the first point of von Mises’s assertions, political economist John O’Neill follows von Mises’s old opponent Otto Neurath in rejecting the above position, and calls it pseudo-rationalism. “Our knowledge”, O’Neill argues, “that informs our decision making is uncertain and the rules of rationality rarely determine a single answer given what is known. A rationalist who believes in reason must recognize the boundaries to the power of reason in arriving at decisions” (1998:115). To believe that there exist a single rule or procedure, such as the price mechanism, that determines the answers to all decisions, is for him the clear mark of pseudo-rationalism. Instead, x and y in our example would have to be compared directly, taking all of their properties and weighing the pros and cons against each-other on a multi-dimensional grid of criteria. This is because their different properties are incommensurable – they cannot be reduced to one another so that we can express the quantity of x, n(x) as n(y), or vice versa. Environmental impacts cannot be expressed in the same terms as product safety or ease of recycling or repair. Even the category ‘environmental impacts’ is internally incommensurable, since CO2 emissions do not have the same consequences as soil erosion or release of lead. To reduce the entirety of two different things to a single, one-dimensional value by necessity means that other aspects of the things are being ignored. In focusing on price, we must by definition ignore everything else. von Mises’s first point hence rests on his second; the belief that price, unlike other properties such as weight or volume, is a conglomeration of all relevant knowledge, and can thus carry all the information need to make rational decisions. There are three reasons that this assumption is incorrect.
Firstly, money is actually a very poor carrier of information. Market prices do not measure externalities, and companies can actually gain competitive advantages by externalising costs and passing them on to society in the form of pollution, increased job insecurity, potentially harmful products, etc. The real cost, not in money, but in the effect on individuals, society and the environment, is hidden by the market price. Resource cost is also greatly shaped by the monetary cost of extraction, and not the environmental or health costs involved. Even if one assumes that such externalisation is balanced out by penalisation, such as the Pigouvian tax[3] suggested by reformists who hope to “fix” the market, issues remain. Price can be influenced by the market power of individual actors, and competition itself can be another hurdle; there is an inherent incentive to keep information from competitors, as not to lose competitive advantages. The most relevant example is information concerning plans and strategies for the future, which are most often kept secret. Patents and trade-secrets can also hide scientific and technological knowledge from the public, which could be relevant to decision-making.
The only information that the market relays to each actor is, potentially, the relation between supply and demand at the time the plan is made; each actor is blind to how their competitors plan and react to the same information. Therefore, no actor has adequate information to construct a plan that suites future levels of demand, even though every actor can be said to act rationally given the information they possess. Individual actors whom are not in deliberation, all behaving rationally, can produce an overall sub-optimal result; this is a central understanding of game theory (see also O’Neill, 1998:99, 134-138).
Secondly, only the subjective willingness to pay of those with purchasing power has any effect on the market. Nor does the market care from where purchasing power originates; any given sum of money has the same power, regardless of whether it comes from a single billionaire or a million of the most impoverished. Thus the poor are not only unable to participate, but the frivolous fancies of the wealthy will often weigh much higher than their most basic needs (Mujezinovic, 2013).
Moreover, by marginalising and excluding actors lacking purchasing power the market does the same to the knowledge they posses. Only the market value, i.e. profitability, of knowledge matters on the market; but such knowledge is far from the only knowledge relevant to rational decision-making (Ibid.). The obvious example is the scientific knowledge concerning human caused global warming and other environmental issues, which is continuously ignored by capitalists who opt to continue ‘business as usual’.
Reformists have argued that a more fair distribution of wealth can be achieved through changes in policy, which would alleviate this problem and allow everyone to participate in market exchanges. That, however, ignores the fact that the incentive structure is not altered by redistribution. It is not for a lack of money or the inability to participate on the market that the knowledge concerning environmental limits is ignored. It is ignored because it is not profitable, and because if taken into account it would actually act as a hurdle to both profit in general, and to the dominant paradigm of constant economic growth[4]. Additionally, there are people and entities that lack, by their very nature, the ability to participate on the market; such as future generations, non-human animals and Nature herself. If we acknowledge these things to possess any form value or meaning beyond just what those able are willing to pay for them, the market is insufficient to our ends (O’Neill, 1998: 112-129)(O’Neill, 1993: 161-171).
