## Thursday, January 22, 2015

### Socialist Calculation and the Iron Ore Somewhere Behind Sally's Teepee

I have been reading about the socialist calculation debate. I believe the Austrians come close to the truth, but still the Austrian arguments do not entirely satisfy me. I've been trying to make sense of it. This morning I awoke inspired with an example which I will tell below. This example makes a point which is not made clearly on the Austrian side, I think, at least not in the reading I've done so far.

Suppose Sally lives in a mostly-primitive society in which iron ore has come to be valued. Suppose Sally stumbles upon an outcropping of rock which she identifies as iron ore, one day when she is out wandering in the hills behind her teepee.
Suppose Joe is an iron worker. He can make iron implements which are valued in trade when he can get iron ore for less than \$0.20/pound.  Suppose the sources from which Joe knows he can get ore are normally willing to sell for no less than \$0.25/pound, but Joe augments his income sometimes when good luck lets him find ore priced down in his range.

Suppose Sally's breakeven price, to bring ore to Joe, is \$0.10/pound. Any less than that and she simply would not do it. She offers to bring ore to Joe for \$0.18/pound.
This is what Joe knows: he can get ore from Sally for \$0.18/pound. He does not know where the ore is. Only Sally knows where the ore is. So the knowledge of the availability of ore reaches Joe from a person whose cooperation is necessary. That person offers a price. Joe has no way of knowing Sally's markup. Sally has no reason to tell Joe her markup.

The same would be true for a central planner. Substitute a central planner for Joe. Still, the central planner must win Sally's cooperation in order to get the ore.

This fits with Hayek's description of knowledge distributed in many minds, and perhaps it shows why a central planner can not assemble all the information needed for central-planning's goals. The limitation is not just the capacity of the mind (or the computer) of the central planner. The limitation is on the availability of information. When an individual mind learns something of value (to the larger community in trade) the interests of that individual are not separable from the knowledge held by that individual. If you want to benefit from the knowledge you have to win the cooperation of the knowledgeable individual. The knowledgeable individual, being human, can choose how to act, and can be expected to choose trade only on terms acceptable to that knowledgeable individual.

Perhaps this point is well known by Austrian economists who are deeper and better-read than I, but it is a new insight for me.

An Austrian-economist friend has kindly given me comments on the above. He noticed the prices (such as \$0.20/pound) in my example and pointed out that prices cannot be "givens" in a market process. He is right. Let me explain.

I sensed when writing this example that I was adopting an anachronism with those prices, because my background is a primitive society. In my background there certainly would not be dollars. There probably would not be anything like market prices.

But my principal audience for this blog is the educated layman. I hope this layman, aided by those descriptive prices, will grasp the point I try to make. I hope this layman will not stumble on the issue noticed by my Austrian friend.

I intend those prices as a shorthand, a way of showing clearly that Sally and Joe find themselves in circumstances in which they could cooperate. There is a range of agreements which Sally and Joe might reach, and throughout this range both would gain.  I believe, although I might be mistaken, that such mutually beneficial prospects (with a range of possible division of gains) present themselves to members of primitive societies, even if those societies lack market prices.

References:
1. Rivalry and Central Planning: The Socialist Calculation Debate Reconsidered, by Don Lavoie, 1985.
2. The Economics of Time and Ignorance, by O'Driscoll and Rizzo, 1985.
3. The Resource-Patterns Model of Life, whose critters speak regularly to me.