Sunday, August 18, 2013

Prices and the Efficient Allocation of Resources

Just how important are prices anyways?  Can resources be efficiently allocated without them?  What percentage of activities have actual price tags?

Wake up or sleep in? Price tag? No.
Put on clothes? Price tag? No.
Brush your teeth? Price tag? No.
Shave? Price tag? No.
Use the toilet? Price tag? No.
Go for a jog? Price tag? No.
Take a shower? Price tag? No.
Eat breakfast? Price tag?  No.
Brush your teeth?  Price tag?  No.
Put on deodorant?  Price tag?  No
Go to Starbucks? Price tag? No.
Buy a cup of coffee?  Price tag?  Yes.

Clearly the vast majority of our allocation decisions do not have literal price tags.  But they do all have an opportunity cost.  Each use of a resource requires that you sacrifice all the alternative uses.  Every course of action requires the sacrifice of all the alternative courses of action. This means that resources are put to their most valuable uses when individuals have the freedom to choose which uses they value most.  Therefore, it really does not seem that prices are necessary in order for resources to be efficiently allocated.

I might be wrong though.  But because I'm a pragmatarian...it's not necessary for me to be 100% certain one way or the other.  This is because if prices are truly necessary...if they facilitate the creation of more value...then if congress lowered the tax rate, taxpayers would give them more of their taxes.  A lower tax rate would mean a larger private sector (prices) and a smaller public sector (no prices).

Even though it's purely academic in nature, it's quite enjoyable to discuss the feasibility of pragma-socialism.  Pragma-socialism is a pragmatarian system with a 100% tax rate.  Maybe it's pretty much the same thing as a market economy without any prices.  Every organization would be a non-profit...but you could choose which non-profits you donate to.

Over on Peter Boettke's blog entry... ABCT Providing the Missing Gap...I've been discussing the topic with Nicholas (also his comment on the pragmatarianism FAQ).  As a result of our discussion, I think it would be informative if he could try and quantify exactly how necessary prices are to ensure the efficient allocation of resources.  So I created the following graphic...


























Here's my answer... A-0, B-7.5, C-8.  From my perspective, there's a huge disparity in the allocative efficiency between planned economies and market economies...and little, if any, of that has to do with prices.  It simply has to do with the fact that in a planned economy people's preferences are either assumed, or disregarded.  As a result, how society's limited resources are used (the supply) does not reflect the actual demand for goods/services.  When individuals do not have the freedom to decide which uses of their limited resources they value most...it's a given that resources will not be put to their most valuable uses.

However, from Nicolas' perspective (and the perspective of most/all free-market economists), the disparity in allocative efficiency between planned economies and market economies is in no small part due to the presence of prices in market economies.  Therefore, my guess is that he'll place B on anywhere from 3 to 5 on the allocative efficiency scale.

Anybody is welcome to share the graphic that I created and repost it elsewhere.  Also, for more discussion on the topic just google "A World Without Prices or Profit" and "A Survey on the Importance of Prices".

[Update]

Other blog entries on the topic...

Hey Mungerfesto, Prices OR Consumer Sovereignty?
Prices vs Chips

15 comments:

  1. Sorry about the wait I had IRL stuff to do.

    I notice that you still did not answer my question. Don't worry it is not some kind of trick. (or at least it shouldn't be)

    How is the person controlling a lemonade production unit in “Pragma socialism” going to choose between a two types of sweeteners where the consumer is indifferent? One sweetener will most likely be more efficient for society as a whole. As he sits down at his desk to choose what factors does he take into account to try and make the right choice?

    An efficient modern economy requires a wide-ranging division of labour with specialisation at all levels from the individual with his profession through the firm and industry up to whole regions. The division of labour with its divided production thus also requires exchange between these separate specialised bodies. The flip side of this specialisation is a 'division of knowledge'. Everyone is focused on their narrow expertise & experience, and none can comprehend the whole production structure as a Robinson Crusoe figure or small self sufficient production unit might. (see if you have not already Leonard Read's 'I Pencil' or the original Coat example in Smith's Wealth of Nations for an exposition of the division of knowledge)

    There is then a problem for the separated economic actors to overcome as to how to coordinate their activity. Particularly in terms of relative scarcity of goods. Relative scarcity is goods being scarce in terms of each other. In other words the price or cost of one thing in terms of another.

