PART THREE. ECONOMIC CALCULATION
Chapter XI. VALUATION UNDER CALCULATION
Summary
1. The Gradation of the Means
“Acting man transfers the valuation of ends he aims at to the means.” Ceteris paribus, he attributes the same value of the end to the means (here, time is not taken into account). We can say that the actor would prefer the mean a more than b, but this is only in a scale of values that we cannot assign a cardinal or measurable value.
2. The Barter-Fiction of the Elementary Theory of Value and Prices
Previous economists have misconstrued economic calculation by taking it to all human action. They did not comprehended that money prices are the only vehicle of economic calculation.
The Elementary Theory of Value and Prices: it employs the construction of a market in which all transaction are performed in direct exchange (there is no money).
It has two main errors. First, to assume the neutrality of money; and second, that things and services exchanged are of equal value (objective theory of value). Later economists have debunked these fallacies, first by including the natural and money rate of interest; and second, by the subjective and noncalculative theory of value (when there’s an exchange, it’s because a is preferred over b).
“In the market society there are money prices. Economics calculation is calculation in terms of money prices.”
The Theory of Value and Socialism
*The socialists, Institutionalists, and Historical School attack the economists’ attention to the problems of the isolated individual, commonly referred to as “Crusoe economics.” Although it is necessary to first understand autarkic exchange before proceeding to interpersonal exchange, nonetheless there is some validity in the charge. Ironically, the Crusoe approach is inadequate because it cannot illustrate economic calculation, which is what vitiates the entire program of the socialists and other critics of the economists.
3. The Problem of Economic Calculation
What is Technology?
· It shows what and how something could be achieved given some means.
· It’s the applied art of quantitative prediction of the outcome of possible action.
· It applies objective use-value, acts as a neutral observer, tells how to combine various means to achieve a given end.
· It gives man nothing more than statements about causal relations between external things.
Because of the characteristics of technology, we can say that it’s not suited as a method to best allocate the means, since only man can choose where to employ those means according to where he thinks would remove more uneasiness. It’s helpful to tell us how to get to a given end with certain means, but it doesn’t tell us where these means would be best allocated.
“But the practical man, eager to improve human conditions by removing uneasiness as far as possible, must know whether, under given conditions, what he is planning is the best method, or even a method, to make people less uneasy.” (page 208)
Another important factor is that in order for us to make comparisons between better states, we need to include the concept of money. Money is the vehicle of economic calculation. We can see here how Mises is introducing the problem of economic calculation in socialism, and how we cannot do this calculation without a proper system of prices.
4. Economic Calculation and the Market
“The quantitative treatment of economic problems must not be confused with the quantitative methods applied in dealing with the problems of the external universe of physical and chemical events. The distinctive mark of economic calculation is that it is neither based upon nor related to anything which could be characterized as measurement.” (page 209)
The problem with measurement in the exchange ratios (prices) is that they are permanently fluctuating.
“We are not dealing at this point of our investigation with the problem of a “quantitative science of economics”, but with the analysis of the mental processes performed by acting man in applying quantitative distinctions when planning conduct.” (page 210)
1. The Gradation of the Means
“Acting man transfers the valuation of ends he aims at to the means.” Ceteris paribus, he attributes the same value of the end to the means (here, time is not taken into account). We can say that the actor would prefer the mean a more than b, but this is only in a scale of values that we cannot assign a cardinal or measurable value.
2. The Barter-Fiction of the Elementary Theory of Value and Prices
Previous economists have misconstrued economic calculation by taking it to all human action. They did not comprehended that money prices are the only vehicle of economic calculation.
The Elementary Theory of Value and Prices: it employs the construction of a market in which all transaction are performed in direct exchange (there is no money).
It has two main errors. First, to assume the neutrality of money; and second, that things and services exchanged are of equal value (objective theory of value). Later economists have debunked these fallacies, first by including the natural and money rate of interest; and second, by the subjective and noncalculative theory of value (when there’s an exchange, it’s because a is preferred over b).