Thirdly, a market-based system also assume that the outcome of all production is things which are to be consumed by individuals, rather than things to be enjoyed by the entire human family, such as clean air or drinkable water. To quote Iain McKay: “[i]f the market measures only preferences amongst things that can be monopolized and sold to individuals, as distinguished from values that are enjoyed collectively, then it follows that information necessary for rational decision-making in production is not provided by the market (2008:2130)”. That which may be rational for an isolated individual given a competitive, or even antagonistic, relation to other individuals, may not be rational for a group given a cooperative relationship between its members. The chief premise of the famous Prisoner’s Dilemma is after all that the prisoners in question are sequestered from each-other and make their decisions individually. Where they to collaborate and arrive at a joint decision there wouldn’t be a dilemma!
Conclusively, not only is rational economic decision-making possible without money, a rational and above all sustainable economy practically demands decision-making based on something other than market price. Only then can we take into account all the facts needed for truly rational outcomes to become possible. The truth is that von Mises’s so called ‘solution’ is no more a solution than sweeping dirt under the rug is ‘cleaning’; it simply conceals the problem. The environmental, social, ethical, etc. consequences of decisions do not cease to exist because one decides to ignore them – all that does is exacerbate the problem since the main system of decision-making is unable to take into account the vast majority of negative consequences. As long as there is a profit, the system appears to be working fine by its own standards.
PROBLEMS AND SOLUTIONS WITHIN A RBE & THE ISSUE OF COMPLEXITY
Although von Mises’s proposed solution has been shown to be futile, his arguments still present us with one final problem: that of complexity. Let us return to the example given with the four methods. When dealing with such a simply example, it is not difficult to image non-monetary ways of comparing x and y – perhaps their environmental impact or total availability could be the basis. It would, for example, be conceivable that a cannery that makes their cans out of one of two potential metals could easily explore which one would be most suitable.
But for von Mises, it is above all when it comes to so-called ‘intermediate products’ that the real problem reveals itself; i.e. goods that are themselves components of other goods. Goods such as computers, which have potentially hundreds or even many thousands of intermediates. “The human mind” von Mises claims, “cannot orient itself properly among the bewildering mass of intermediate products and potentialities […]. It would simply stand perplexed before the problems of management and location (1990:17).” The essay I, Pencil by Leonard Read, although stemming from a pro-free market ideological basis, remains a good illustration on how even such a simple product as a pencil might have a very complex production chain. How do we solve this problem of complexity, given that we now know that von Mises’s proposition merely ignores most of what is actually relevant for truly rational decision-making?
Could not a potential solution lie in simply relieving the human mind? To merely detail all the properties of all the intermediates involved and use a computer to find the optimal method? Computer aid in decision-making is certainly an integral part of helping us ‘orient ourselves’, but we mustn’t assume that computers can simply resolve the entire issue for us through straight-forward calculation. That would be to repeat von Mises’s own mistake and assume commensurability between different values. It would be to assume that all problems have a solution in the form of Method 4 in the example given; one that is clearly superior in every way. Yet we may very well encounter situations where one method is better in the sense of using less resources, but another is more sustainable; where one uses less energy but the other is safer, and so on; i.e. methods 1 and 2. This is illustrated more clearly in table 2, showing an example of how resource costs could potentially be presented in a RBE.
| Method 1 | Method 2 | Method 3 | |
| Resources used | Copper, tin | Aluminium | Iron, Platinum |
| Environ. impact of resource retrieval[6] | 3, 2 | 1 | 2, 4 |
| Resource scarcities[7] | 20%, 15% | 5% | 10%, 60%* *resource very rare! |
| Energy use | 1000 kWh | 3000 kWh | 1500 kWh |
| Environ. impact of energy use | 2 | 3 | 2 |
| CO2 equivalent emissions | 500 m3 | 700 m3 | 600 m3 |
| Other pollutants | SO2, 1 ppb | Pb, 0.002 µg/m3 | NO2, 2 ppb |
| Est. product lifespan | 4 years | 7 years | 5 years |
| Environ. impact of total production process[8] | 3 | 2.5 | 2 |
| Recyclable % | 85% | 95% | 70% |
| Energy requirement for recycling (total) | 3500 kWh | 2000 kWh | 1000 kWh |
| Environ. impact of recycling | 1 | 3 | 2 |
| Potential alternative uses[9] | 22 | 16 | 19 |
Table 2: Example of a resource cost array detailing some aspects of three methods of manufacturing an equivalent product. It is not an extensive list but an example of what might potentially be taken into account in a RBE. Note that the table only details a one time cost; ‘products’ such as hospitals or machines would have to have a year-by-year account of their cost through-out their estimated lifespan. As this table is meant as an example only, the numbers are just invented and no attempt has been made to reflect real world conditions.