    Something as simple as a desirable new use for copper for example should reverberate through the entire economy changing relative values. That people want more of the new copper good means that millions of other uses for copper will have to be re-evaluated if efficiency is to be maintained. Each individual producer, & consumer will have to decide whether it is still worth using copper or adopting a substitute.

    In a profit and loss system the actors will bid for copper, the price of copper will go up. Copper users will be able to look at their books to see how continued use of copper will affect their profits, they can look at the price of substitutes and make a judgement on suitability/desirability vs cost. If they choose the substitute then that will in turn bid up its price and people may decide to use another substitute which will again effect the prices of other substitutes and so on through the economy. As such even people who have nothing to do with copper in their production & consumption decisions & are very far removed from the original cause of increase in copper price can still be affected by it. As each economic actor looks at the price and looks at his profits and decides how to economise causing a chain reaction of adaptation.

    Now you talk about a market economy without prices (and estimate that it will be 75% efficient!). To be honest a market economy without market prices does not seem at all possible. From the examples you have given me so far, there does not seem to be any equivalent to the changes in relative scarcities cascading through the economy due to judgements about profit and loss.

    BTW, there has been a bit of a mix up, I am not Cachanosky, although I can see why you might have thought so.

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    1. A paragraph can have an efficient allocation of inputs (words). A recipe for bread can describe an efficient allocation of inputs (ingredients). A bakery can have an efficient allocation of inputs (labor, land, equipment). A country can have an efficient allocation of inputs (public goods). But whether or not an allocation is efficient or not depends entirely on consumer feedback (money). More revenue means more efficient. That's the only benchmark for efficiency.

      Our intrepid entrepreneur can simply guess that using one sweetener rather than another would be a better combination of inputs. If consumers agreed...then he would receive more revenue. If consumers disagreed...then he would receive less revenue. If there was no change in his revenue...then consumers would be indifferent.

      A few passages on indifference...

      "A sound economic deliberation must never forget these two fundamental principles of the theory of value: First, valuing that results in action always means preferring and setting aside; it never means equivalence or indifference. Second, there is no means of comparing the valuations of different individuals or the valuations of the same individuals at different instants other than by establishing whether or not they arrange the alternatives in question in the same order of preference." - Ludwig von Mises

      "Preferences are subjective to each individual. The existence of human action implies that an individual can rank different alternatives from highest valued to lowest valued. An observer can discover a small piece of this ranking only when the individual demonstrates his preferences in voluntary action. Such demonstrations only occur in choosing one alternative instead of another. Indifference never leads to choice; thus, it has no role in a value-free model of preference." - Jeffrey Herbener, Austrian Methodology: The Preferred Tax Type

      Regarding copper...

      "When economists say, “We will never run out of resources,” what they often mean is that faced with increasing scarcity of one resource, we will always find new solutions to the problem that that resource originally solved. In an important sense, the actual economic resource was not copper but “the ability to convey voice and data.” And that resource has become “less scarce” by the substitution of sand. This illustrates Simon’s point that the “ultimate resource” is the human ingenuity that finds new and better ways of using physical resources. - Steven Horwitz, Economists and Scarcity

      Let's imagine that some innovative baker added saffron to his recipe. Unfortunately, there's a relatively small supply of saffron but a relatively large demand for it. So in the current system the innovative baker would have to charge a high price for his bread because one of the inputs was expensive. But in the non-profit system there would simply be a small supply of better bread. And given that it's better...more people would give their money to the innovative baker...and the innovative baker would give more money to the saffron farmers...which would allow them to get more land to grow more saffron. This would increase the supply of saffron which would increase the supply of better bread. More better bread increases the amount of value that we, as a society, derive from our limited resources.

      Therefore, we don't need prices to determine the efficient allocation of scarce resources. All that's needed is consumer sovereignty. Consumers have to have the freedom to decide for themselves who they give their money to.

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    2. Going back to the "ultimate resource"...J.S. Mill would certain agree...

      "Originality is the one thing which unoriginal minds cannot feel the use of. They cannot see what it is to do for them: how should they? If they could see what it would do for them, it would not be originality. The first service which originality has to render them, is that of opening their eyes: which being once fully done, they would have a chance of being themselves original. Meanwhile, recollecting that nothing was ever yet done which some one was not the first to do, and that all good things which exist are the fruits of originality, let them be modest enough to believe that there is something still left for it to accomplish, and assure themselves that they are more in need of originality, the less they are conscious of the want."