“In the market society there are money prices. Economics calculation is calculation in terms of money prices.”
The Theory of Value and Socialism
*The socialists, Institutionalists, and Historical School attack the economists’ attention to the problems of the isolated individual, commonly referred to as “Crusoe economics.” Although it is necessary to first understand autarkic exchange before proceeding to interpersonal exchange, nonetheless there is some validity in the charge. Ironically, the Crusoe approach is inadequate because it cannot illustrate economic calculation, which is what vitiates the entire program of the socialists and other critics of the economists.
3. The Problem of Economic Calculation
What is Technology?
· It shows what and how something could be achieved given some means.
· It’s the applied art of quantitative prediction of the outcome of possible action.
· It applies objective use-value, acts as a neutral observer, tells how to combine various means to achieve a given end.
· It gives man nothing more than statements about causal relations between external things.
Because of the characteristics of technology, we can say that it’s not suited as a method to best allocate the means, since only man can choose where to employ those means according to where he thinks would remove more uneasiness. It’s helpful to tell us how to get to a given end with certain means, but it doesn’t tell us where these means would be best allocated.
“But the practical man, eager to improve human conditions by removing uneasiness as far as possible, must know whether, under given conditions, what he is planning is the best method, or even a method, to make people less uneasy.” (page 208)
Another important factor is that in order for us to make comparisons between better states, we need to include the concept of money. Money is the vehicle of economic calculation. We can see here how Mises is introducing the problem of economic calculation in socialism, and how we cannot do this calculation without a proper system of prices.
4. Economic Calculation and the Market
“The quantitative treatment of economic problems must not be confused with the quantitative methods applied in dealing with the problems of the external universe of physical and chemical events. The distinctive mark of economic calculation is that it is neither based upon nor related to anything which could be characterized as measurement.” (page 209)
The problem with measurement in the exchange ratios (prices) is that they are permanently fluctuating.
“We are not dealing at this point of our investigation with the problem of a “quantitative science of economics”, but with the analysis of the mental processes performed by acting man in applying quantitative distinctions when planning conduct.” (page 210)
Chapter XII. THE SPHERE OF ECONOMIC CALCULATION
Summary
1. The Character of Monetary Entries
“Economic calculation can comprehend everything that is exchanged against money.” (page 212)
Economic calculation encompasses everything that trades against money. We have to remember that what appears to be objective calculations (e.g. in balance sheets) are the product of speculative and subjective anticipation of the future. Nevertheless, they can give us a good guide to the future.
2. The Limits of Economic Calculation
Economic calculation can’t account for things that do not exchange for money. Nevertheless, you can have an easier calculation for the “noneconomic” goods by putting them with a common denominator (i.e. money).
3. The Changeability of Prices
Prices are the subjective valuations of individuals, thus their nature would be of permanent change or flux.
4. Stabilization
Because of the changeability of prices, some people want to “stabilize” them. This means putting a floor price (minimum price) or ceiling price (maximum price). This is a bad idea, since prices would no longer reflect the true valuation of the goods in the market. This would affect the planning of the individuals in both production and consumption.
5. The Root of the Stabilization Idea
*Historically, moneys that originated on the market (such as gold and silver) were adequate for economic calculation, even though they did not possess an eternally fixed “stable” purchasing power. Government inflations changed this and made it imperative for businesspeople to take into account changes in the value of money in their planning and long-term contracts.
Another factor in the popularity of the stabilization idea was the desire for a secure arena outside the uncertainty of the market. People thought the state (with its tremendous might, consuls, and so forth) could provide a shelter for wealth outside the vicissitudes of pleasing the consumers afresh every day.