Note that no straight-forward calculation can be made that finds the optimal method, and the different properties and aspect of each method are not all reducible to each-other or to any single unit. Numerical expressions and mathematical tools are indispensable aids in giving us a proper overview of the issue, and computation is necessary to help us orient ourselves among the many options (some of which are not shown here). Yet, in the end, an informed judgement must be made on which method is the most suitable in this case.
An ordinal scale is a possible solution, where we simply arrange aims from the most to the least important and prioritise aims of a higher order, so that any given aim is only worked toward once the one above it has been satisfied. For example, we could decide that environmental sustainability is always the most important goal, and that only when sustainability has been assured will other matters come into play. The current proposed solution of Peter Joseph and the Zeitgeist Movement utilises such an ordinal scale (2013). Yet even this solution has a small problem attached to it. Even when we find one method that is valid in a given context and scenario, there is no reason to assume it is a universal solution that is equally validity for every context and scenario, and can be applied across the globe[5]. To prioritise sustainability could be a good general rule, but in some cases one would have to make exceptions – what if one faced a scenario where trading away a tiny bit of suitability would immensely improve product safety, or use a resource that is far more abundant? No universal procedure can be applied here, no rule where x amount of sustainability trades for y amount of abundance in every situation, because the two are incommensurable both with respect to each-other and internally. That is, environmental impact cannot be expressed in terms of resources saved; just as different forms of environmental impact are qualitatively different and cannot necessarily be expressed in terms of one another, and different resources differ qualitatively and cannot be expressed in terms of one another.
How we go about applying our reason to achieve the best possible solution must change depending on the given setting. Unlike a capitalist society, a RBE cannot give an answer that is always applicable, such as “maximise profit”. We regard the various possibilities and use the scientific method to assist us; every scenario must be considered on its own and what we do in one case may not be what is done in another case. Value becomes dynamic, and based on current information so as to realistically and rationally find the best possible solution for whatever problem is faced. A part of this is the development of rules of thumb, standard procedures, overall aims, etc., but these are guidelines and not straitjackets. The process also includes making use of computers, which both assist us by giving us overview and sometimes ‘make the decisions on their own’ – there is no need to reinvent the wheel every time, after all. If we’ve arrived at a decision it would be a waste of time and resources to repeat the process of decision-making over and over. It is better if it be handed over to computers until such a time that the need arises to change something in a way that is beyond their abilities. Using computer aid in decision-making frees up our time so that we can focus on deliberation and debate where it is really necessary.
A further clarification of what I mean can be found in an exchange between von Mises and one of his main opponents, Otto Neurath[10]. von Mises asserts that when we “choose whether we shall use a waterfall to produce electricity or extend coal-mining and better utilize the energy contained in coal […] the processes of production are so many and so long, the conditions necessary to the success of the undertaking so multitudinous, that we can never be content with vague ideas. To decide whether an undertaking is sound we must calculate carefully” (1981:89). And, he finishes, “computation demands units” (Ibid.) Neurath, however, responds (quoted in O’Neill, 1998:116):
“The question might arise, should one protect coal mines or put greater strain on men? The answer depends for example on whether one thinks that hydraulic power may be sufficiently may be sufficiently developed or that solar heat might come to be better used, etc. If one believes the latter, one may ‘spend’ more coal more freely and will hardly waste human effort where coal can be used. If however one is afraid that when one generation uses too much coal thousands will freeze to death in the future, one might use more human power and save coal. Such and many other non-technical matters determine the choice of a technically calculable plan… we can see no possibility of reducing the production plan to some kind of unit and then to compare the various plans in terms of such units.”
What this means is simply that comparability need not assume commensurability; we can and must compare different options directly, taking into account all their complex properties. Nor is there one rule that can be mechanically adapted to produce a determinable decision regarding which plan to adopt, in part because uncertainties always exist and our beliefs and expectations form a part of our reasoning. There is thus an ineliminable role for non-technical judgement even in technical decisions.
Nor does von Mises’s complexity problem pose an issue: in a RBE, the complexity of production in an industrially advanced society is laid bare. Complexity is shown to be something constant in any technologically advanced society where manufacturing is done via convoluted chains and networks of production forming a global grid, that alters and is altered by our society and environment. This is the whole point – to reveal the actual, real, tough choices that prices hides. To allow scientific knowledge, academic debate, evidence-based reasoning and ethical concerns a place in decision-making. We need not solve the ‘problem’ of complexity because complexity is not the problem; the concealment of it is the real problem!