      Even Keynes kinda agreed...

      "How can I adopt a creed which, preferring the mud to the fish, exalts the boorish proletariat above the bourgeois and intelligentsia who, with whatever faults, are the quality of life and surely carry the seeds of all human advancement?"

      How could a non-profit market not work? Original minds would still have the freedom and incentive to come up with new uses of society's scarce resources...and consumers would still have the freedom to rank the alternative uses according to value. We would still enjoy the fruits of originality and society would still advance. In other words, the result would be the efficient allocation of resources. We would maximize the amount of value we derived from society's limited resources.

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  2. “But whether or not an allocation is efficient or not depends entirely on consumer feedback (money). More revenue means more efficient. That's the only benchmark for efficiency”

    Production must reflect preferences. Of course. However what good is an economy that does not economise when trying to reflect those preferences.

    “Our intrepid entrepreneur can simply guess that using one sweetener rather than another would be a better combination of inputs. If consumers agreed...then he would receive more revenue. If consumers disagreed...then he would receive less revenue. If there was no change in his revenue...then consumers would be indifferent”

    So let me get this straight. Where two sweeteners have no noticeable difference in taste in lemonade, but one will be more costly to society to use your 'pragmasocilist' entrepreneur would just GUESS? I am a little surprised that you don't see how absurd that is.

    You suggest that the guiding factor would be consumer revenue. But that is insufficient when it comes to cost. What kind of guidance would an entrepreneur trying to produce an identical product but cheaper have from consumers? All the consumers would see is two identical products. Or perhaps the consumer doesn't like the cheaper product taken by itself but would not choose the better quality one if the they knew the true cost. Given a choice a consumer will always choose the better quality good. The question is; is that extra quality worth the materials and effort gone into making it. Consumers are not going to be able to give much guidance to the entrepreneur who has to make that call.

    Also even if by some magic consumer revenue could replace profit & loss system price signalling, did it not occur to you that the entrepreneur might want some forward clue as to what production process to choose. Investing in equipment to process one type of input can be big decision & choosing on a whim could turn out to be quite risky & expensive, especially if there are multiple choices. If the signal only comes after you have made a choice its not going to be a good guide to making that choice in the first place.

    Also your quotes on indifference in value theory are irrelevant. Consumers are often indifferent in real life. In the ingredients list, one of otherwise identical products may use corn starch another potato starch. How many people are going to care about that kind of thing? There is no need to get into value theory over such a simple point. Second the point does not rest on there being indifference it is just there to for clarity and simplicity. (as my point about quality vs cost above illustrates)

    Your Steven Horwitz quote is also irrelevant. It is addressing a completely different point, to what my copper example was trying to make. In fact Horwitz quote assumes substitution using the price mechanism. A mechanism that your 'pragmasocialism' lacks.

    Also it does not matter what good is used as an example copper could be replaced with anything. Good X or good Y even. It make no difference.

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    1. part 2

      “But in the non-profit system there would simply be a small supply of better bread”

      I don't see where you get this from. It does not follow from anything and is just asserted.
      As for the rest of the paragraph I don't think you have understood the point about relative scarcity and substitution.

      How does a person far removed from any saffron activity at all get affected by this bread innovation? Can you replicate the following chain of cause and effect for 'pragma-socialism' and show how David should respond to a change in demand he knows nothing about?

      Saffron bread innovation > increase demand saffron > price of Saffron is bid up

      Andy uses saffron in his product. Andy evaluates the new money price vs profit & decides to use less Saffron and more of good X instead.

      Others like Andy do the same > price of good X is bid up.

      Bob uses good X in his product. Bob evaluates the new money price vs profit & decides to use less of good X and more of good V.

      Others like Bob do the same > price of good V is bid up.

      Chester uses good V in his product. Chester evaluates the new money price vs profit & decides to use less of good V and more of good U.

      Others like Chester do the same > price of good U is bid up.

