# Explaining the Economic Calculation Problem in a Principles Class

## Explaining the Economic Calculation Problem in a Principles Class

03/14/2018Jim Cox

A microeconomics principles class presents professors with the opportunity to at least briefly explain the economic calculation problem. Almost every text spends a page or two on the production function — the relationship between inputs and outputs by a firm.

Here is the relevant data and graphs from one such text.

The professor can ask the students, “at what output should the firm produce?”— which is a central issue in microeconomics. Looking at the figures and the graphs the students will likely answer, “at the peak of Total Product”, or “at the highest Marginal Product”, or “at the highest Average Product”.

None of these responses is correct, as there is no rational way to answer based on the limited information given. There is no rational way to answer because the data only include quantities of inputs and quantities of outputs. There is no value in the form of prices attached to either the inputs or the outputs. Until the prices of these are included there is no answer.

Here’s an example to illustrate this point:

If the outputs are valued by consumers in the market at a price of \$1.00 while each input costs the firm \$100.00 it is obvious that to produce any of these outputs would be a financial disaster for the firm in the way of major losses (and thus the firm will be destroying value in the world). Conversely, if the consumers in the market value the outputs at a price of \$50 each and the input costs are \$2 for each, the firm can make major profits (and thus the firm can be adding value in the world).

Socialists had proposed abolishing both money and prices leaving them in the same position as our students in trying to determine which output quantity would be best. Pointing this out allows the professor to recount Ludwig von Mises’s highlighting this problem in his 1920 article, "Economic Calculation in the Socialist Commonwealth" and the resulting debate over the issue in the 1920s through the 1930s.

While Mises — and Hayek who also participated in this debate — maintained their views, the socialist critics retired from the debate self-satisfied that they had answered the challenge by claiming that the socialist authorities could direct the managers to adjust production by simulating markets, that is non-existent markets! They would just be “playing market”.

As Mises pointed out, even the best intentioned socialist manager would be lost in trying to discover just what the best output would be.

I also like to make the point in my classes that playing market with assets one does not own is far removed from risking personal assets one does own! When one owns the assets, such decisions will have a major impact on the owner’s personal financial well-being.

(By the way, I have never in my many years of teaching principles classes seen a text that raises the economic calculation issue at all.)

## Trump Pushes Death Penalty for Drug Dealers, Can We Start with the CIA?

03/19/2018Tho Bishop

In New Hampshire today, President Trump announced his plan for tackling the opioid crisis.  The main points from the plan, as reported by Axios, are:

• Work with coastal services and shipment services to set up screening technologies to detect illicit substances that are being shipped into the country.
• Support research and development efforts for technologies and additional therapies designed to prevent addiction and decrease the use of opioids in pain management.
• Reduce demand and the overprescription of opioids.
• Allocate funds for initiatives related to opioids to help states transition to a nationally interoperable Prescription Drug Monitoring Program network.
• Increase support for state and local drug courts to provide offenders with access to treatment "as an alternative to or in conjunction with incarceration, or as a condition of supervised release."
• Urge Congress to pass legislation that tightens sentencing penalties for drug dealers trafficking certain illicit opioids.
• Impose appropriate criminal and civil actions to hold opioid manufacturers accountable for any unlawful actions, and also screen federal inmates with opioid addiction and connect them to treatment services.

In short, it appears the Trump Administration's main objective is to ramp up law enforcement, spend taxpayer money on "research", and aim to "reduce demand," likely by increasing restrictions on physicians - which often pushes patients into more dangerous illicit drugs

Sadly nothing here touches on the largest driver of the opioid crisis which, as Mark Thornton has explained, is a pain epidemic going on in America. Unsurprisingly, given the rhetoric from the administration, the idea of removing Federal restrictions on marijuana - something that appears to help actually address opioid usage - was not suggested.

Of course another much talked about part of the president's proposal is to introduce the death penalty for large scale dealers. This invites the question: should this mean the end of the CIA?

