Socialist Economics


Tim Worstall has a blog today on the socialist calculation problem. Here he concentrates on the impossibility of collating the data necessary for inputting into computers. This is the only a part of the problem.


1. The Relevancy Problem

Mises said (in Human Action). “Knowledge is about the past, decision is about the future” Past information can only be a guide to future decisions. But if any actor acts differently then past information becomes imperfect, unless the changes follow regular patterns – move along known demand and supply curves in economics language. If there is a structural change, then that past information becomes outdated.

 Example – the credit crunch

A major feature concerning the credit crunch is that we have “entered uncharted territory”. That is, the previous macroeconomic models approximations of the economy are incorrect. The relationships that economists have spent years refining are now irrelevant. This is why the government is going to get things wrong in tackling the credit crunch. There is no past data to model, so they are just guessing. Even if they chose the best policies (unencumbered by ideology or political spin), choosing the optimal combination of quantity, time and place is impossible. However, solving for the macroeconomy is much simpler that the millions of products making up the microeconomy.


2. The Disequilibrium Problem

To solve the price problem mathematically is to find the solution to the simultaneous equations.

 P = -x1D+a1

P = x2S+a2

 Where P = Price, D = Demand quantity, S = Supply Quantity, x1 = Elasticity of demand, x2 = Elasticity of supply.

 In the real world, the market is rarely in equilibrium. There are so many things changing that a best you can only characterize the “solutions” as transitory and approximate. At worst, they may be a long out. These equations are for each of many millions of products available, and have to be all solved to produce a general equilibrium. If individual calculations are out, then the relative quantities will be out, having a knock-on effect to all other products. If the relative prices are out in one period, then the information for the next recalculation will be out.

 3. The Philosophy of Socialism

 But even with these problems sorted out, socialism is about equality and “fairness”. In other words, the price of labour is not market determined, nor the price of many items – e.g. healthcare, education, food etc. No Socialist Government is going to suppress the democratic will of the masses, to that a dictatorship of a computer. The “socialist solution” means suppressing the very values in which socialists believe.

 Example – Social housing

A socialist system might hold that people should be allocated housing on the basis of need, rather than ability to pay. So a single person would get much smaller accommodation than a large family. If the rent was controlled or housing was free at the point of consumption, people would want to trade housing. A retired couple, whose children had left home may want to trade for a smaller property in a more desirable area. Someone may be willing to pay more rent for a property near to friends, or to their work, or for a something more desirable (with a garden, near to the country, near to the train station etc.). A socialist may want to override these signals with other aims.


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