      David uses good U in his product........... ect ect. I am sure you can see the pattern

      In your model money flows from consumers down the supply chain. (I assume through donations). The problem is that you are not actually replacing formal explicit prices. As far as I can see there is no weighing one good against another. The consumer donates money to the bakery. The baker splits that money among his suppliers and them to their suppliers ect. The consumer has shown a preference for a particular good. People want saffron bread we know. But the transmission of value breaks down after that. The baker's decision of how to split money amongst his suppliers is going to be arbitrary. How does he know what the amount of saffron he needs is worth in terms of a monetary figure? The epistemic burden is being placed on the individual actors rather being shared across the system, & each mistake is likely to compound on down the supply chain. The role of money in this model seems to be just to reward institutions and firms rather then to compare goods.

      Also I am still not clear on some of the details. Could you explain more on

      . Is there a labour market, if so how does it work in terms of wages. Does everyone equal wages paid by the state?

      . How does the tax 100% system work. Are people paid in kind by not taking wages but getting stuff for free, or is there actually some discretionary income.

      . You use the words like 'give' and 'get' when referring to money transactions. Do the firms produce for sale or do they just give their wares away based on the volume of donations they receive?

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    2. "Where two sweeteners have no noticeable difference in taste in lemonade, but one will be more costly to society to use your 'pragmasocilist' entrepreneur would just GUESS? I am a little surprised that you don't see how absurd that is."

      You're looking at "price" to determine cost and I'm looking at scarcity. If both sugar and dates are equally available...and consumers are indifferent...then I struggle to see how we end up with a huge efficiency disparity between B and C.

      But your argument is that one sweetener is significantly more costly to society. This means that it's not as readily available. If dates are really more costly to society than sugar...then it means that dates are harder to come by. But how could Mr. Lemonade not know which inputs are harder to come by? And how could Mr. Lemonade be resourceful in C but not B?

      Maybe it wasn't even Mr. Lemonade who came up with the date idea. Maybe it was Mr. Date who had miscalculated and expanded his date farm a little too much. Now he's sitting on a ton of surplus dates and is trying to find lemonade producers who are willing to take a little risk.

      So Mr. Lemonade is constantly on the lookout for more readily available inputs that better match consumers' preferences and Mr. Date is constantly on the lookout to persuade the Mr. Lemonades of the world that dates are viable substitutes. What I'm describing though is simply a market.

      Regarding wages...wages are simply one of many inputs that Mr. Baker has to worry about having an adequate supply of. Just like he has to give Mr. Flour enough positive feedback (money) to ensure an adequate supply of flour...he also has to give his employees enough positive feedback (money) to ensure an adequate supply of labor. If he doesn't give them enough money...then they can try and find more money elsewhere.

      So people would still be paid. And they would go give their money to whoever provided them with the inputs they valued most. And values would change according to changes in relative availability.

      Organizations wouldn't produce for sale...they would produce for positive feedback (money). And that positive feedback would depend to some extent on how well an organization was distributing their wares.

      For example...if the Red Cross was distributing disaster relief to people who didn't really need any disaster relief at all...then clearly you wouldn't be inclined to give the Red Cross any positive feedback (money).

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  3. There is a similarity between our discussion and the 1930's calculation debates. You say you talking about scarcity/opportunity cost not market prices, the 1930's neoclassical socialist's like Oscar Lange said they would use non market 'parametric prices'.
    Hayek's would say that you are both assuming what you are trying to prove.

    You say that relative scarcity will be reflected in how hard a good is to get hold of. However in a real market system the fact that goods seem to be available or not in proportion to their scarcity is the result of the economising actions of people checking prices & watching their bottom line.

    “But how could Mr. Lemonade not know which inputs are harder to come by?”

    He may know how hard they are to come by in his local area or area of focus. But the economy is big and subject to a 'division of knowledge'. For "how hard to come by" to be any sort of guide it will have to reflect scarcity across the whole economy as well as taking into account transport and other costs. For this to happen value will have to be equalised across the whole economy and this can only be done through the ignorant economic actors that make up the economy. If each ignorant actor remains ignorant and make guesses like you suggest then the economy will be out of balance with shortages and gluts in different sectors.

    The “what kind of lemonade sweetener?” problem I posed, is a constituent, a small piece of many small pieces that together make the coordination the whole economy. If everyone gets their own small question wrong then there is no coordination over the whole.

    So I think your whole position is backwards. Asking “how could Mr. Lemonade not know?” is not the right question when we are talking about overcoming a lack of knowledge.