After all, selling drugs and torturing people are the only things it appears to be good at

## Vox Gets it Wrong: the Left is Abandoning Free Speech

03/19/2018Tho Bishop

Last week Matt Yglesias over at Vox tried his best to deflate the notion that America was becoming increasingly hostile to free speech. Unfortunately, as Daniel Bier over at Skeptical Libertarian noted, Yglesias's own charts indicate that support for free speech among "Liberal" and "Slightly Liberal" Americans is at the lowest point in over 40 years.

Utilizing data from the General Social Survey, Yglesias shows that the US as a whole has demonstrated a growing willingness to defend the freedom of homosexuals, communists, militarists, and anti-theists to speak freely. Of course none of this should be particularly surprising. Prominent politicians on the left have actively praised communist leaders, militarism has received bipartisan support for decades, and social trends have become increasingly more tolerable for homosexuals and atheists.

Meanwhile, the GSS data shows a drastic drop in support for the free speech rights of racists.

It should go without saying that defending the rights of racists to speak is not the same thing as defending those ideas. In fact, one's commitment to free speech matters most when it involves ideas you strongly oppose. As Andrew Syrios wrote for the Mises Wire:

Discerning what exactly free speech is can sometimes be challenging, as in cases of libel, slander, and direct threats. But these are really not the issues at heart here. The vast majority of speech being “regulated” today is simply that of an unpopular opinion. Yes, many ideas are bad. And they should be refuted. Moreover, resorting to the use of political force to silence adversaries is a sign of the weakness of one’s own position. But, in using force to silence others, anti-speech crusaders are making another argument. They’re arguing that political force can and should be used to silence people we don’t like. What idea could be worse than that?

By this measure, the support for using force to silence the thoughts of others is growing in this country. In fact, if we use Vox's own data, they are declining most dramatically among those who identify as "Liberal" and "Slightly Liberal."

In conclusion, Vox gets everything wrong, in their article titled "Everything we think about the political correctness debate is wrong."

## Pompeo and Haspel are Symptoms of a Deeper Problem

03/19/2018Ron Paul

President Trump’s recent cabinet shake-up looks to be a real boost to hard-line militarism and neo-conservatism. If his nominees to head the State Department and CIA are confirmed, we may well have moved closer to war.

Before being chosen by Trump to head up the CIA, Secretary of State nominee Mike Pompeo was one of the most pro-war Members of Congress. He has been militantly hostile toward Iran, and many times has erroneously claimed that Iran is the world’s number one state sponsor of terror. The truth is, Iran neither attacks nor threatens the United States.

At a time when President Trump appears set to make history by meeting North Korean leader Kim Jong-un face-to-face, Pompeo remains dedicated to a “regime change” policy that leads to war, not diplomacy and peace. He blames Iran – rather than the 2003 US invasion – for the ongoing disaster in Iraq. He enthusiastically embraced the Bush policy of “enhanced interrogation,” which the rest of us call “torture.”

Speaking of torture, even if some of the details of Trump’s CIA nominee Gina Haspel’s involvement in the torture of Abu Zubaydah are disputed, the mere fact that she helped develop an interrogation regimen that our own government admitted was torture, that she oversaw an infamous “black site” where torture took place, and that she covered up the evidence of her crimes should automatically disqualify her for further government service.

In a society that actually valued the rule of law, Haspel may be facing time in a much different kind of federal facility than CIA headquarters.

While it may be disappointing to see people like Mike Pompeo as Secretary of State and Gina Haspel as the head of the CIA, it shouldn’t be all that surprising. The few areas where President Trump’s actions are consistent with candidate Trump’s promises are ripping up the nuclear deal with Iran and embracing the torture policies of President George W. Bush. Candidate Trump in late 2015 promised to bring back waterboarding “and a whole lot worse” if he became president. It seems that is his intention with the elevation of Pompeo and Haspel to the most senior positions in his Administration.

We should be concerned, of course, but the real problem is not really Mike Pompeo or Gina Haspel. It is partly true that “personnel is policy,” but it’s more than just that. It matters less who fills the position of Secretary of State or CIA director when the real issue is that both federal agencies are routinely engaged in activities that are both unconstitutional and anti-American. It is the current Executive Branch over-reach that threatens our republic more than the individuals who fill positions in that Executive Branch. As long as Congress refuses to exercise its Constitutional authority and oversight obligations – especially in matters of war and peace – we will continue our slide toward authoritarianism, where the president becomes a kind of king who takes us to war whenever he wishes.

