A quick bit of the socialist calculation problem

Tyler Cowen has some questions pertaining to the socialist calculation problem, and his own brief discussion here. I just have a few points to make. First is that business, especially the larger ones, do suffer from the socialist calculation problem. The second is that unlike a nation, a business has a much narrower field of interest, and thus a much smaller problem. The third is that all the stakeholders in a business, including customers, employees, managers, owners and vendors have the option of voluntary exit.

How does rational calculation take place within a firm? In some ways it doesn't. Fortunately for the firms, there are enough other market factors and external prices available that managers are not totally blind. Many decisions can be determined to be good or bad by the reaction of the relevant stakeholders. Bad decisions are punished by employees quiting or demanding higher wages, customers going elsewhere, vendors giving stricter terms, and owners dumping the stock.

If one person owned (privately) all the firms in the economy, would rational calculation be possible? No. The option of exit is removed for all stakeholders. If the given condition is not a continuing requirement, then we'd be back to considering normal market conditions very quickly.

If one dictator controlled all the firms in the economy, would rational calculation be possible? No. This is the simple case of the socialist calculation problem.

If institutional investors or a diversified citizenry all owned the so-called "market portfolio" in equal proportions, like the Capital Asset Pricing Model suggests, would rational calculation be possible? No. If this initial condition is an ongoing requirement then there is no way to know what the "market portfolio" is or ought to be and investment is essentially frozen. Otherwise, many will trade various positions and become again a more normal market.

The conditions required to avoid the socialist calculation problem are the same conditions as for a free market - private property, liberty to trade property without restriction, and freedom of association. To the extent that firms disallow or discourage these conditions for the firm's resources, those firms then start suffering from the socialist calculation problem. The other hypothetical questions place massive restrictions on trade.

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Anyone who'se ever had to

Anyone who'se ever had to deal with the stupidities of management at a 100,000+ employee company certainly is aware that businesses suffer from the socialist calculation problem.

The thing is, though, even the biggest business is still very small relative to the overall economy of the country it's in, though it may be much larger than the entire economies of smaller countries. And even the biggest businesses can and do fail, and when they fail they fail peacefully and without anybody having to march in the streets to make it happen.

These factors limit the extent of the problem, and these are what Cowen is missing, I think.

This is similiar to a

This is similiar to a question I posed here a while back while drunk: What is the real difference between a countries government and a land/real estate developer, or any large business for that matter? This quuestion is especially worth considering if you think of the land developer.

January 9th Carnival of the

January 9th Carnival of the Capitalists
Personal favorites: Why dividends can matter in the long run, why index funds could increase market volatility even under efficient markets theory (which is a stepping-off point for a discussion of market rationality), comparing socialist thinking in t...


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