    (Also I want to emphasise the point I made in my last post that the lemonade question does not rest on the consumers being indifferent. If the consumers liked sweetener 2 (dates or whatever) a little better then sugar it would not then make the choice of sugar the right one. That they choose 2 over 1 in a blind taste test does not mean that they might not prefer 1 over 2 when cost is taken into consideration. As people do all the time when faced with the choice of quality vs quantity)

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    1. "Except for Sax, Wicksell, Lindahl, Musgrave, and Bowen, economists have rather neglected the theory of optimal public expenditure, spending most of their energy on the theory of taxation." - Paul A. Samuelson, The Pure Theory of Public Expenditure

      "However no decentralized pricing system can serve to determine optimally these levels of collective consumption. Other kinds of "voting" or "signalling" would have to be tried. But, and this is the point sensed by Wicksell but perhaps not fully appreciated by Lindahl, now it is in the selfish interest of each person to give false signals, to pretend to have less interest in a given collective consumption activity than he really has, etc. I must emphasize this: taxing according to a benefit theory of taxation can not at all solve the computational problem in the decentralized manner possible for the first category of "private" goods to which the ordinary market pricing applies and which do not have the "external effects" basic to the very notion of collective consumption goods." - Paul A. Samuelson, The Pure Theory of Public Expenditure

      That paper by Samuelson provides the definitive economic justification for the public sector. It's been cited over 5000 times.

      So Is optimal public expenditure possible? Yes, because if taxpayers had to pay taxes anyways, then they would have a disincentive to give "false" signals. And if optimal public expenditure is possible without prices...then how could optimal private expenditure not be possible without prices?

      You're arguing that optimal private expenditure is not possible without prices. Therefore, it seems logical to conclude that you don't believe that optimal public expenditure is possible without prices.

      Mises and Hayek didn't really win the debate. They only half won...given that we have a mixed economy with around a 50% tax rate. They could have really won...they could have stomped Samuelson...if they had simply stopped fetishizing prices.

      Samuelson's argument is the very best argument for the public sector. No other argument comes even close. And neither Hayek nor Misses came close to defeating it. They couldn't let go of their prices enough to see the obvious line of attack. And neither could their followers.

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    2. “That paper by Samuelson provides the definitive economic justification for the public sector”

      What that paper does within Samuelson's system is show that markets(as he understood them) can not optimally produce 'collective goods'. He is also at the same time denying that the INCENTIVES exist for any other method work.

      Your position is that you have found a way around that incentive problem. From there your logic is clear, if this problem is solvable for collective goods why not private goods.

      It is my position that your preference revelation problem is not relevant to economic calculation which is about KNOWLEDGE not INCENTIVES. People who have pure hearts & would never want do the wrong thing may still lack the knowledge necessary to do the right thing.

      The main problem is that you are just accepting as given Samuelson's neoclassical economic paradigm. Then confusing a problem within that paradigm for a debate about that paradigms very relevance.

      The problem has only started once your taxpayers have given their accurate preferences. The way Samuelson & other neoclassicals conceived the market is as a series of

      “optimising equations that an optimising calculating machine could theoretically solve if fed the postulated functions. No such machine now exists. But it is well known that an “analogue calculating machine” can be provided by competitive market pricing”

      That “competitive market pricing” means perfect competition. One of the conditions of which is (amongst others) PERFECT KNOWLEDGE.

      The problem with conceiving of the market in this way is that it abstracts away from the actual real life causal process of market adjustment, for a static equilibrium toy based on unrealistic assumptions. Now every student who has opened an introductory economics text has learned this model & it has its pedological uses, especially in graphical form to explain basic principles. The problem was that economists took the model too seriously. They tried to show that a non market price system could work by copying perfect competition & the equations of general equilibrium. Samuelson references these 'solutions' when he talks about the “parametric decentralized bureaucrat” in the paper.

      “So Is optimal public expenditure possible?” Not through the channels Samuelson suggests. Nether perfect competition nor “parametric” socialism are adequate vehicles for getting your tax choice preferences reflected in relative scarcities that economic actors can use.

      I highly recommend Israel Kirzner's Pamphlet -
      How Markets Work: Disequilibrium, Entrepreneurship and Discovery (free as a PDF from the Institute of Economic Affairs)

      Which goes into the history of the Calculation Debate & fleshes out what I have said here in detail about the failings of Samuelson's & his contemporaries economics.