I am heartened to see some Senators – including Sen. Rand Paul – pledging to oppose President Trump’s nominees for State and CIA. Let’s hope many more join him – and let’s hope the rest of the Congress wakes up to its role as first among equals in our political system!

Reprinted with permission.

## "Big Data" Isn't Enough to Make Socialism Work

03/16/2018Tho Bishop

When sharing Bob Murphy's excellent article today on the Knowledge-Calculation Debate, one of the most common responses has been "Murphy makes a good case, but why does this really matter?"

Beyond the value of grasping intellectual nuance, I think this debate has actually increased in real world importance over time with the rise of "Big Data."

Increasingly we see entrepreneurs, economists, and other thought leaders discuss the possibility of using improved data collection and algorithms to solve the "knowledge problem" Hayek famously outlined.

Now, of course, these big data central planners still suffer from their own fatal conceit, as brilliantly discussed in this article by Per Bylund. Still though, laissez-faire skeptics are able to use Hayek's knowledge critique of socialism as a way of justifying their new tech-backed schemes.

The same can't be said for the Misesian critique of socialism grounded in economic calculation, as Xiong Yue noted last year:

[T]hose who consider the problem of socialism as merely a problem of information failed to understand that the core problem of socialism lies in the absence of prices in a centrally-planned economy. The role of prices in the market economy is unique because money prices offer an indispensable tool in economic calculation. As Mises writes in Human Action,

One cannot add up values or valuations. One can add up prices expressed in terms of money, but not scales of preference.

With prices as a guide, entrepreneurs can potentially pursue profits by examining differences in the market prices of production factors and the expected prices of the final products. He or she can then organize production accordingly.

Therefore, even if we have some excellent data already, without this market-price mechanism, neither the economic calculation nor the efficient allocation of resources is possible; the planned economy is therefore not feasible. Because rationally planning or resource allocation requires the ability to calculate economically, such calculations need the prices which can be determined only in the market by the real-world exchange of owners of private property in the first place. Since the planned economy requires state and collective control of resources — and thus does not allow for these necessary voluntary exchanges between owners — it cannot rationally plan the operation of the modern economic system.

As a result, it's theoretically impossible for a planned economy to determine the prices needed for economic calculation. The cutting-edge technologies may help Jack Ma to optimize his strategies in his private enterprises in a relatively capitalist society. However, for a modern economy, as long as there are no prices available on which to base economic calculation, the failure of a planned economy is inevitable. As Joseph Salerno writes in his postscript to “Economic Calculation in the Socialist Commonwealth”:

[I]n the absence of competitively determined money prices for the factors of production, possession of literally all the knowledge in the world would not enable an individual to allocate productive resources economically within the social division of labor.

As someone who has witnessed first hand Barney Frank quote F.A. Hayek in order to justify the creation of new government bureaucracies, I have seen how dangerous people can twist his ideas to justify all sorts of elaborate government schemes. It is much harder to do so with Ludwig von Mises

## Trade from San Francisco to Miami Saves NFL Player \$300,000

03/16/2018Tho Bishop

In the face of staggeringly high tax rates and growing housing costs, people are abandoning San Francisco at such a rate that U-Haul prices have skyrocketed in the area.

The start of the NFL off-season offers an amusing illustration of just how significant the California tax burden is compared to other states. As Mike Florio of ProFootballTalk notes, when center Daniel Kilgore was traded from the 49ers to the Miami Dolphins, he saw his roster bonus increase by over \$300,000 dollars thanks to Florida not having California's 13.5% income tax.

Unfortunately for Kilgore, he won't be quite so lucky with his remaining \$2.525 base salary. The majority of states with professional sports teams have what is often referred to as a "jock taxes," where states (and some times cities) steal from the game checks of pro athletes. It was these taxes that actually led to Cam Newton having to pay the State of California for the privilege of losing in Super Bowl 50. While Kilgore will avoid them every time he plays a home game, only one of his 2018 away games (against the Houston Texans) is in a state that doesn't engage in this practice.1

Still, Kilgore was a financial winner thanks to his trade to South Beach. Now whether the extra cash is worth moving from Jimmy Garrapolo to Ryan Tannehill is another matter altogether.