The same is true of the difficult choices and trade-offs in production; it is a constant companion of decision-making in any society. In any situation where you do not have access to an infinite amount of resources, time and possibilities, a trade-off will be necessary when faced with several valid, yet mutually exclusive, options. As long as you can’t have everything, choices need to be made – these will always involve ‘opportunity costs’ and forgone alternatives in some form. In a moneyless society the ‘calculation problem’ becomes transformed into the continuous challenge of what the most rational and beneficent method of making trade-offs is, and what needs to be prioritised in any given situation. In other words, the lack of a price mechanism does not mean an inability to make rational choices, it means that for once we get to make actually rational choices! We get to disregard what The Market says and use our reason and judgement to try to find the best possible way to do whatever we want done – selecting the highest quality, greatest sustainability and overall biggest benefit to everyone that we can; and not the cheapest or most profitable way.
Tools such as multiple-criteria decision analysis, natural capital accounting, material balance planning and input-output modelling are all potential sources of aid, that can help us in that endeavour. Yet they are all in various ways flawed and burdened by the politics and ideology of currently existing or dead economic systems. The same can be said of the methods of post-normal science, cybernetics and systems theory; there is a potential in each one, if only it was developed further in a way that is relevant to a RBE. Unfortunately, the efforts to do so have been hampered by the nearly century-old arguments of von Mises. Recognising them as incorrect is the first step towards building actual alternatives and, as O’Neill (1998:128) puts it, “entails a need to rethink the ways we make decisions without a single measure.” The possibility of a RBE has been shown. The real work remains to be done.
1 Note that this particular piece does not go into the epistemological arguments concerning centralised or decentralised forms of economic planning. For more details on that issue, see O’Neill, 1998:129-159, where the scientific community itself is held up as an example of decentralised, non-market, multi-dimensional global coordination. See also Mujezinovic, 2013 for a briefer overview.
2 The use of ‘need’ is intentional, as for instance the bloody regime of the Khmer Rouge did attempt to simply ban the use of money without overcoming the need for it, with disastrous consequences.
3 See Baumol 1972:307–322 for more information.
4 Exposing and arguing against this paradigm is a crucial element in the school of economics known as Ecological Economics. See the work of Herman Daly, Nicholas Georgescu-Roegen or Joan Martinez-Alier, among many others, for examples.
5 The ecological disasters caused by large-scale factory farming, both of the capitalist and USSR-style command economy varieties, serve as a real world example of the consequences of neglecting local conditions and attempting to apply the same approach globally.
6 Assume that a qualitative judgement based on ecological research is expressed on a 1-10 scale for easy overview.
7 One presumes that such a thing would be measured as the total world need / know total world availability. Thus a number of 10% means that the total world need is 10% of the total known world availability.
8 This would be an approximation, expressed numerically on a 1-10 scale, based on the inclusion of intermediate products. Other tables would detail all such intermediates and their respective Resource Costs. This value could thus be altered for each method by altering the choice of intermediate products; and the same value for each intermediate product could be altered by a different choice of its constituent products, and so on.
9 Resource tables for the alternative uses, alternative means of producing them, and all the urgencies of need for each would also have to be taken into account.
10 Caveats must be made regarding the context, and that the technological references are outdated in respect to what the Zeitgeist Movement (or the Venus Project) wishes to accomplish. It is rather the principle of the matter that I wish to illustrate through these citations.
BIBLIOGRAPHY
Baumol W J 1972, ‘On Taxation and the Control of Externalities’, American Economic Review, 62(3)
McNally D 1993, Against the Market, Verso
McNally D 2010 Against the Market, talk held in Fall of 2010
audio file available through the Havens Center for the Study of Social Justice:
www.havenscenter.org
McKay I 2008, An Anarchist FAQ: Volume 1, AK Press
Mujezinovic D 2013, ‘A brief analysis of Hayek’s Epistemological Critique Against Central Planning and in Support of Markets’, unpublished
avaliable at lancaster.academia.edu/DavorMujezinovic
O’Neill J 1993, Ecology, Policy and Politics, Routledge
O’Neill J 1998, The Market: Ethics, Knowledge And Politics, Routledge
Peter Joseph 2013, Economic Calculation in a Natural Law / RBE, talk held on November 12 of 2013 in Berlin
video available at www.youtube.com/watch?v=K9FDIne7M9o
Read L 1958, ‘I, Pencil: My Family Tree as told to Leonard E. Read’, the Freeman December Issue
von Hayek F 1945, ‘The Use of Knowledge in Society’, The American Economic Review, Vol. 35, No. 4
von Mises L 1981, Socialism: An Economic and Sociological Analysis, Liberty Fund
von Mises L 1990, Economic Calculation in the Socialist Commonwealth, Mises Institute
Source: Economic Calculation in a Resource Based Economy – A Defence
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