Why It Matters
In this chapter, Mises lays out the boundaries of economic calculation and explains that, within their sphere, market prices render all the services needed of them. The tools of economic calculation are inappropriate, though, when people extrapolate into areas outside of the actual market. In particular, economic calculation cannot provide a measure of immutable value, because no such thing exists. The efforts to devise a stable money and to provide a flow of guaranteed income are futile.
1. The Character of Monetary Entries
“Economic calculation can comprehend everything that is exchanged against money.” (page 212)
Economic calculation encompasses everything that trades against money. We have to remember that what appears to be objective calculations (e.g. in balance sheets) are the product of speculative and subjective anticipation of the future. Nevertheless, they can give us a good guide to the future.
2. The Limits of Economic Calculation
Economic calculation can’t account for things that do not exchange for money. Nevertheless, you can have an easier calculation for the “noneconomic” goods by putting them with a common denominator (i.e. money).
3. The Changeability of Prices
Prices are the subjective valuations of individuals, thus their nature would be of permanent change or flux.
4. Stabilization
Because of the changeability of prices, some people want to “stabilize” them. This means putting a floor price (minimum price) or ceiling price (maximum price). This is a bad idea, since prices would no longer reflect the true valuation of the goods in the market. This would affect the planning of the individuals in both production and consumption.
5. The Root of the Stabilization Idea
*Historically, moneys that originated on the market (such as gold and silver) were adequate for economic calculation, even though they did not possess an eternally fixed “stable” purchasing power. Government inflations changed this and made it imperative for businesspeople to take into account changes in the value of money in their planning and long-term contracts.
Another factor in the popularity of the stabilization idea was the desire for a secure arena outside the uncertainty of the market. People thought the state (with its tremendous might, consuls, and so forth) could provide a shelter for wealth outside the vicissitudes of pleasing the consumers afresh every day.
Why It Matters
In this chapter, Mises lays out the boundaries of economic calculation and explains that, within their sphere, market prices render all the services needed of them. The tools of economic calculation are inappropriate, though, when people extrapolate into areas outside of the actual market. In particular, economic calculation cannot provide a measure of immutable value, because no such thing exists. The efforts to devise a stable money and to provide a flow of guaranteed income are futile.
Chapter XIII. MONETARY CALCULATION AS A TOOL OF ACTION
Summary
1. Monetary Calculation as a Method of Thinking
Monetary calculation is the guiding principle of action in any society with a division of labor. It transforms the very thought process of anyone considering action that involves the property of others. Potential actions are evaluated on the basis of expected costs and revenues, while past actions are evaluated with the accounting of profit and loss.
2. Economic Calculation and the Science of Human Action
Praxeology and economics would never have been developed were it not for the historical evolution of economic calculation. Only with money prices and the related concepts of capital, profit, and loss could the early writers have noticed patterns in commercial activity.
Why It Matters
In this very short chapter, Mises stresses the tremendous significance of economic calculation. It is not simply a habit of businesspeople, but rather a distinct mode of thinking. It is necessary for modern civilization, and is the reason for the usefulness of quantitative science. However, Mises underscores the fact that calculation can only work where there is money and where goods of all orders are owned privately.
1. Monetary Calculation as a Method of Thinking
Monetary calculation is the guiding principle of action in any society with a division of labor. It transforms the very thought process of anyone considering action that involves the property of others. Potential actions are evaluated on the basis of expected costs and revenues, while past actions are evaluated with the accounting of profit and loss.
2. Economic Calculation and the Science of Human Action
Praxeology and economics would never have been developed were it not for the historical evolution of economic calculation. Only with money prices and the related concepts of capital, profit, and loss could the early writers have noticed patterns in commercial activity.
Why It Matters
In this very short chapter, Mises stresses the tremendous significance of economic calculation. It is not simply a habit of businesspeople, but rather a distinct mode of thinking. It is necessary for modern civilization, and is the reason for the usefulness of quantitative science. However, Mises underscores the fact that calculation can only work where there is money and where goods of all orders are owned privately.