• 1. Along with Florida and Texas, Washington and Tennessee are the only other states without these taxes. Nevada will be the fifth, after the Raiders move to their new tax-payer subsidized stadium.

## It Doesn't Take a Genius to Understand Economics

03/16/2018Per Bylund

In fact, most geniuses seem to simply not get economics. An example is the recently departed physicist Stephen Hawking, who - like so many - made rather ridiculous statements of economic nature. Quoted by MSN/MarketWatch, Hawking makes several very simple mistakes in his attempted economic commentary. For instance, he seems to not understand the difference between a natural resource (the physical production factor) and an economic resource (the subject value), which leads him to erroneously conclude that hoarding, and the resulting increased scarcity of physical ​resources, impoverishes humanity. Also, Hawking noted:

“If machines produce everything we need, the outcome will depend on how things are distributed,” he wrote. “Everyone can enjoy a life of luxurious leisure if the machine-produced wealth is shared, or most people can end up miserably poor if the machine-owners successfully lobby against wealth redistribution.”

This is a common view that at best captures a fundamental misunderstanding of economics: that ownership of the means of production somehow implies power (economic or otherwise). But, as we've known since Menger, the means of production have only value to the extent they contribute to the production of consumers' goods, the consumption of which is the realization of value. In other words, if I buy all machinery in the world and refuse to use any of them to produce goods, the economic value is zero. If I don't use the machinery to produce and sell ​consumers' goods, I have destroyed the economic value of my property.

The real effect of robots "producing everything" is that the cost of production plummets, which offers producers profits. But as we're flooded with goods, their market price also plummets. And as the (only) role of capital is to increase the productivity of labor, it means we don't have to work much to support a very high standard of living. The true gig economy is that we can work only for an hour or two - ​when we feel like it - to support a month's (or maybe a year's) worth of luxurious leisure.

​This is apparently a problem to some geniuses.

## Hyperinflation Has Venezuelan Merchants Weighing Cash, and Now It's Breaking Their Scales

03/15/2018Tho Bishop

It is interesting to see how prices emerge in a hyperinflationary environment like  see in Venezuela. While the government finally cut its “official” exchange rate of 10 bolivars to the dollar, it continues to vastly overstate the value of its currency.

Luckily markets continue to find a way. Assisted by good old fashion corruption, military members and other government officials are able to profit off selling government supplies. Of course the question still remains: how is economic calculation is possible in a monetary climate as extreme as Venezuela?

In 2016, the Wall Street Journal published a fascinating article about a Home Depot employee named Gustavo Diaz who runs one of the most subversive websites back in his home country, DolarToday.com. The website takes information gathered from Venezuela black markets and uses it offer a real market value for the Bolivar. This information undermines the ability of the government and central banks to hide the consequences of their policies, leaving market actors better informed.

As Mr. Diaz puts it:

It’s ironic that with DolarToday in Alabama, I do more damage to the government than I did as a military man in Venezuela.

Another interesting measure has been pieced together by Bloomberg. Their Cafe Con Leche Index looks at the price of a cup of coffee in Caracas. A March 14th report has a .50 cent cup of coffee now costing 75,000 Bolivars, pushing the annual inflation rate over 4000%.

The rising price does create other challenges though. Increasingly merchants have relied on weighing cash used for transactions, rather than counting. Unfortunately this has created some new challenges for merchants, whose scales are not capable of handling the weights now required to buy goods such as ham. As Patricia Laya writes as part of a fascinating series Life in Caracus:

The store’s deli scales run to only six digits. And ham, my Whatsapp food-hunting community tells me, is retailing nowadays for about 1,480,000 bolivars per kilogram. It didn’t matter that I wanted only a few hundred milligrams. The cost was, at this market at least, incalculable.