      Also this youtube video - Competition and Entrepreneurship | Dr. Israel Kirzner

      Which does not go into the calculation debates but focuses on the competing visions of competition.

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    3. Thanks for sharing those two resources. I added quite a few passages from both to my database. And I shared the video in the way-too-numerous forums that I participate in...Entrepreneurship vs Redistribution.

      I agree that knowledge is essential...but I didn't run across anything in those two resources that really drives the point home that insight/foresight depends on price tags. The video was full of examples that had absolutely no price tags involved...

      "You don't know what the future is going to hold exactly, but you got to decide. You're driving along the road and it's not a nice clear summer day where you can see for miles ahead. It's a dark, foggy night...and you gotta decide. You gotta decide where to drive, how to drive, what speed to drive. You gotta get ahead. Because to stand still is no solution either. Somebody might ram you from the back."

      If a bakery is successful then it means that the baker has more insight/foresight than the people who failed to successfully operate a bakery. He made less mistakes than they did. So it's doubtful that somehow the absence of price tags in the public sector would be his kryptonite.

      If he has an adequate amount of flour to meet future demand, then it's doubtful he's going to order more. Same thing if he has an adequate amount of police protection, an adequately educated supply of labor, adequately maintained roads, and so on.

      The baker can accurately see where the bottlenecks are...so he's not going to stand still just because there aren't price tags on public goods. He's going to decide whether he needs more x or y and the result would be the optimal provision of public goods.

      I fail to see how this couldn't carry over to the private sector as well. The baker isn't going to freeze up just because there aren't any price tags on flour. If there's a shortage of flour then he'll sacrifice the alternative uses of his money to give more money to the flour producer who is making the least mistakes. The result will be the optimal provision of private goods.

      Right now the total tax rate is nearly 50%. I think it's essential that we step away from price tags and consider what it is that ensures that limited resources are put to their most valuable uses. As Kirzner argues...it simply boils down to freedom. Freedom to choose how you use your limited resources.

      Given that there's not a lot of support for giving taxpayers the freedom to choose where their taxes go...it seems like the price tag fetish might be the source of the bottleneck.

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  4. Part 1 The Kirzner resources I linked were not meant to address the issue of knowledge or calculation directly in relation to 'pragma-socialism'. You gave me a Samuelson paper as a substitute for explaining your point. I suggested Kirzner as a supplement to my explanation as to why Samuelson's paper was no answer to my objections.

    "The video was full of examples that had absolutely no price tags involved"

    That is because the existence of a money price system is assumed. His examples are designed to show the difference between market process economics and static equilibrium economics of the kind Samuelson uses. The idea of a priceless entrepreneurial system would strike Kirzner as bizarre.

    You still seem not to get the point about relative prices. Which I find strange as you accept the idea of opportunity cost. Well then surely you must also accept that there must be some practical way of comparing peoples opportunity costs across society. Now I know you think you have done this by having people allocate money to productive organisations. However that is not really allowing comparisons of ALL goods against each other. As I have tried to tell you before the 'money' your tax payers allocate only flows down a supply chain. It does not flow ACROSS!

    What is the point of money? For that matter what is the point of an economy? An economy's prime purpose is to economise! A single man can economise well enough. As his preferences are inside him and resources available are apparent. A many man economy however requires that every man economise not just for himself but for everyone else.

    To do this they have to be aware of how much one good is valued in terms of another good by everyone else. If iron is in short supply & wanted greatly our man needs a way of knowing that. He might want to act as an entrepreneur but unless he knows that iron is scarce relative to his preference for his iron holdings then he is not going to be able to.

    This knowledge of relative scarcities must seep into all areas of society just like the blood vessels & nerves permeate the entire body. This one of the roles of money. It flows like water across the economy as people make exchanges. If a change in supply/demand or preferences happens the effects will spread like ripples across a lake from the impact of a thrown pebble.

    Here is Hayek explaining it in The Use of Knowledge in Society (section 5, H.21)

    Without money transactions and people noticing price differentials the economy can not economise towards the equilibrium we see in the demand and supply diagrams.

    I will now pick at some of your examples (in the next post due to space limits)

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    1. Part 2

      I will now pick at some of your examples

      “If a bakery is successful then it means that the baker has more insight/foresight than the people who failed to successfully operate a bakery”

      Well you are just assuming a functioning economy that you are trying to prove, insight must include using resources wisely in terms of the rest of the economy.

      “If he has an adequate amount of flour to meet future demand, then it's doubtful he's going to order more”

      Well perhaps he should! Due to some fortuitous conditions flour might be cheap. He might want to make the entrepreneurial judgement that buying more then he needs now will be worth the extra storage cost if the price goes up. Yet if he cant see the prices that flour is exchanging at then he won't be able to see that it is cheap. Now in the past you have suggested that people will know relative scarcities by how much is available. But without the price equilibrating from across the whole economy, the amount available may just be a local glut or shortage. The baker will therefore be making decisions based on wrong information and that will result in further discohesion of social economising.

      “The baker can accurately see where the bottlenecks are...so he's not going to stand still just because there aren't price tags on public goods. He's going to decide whether he needs more x or y and the result would be the optimal provision of public goods”

      Again as in may last paragraph he might be able to see where local bottlenecks are but that does not mean that he knows how he should respond to the constellation of relative scarcities & preferences across the economy.

      “If there's a shortage of flour then he'll sacrifice the alternative uses of his money to give more money to the flour producer who is making the least mistakes”

      Apart from the problems with him knowing who is “making least mistakes” it does not have anything to do with cohesive economising across society.

      “As Kirzner argues...it simply boils down to freedom. Freedom to choose how you use your limited resources”

      Freedom to call someone when nether you or they has a telephone is not very effective, as with freedom to drive with no car. It is the same for freedom to economise without knowledge of relative scarcities from across the whole economy.

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    2. How could Bob, an entrepreneur, not have knowledge of relative scarcities from across the whole economy? In a market system with prices, Bob still has to look the prices up. In a market system without prices, he still has to look the scarcities up. The iron producers are still going to have websites and their websites are going to share the necessary information regarding the past, present and (expected) future availability of their iron. So the availability of iron can be easily known to anybody who uses iron as an input.

      The difference is, in a price tag system, the iron producers don't care how Bob uses the iron. As long as Bob pays for the iron then they could care less if he blatantly wastes it.

      But in a system without price tags, the iron producers would actually be investors. They would be incentivized to ensure that Bob will use their iron economically. Because if he does, then this will increase the amount of positive feedback (money) that he receives, which will increase the amount of positive feedback that they receive.

      The point in sharing Samuelson's paper was to provide evidence that the bottleneck for greater liberty has absolutely nothing to do with the importance of prices...and everything to do with the assumption that government planners are omniscient.

      If you get a chance, take a look at this thread I created... Government Success vs Market Success. Click on the second spoiler to read all the passages concerning the assumption of omniscience.

      Regarding Hayek's essay...it's one of my favorite essays. He gets it right that information is decentralized and that it's delusional to assume omniscience. But he then confuses the issue by bringing prices into the discussion. Markets work because they don't assume omniscience...not because they have price tags.

      If you get a chance, check out all my passages on partial knowledge.

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    3. Firm websites with their production levels would be in terms of physical quantities or other practical units. These units are not commensurable, that is we can't measure & compare them by the same standard. Your suggestion is that the entrepreneur be faced by a vast sea of production tables in units that can't be compared. That is why those website production tables can NOT represent relative scarcities. As 'relative' means 'in comparison with something else', & if you can't make a comparison of two things then you can't know their relative scarcities.

      The whole point of suggesting section 5, H.21 (p526 in the pdf) of The Use of Knowledge in Society was that it explains exactly how prices serve to spread & equalise relative scarcities across the economy. Markets do not assume omniscience precisely BECAUSE the ignorant economic actors have prices arising out of profit & loss to base their decisions on. The Samuelson paper according to your quotes is a 'market failure' argument. This refers to goods that are non-excludable and non-rivalrous, where the price system is supposed to not work adequately. It is however nowhere an argument or inference that prices can or should be done away with for the rest of the goods in the economy.

      Solving the 'preference revelation problem' as you think you have is not to solve the general economic problem that Hayek alludes to at the beginning of The Use of Knowledge in Society. They are different & I think you have confused them.

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    4. If you're still interested...I fleshed out the topic some more...Prices vs Chips.

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