A similar dynamic is impeding the use of credit and debit cards. The price of a set of sheets (33,541,963), a pair of Adidas sneakers (10,500,000) or even a slice of lasagna (401,450) can’t fit on the screens of older card machines; the solution is to split one purchase into several transactions. Even the invoice printers that many businesses use for reports to tax authorities are running out of space.

So how does a country like Venezuela reverse this sort of monetary chaos? Luckily the answer there is simple. It must end the socialist policies that destroyed the country, and abandon the Bolivar. At some point the latter will be inevitable. Hopefully for Venezuelans, the former is as well.

## Of Course the UN Is Considering Legitimizing Maduro's Next Election in Venezeula

03/15/2018Tho Bishop

Venezuela continues to be one of the great humanitarian crises of our times. Every day brings new horrific headlines of starvation, violence, and chaos. Not only should this tragedy serve as a reminder of the true evils of socialism, but is vivid illustration of what hyperinflation looks like in the modern world.

While the Venezuelan government has tried it hands with modern gimmicks - like the largest cryptocurrency scam since Prodeum - the citizens continue to struggle with the realities of a currency so worthless that thieves don’t even bother picking it up off the floor.

The question now is simply how long this horror story continues.

Elections in the country are set for May, but of course no one expects politics to offer much hope for the Venezuelan people. What’s interesting here is that it provides another fascinating example of how dangerous the United Nations truly is.

Stalin is credited to have said, “It's not the people who vote that count, it's the people who count the votes.” Understandably his ideological heir, Nicolás Maduro, feels pretty good about his re-election chances in Venezuela. His opponents  have no delusions to think elections will be handled fairly, and are calling boycotting elections.

In enters the UN, who is considering sending in observers to ensure the integrity of the election process. Of course this is precisely what the Maduro government desires. After all the Venezuela people, beaten and starved, are unlikely to take the presence of a few foreign bureaucrats as the protection they need to stand up to their oppressive leaders. The UN’s presence will only serve to prop up Maduro, at least until complete economic collapses leads to military intervention – which some analysts think could be in the next 12 months.

Still, the fact that the UN would ever consider serving the desires of Venezuela’s socialist government is simply another reminder that the UN is worse than useless.

Of course, at the end of the day, any inevitable change in leadership in the country will not solve the plight of the country without a revolution in ideology. As Jose Nino has noted in several great articles for us, socialist ideology was a Venezuelan problem before Hugo Chavez, and risks outliving the rein of Maduro

## Why Gun Control Doesn't Explain Australia's Low Homicide Rates

03/14/2018Ryan McMaken

Gun control advocates often point to Australia as an example of how "banning" guns leads to significant declines in homicide rates.

Whether or not the much vaunted gun laws were ever fully implemented remains a matter of debate, but data does indeed suggest Australia's already-low homicide rates continued to slide downward in the twenty years following the alleged banning of guns. Unfortunately, as Leah Libresco writes at the Washington Post, this doesn't give us enough information to draw many conclusions:

I researched the strictly tightened gun laws in Britain and Australia and concluded that they didn’t prove much about what America’s policy should be. Neither nation experienced drops in mass shootings or other gun related-crime that could be attributed to their buybacks and bans. Mass shootings were too rare in Australia for their absence after the buyback program to be clear evidence of progress. And in both Australia and Britain, the gun restrictions had an ambiguous effect on other gun-related crimes or deaths...

That sample sizes should be so small in Australia is not a surprise. Commentators on Australia often neglect to note that the country has a population smaller than that of Texas. Obviously, the demographics, geography and history of the two regions are extremely different as well.

But with so few homicides to analyze in the first place, any asserted causality between the gun "ban" and homicide rates is indeed ambiguous.

Other data suggests that Australia's experience is less than useful as an example to the rest of the globe. One of our readers, who goes by the pseudonym Alex Great, sent along a number of useful links in his own commentary which follows:

Proponents of gun control will point to the declining homicide rate and claim that Australia has seem zero mass shootings since the NFA was enacted.

However, analyses like this are quite simple and miss a lot of important data. For example, looking at official homicide data from the Australian government, we can see that the sharp decline occurred years after the NFA was enacted. A 2003 study backs this up, noting that homicide rates were already falling before the NFA.

A report from 2007 titled “Gun laws and sudden death: Did the Australian firearms legislation of 1996 make a difference?” also noted that homicides were already falling prior to the NFA being enacted, and found that the NFA did not speed up the declining rate of homicides in Australia. More recent studies still find that the decline in homicides can not be attributed to the NFA, since non firearm homicides also sharply declined in the same period:

There was a more rapid decline in firearm deaths between 1997 and 2013 compared with before 1997 but also a decline in total nonfirearm suicide and homicide deaths of a greater magnitude. Because of this, it is not possible to determine whether the change in firearm deaths can be attributed to the gun law reforms.

In fairness, a review of the literature from Harvard did find that states that had more guns bought back experienced more rapid declines in homicide. However considering Australia was experiencing a decline in non firearm homicide at the same time, it is difficult to pinpoint exactly how much of an effect the NFA actually had. Even the review admits that no study was able to explain exactly why gun deaths were falling.

The claim that Australia has had no mass shootings since the NFA is also blatantly inaccurate, for example, there was a school shooting in Melbourne in 2002 that killed two and injured five. The 2014 Sydney Seige, where a man armed with a shotgun took a cafe hostage, also shows that despite the NFA, Australia has been unable to get rid of gun violence in public places.

This lack of causality is also reminiscent of the gun control experience in Britain. As I noted in this article, England and Wales already had very low homicide rates — both historically and globally — by 1900. But given that gun control measures were not enacted until years later, it would be inaccurate to simply refer to gun control as the cause of low homicide rates in the region:

The first significant modern gun control law in the UK was the Firearms Act of 1920. The Act abolished what had been up until then an assumed right to carry arms.  The Act was likely introduced as an anti-Irish and anti-communist measure, as there was no evidence (then or now) of rising crime at the time. The 1920 act was followed by increasingly restrictive gun control laws in 1937, 1968, and 1988. From the 1950s into the early 2000's however, the homicide rate grew steadily.

Thus, these examples do not really provide a historical experience that we can point to and say "gun control led to low homicide rates in the UK and Australia."

## Democrats Side with FDA over Terminal Patients

03/14/2018Tho Bishop

Often the worst of Washington is a bipartisan affair, but late last night a solid Democratic voting block stopped legislation that would allow terminally ill patients the ability to seek help from non-FDA approved treatments.

Needing a two-thirds vote to expedite right to try legislation, 140 Democrats voted against patient rights. Representative Frank Pallone Jr. of New Jersey, the senior Democrat on the Energy and Commerce Committee, defended his vote by saying "By defeating this bill tonight, we protected patients and supported F.D.A.’s continued role in approving experimental treatments that may help save a patient’s life.”

Yes, in the twisted world of Washington politicians limiting the choices of dying patients is "protecting them."

While Democrats desperately clung to the narrative that non-FDA approved drugs represented "false hope", we are given examples every day of how absurd this notion truly is. Rather than being some sort of scientific seal of approval, the FDA approval process is a bureaucratic nightmare, taking years of testing and millions of dollars to complete. The numbers of lives lost due to the FDA's actions is incalculable. As Timothy Terrell has noted:

The American public tends to think of the FDA as a protector against dangerous side effects, as we saw with Thalidomide decades ago. But how many Americans have died because of lags in approval? A five-year delay in bringing the antibiotic Septra to the US market may have cost 80,000 lives. A lag in the approval of beta blockers may have cost 250,000 lives.1 The FDA's ban on advertising aspirin as an effective preventer of first heart attacks may have caused the deaths of tens of thousands of Americans every year. But because it's easy to identify those harmed by side effects, and difficult to identify who might have been saved by earlier introduction of Septra to the marketplace, the FDA tends to be over-conservative in its regulatory process.

In spite of yesterday's vote, this right to try legislation isn't dead yet. Legislators supporting the measure have made it clear that it will be reintroduced and go through the standard voting process. Of course this delay, coupled with what will be required to get it through the Senate, could prove fatal for many of  Americans who could possibly benefit from medical freedom.