The economic calculation problem. Free markets are just plain better
I was reading a book by Thomas Sowell recently, and he claimed (with sources) that the Soviet Union had an estimated 24 million different prices for goods and services. These prices were of course in general set by the central economic planing committee Gosplan. Now I found this to be incredible because Prices are set in relation to each other.
A system of prices exists because individual prices are related to each other. If, for example, copper rods cost 40 cents a pound and the process of drawing a rod into wire costs 25 cents a pound, then it will be profitable to produce wire from a copper rod if its price exceeds 65 cents. Conversely, it will be unprofitable to produce wire if its price falls below 65 cents.
Prices convey a tremendous amount of information. Obviously prices dictate how resources are allocated in a society, whether those prices are set by Gosplan or by spontaneous order.
So, lets stop a minute and take a breath and think about the free market solution to this problem and the alternatives.
We have the free market solution, which is to let private economic actors make decisions in the marketplace themselves based on their own sets of criteria (Too innumerable to name). This information is translated into prices every time an economic agent makes pretty much any kind of decision in the marketplace (whether to buy or not, at what price, whether to sell or not and at what prices, how much to buy/sell, when to buy/sell, personal preferences and tastes, opportunity cost considerations etc…to many to name here as well).
And we have alternative solutions. I'm going to go ahead and keep things simple by only using the Soviet Model as an alternative where there are still prices, but each is set by a central authority whose job it is to figure out how to allocate resources. Relevant to this discussion is that I once had a flame war with a well educated communist in my early days on Reddit. His suggestion for overcoming the economic calculation problem was to survey the people of society for their needs and then allocating resources based on that. So lets say we combined the soviet model of Gosplan setting prices with his model and had the added benefit of Gosplan setting prices based on Surveys they conducted.
So lets say this was a simple survey (simple is easier to process for the authorities). It asks, on a scale from 1-10 rate your need or desire for product/service X. It then asks the same question about product/service Y and Z and so on, until all the relevant information of society is collected and processed. Lets leave aside the problems of how long it would take to collect and analyze such a data set and assume that it can be done faster than economic conditions change (Thats a whole other fatal flaw of central planning in regards to price setting).
So, in effect, from this survey we can get a theoretical minimum of ten prices for each good or service (scale of 1-10 remember), and the number can go infinitely higher depending on how precise the authorities want their prices to be.
Now remember, Prices are related to each other, so each price has to be set in relation to every other price. This sets us up with an interesting problem for the central planners.
Exactly what combination of prices would be best for society and would best allocate scarce resources?
I wanted to do a quick "back of the envelope" calculation to get an idea of how many combinations of prices there could be if there were only ten different possible prices (based on the survey method) for the estimated 24 million different price points. You can read about combinatorics yourself here, which is what I used to arrive at this number. But since prices can repeat, this is a problem of a permutation with repetition (since prices can be the same from good to good)
The Number you ask?
For comparisons sake, it is estimated that there are 1082 ATOMS in the observable known universe, and thats the high estimate.
Thats how many different price combinations there were in the Soviet Union when it had 24,000,000 different prices. If we get more precise with our pricing system it only gets worse since the base number increases.
This problem also only gets worse if we start adding price points from additions of people demanding goods (EG: population increase), new and different products etc. This problem also gets worse with the principle that economic conditions change …for all practical purposes… at an instantaneous rate of change, meaning the Gosplan must update its information continuously, there cannot be gaps in the flow of information otherwise resources will be wasted in proportion to the size (big or small) in the gap of knowledge.
I think this sub is educated enough to understand the role of prices, and how they work in general. If you want to understand a little bit more about prices and how the Gosplan model failed, here ya go. https://www.youtube.com/watch?v=zkPGfTEZ_r4
Now the retort "But we can have a Super Computer" do that work for us.
this is pure fantasy
leaving aside various problems like the cost of running such a computer, the technology involved, who would program and run it, how would it collect information efficiently and timely etc, we have a huge problem with using A computer to do this job, because even the world current world record holder for fastest computer, "Sunway TaihuLight", pales in comparison to the computing power we would need to do such a thing.
According to different estimates, the human brain performs the equivalent of between 3 x 1013 and 1025 FLOPS. The median estimate we know of is 1018 FLOPS. According to that median estimate and our estimate of global computing hardware, if the world’s entire computing capacity could be directed at running minds around as efficient as those of humans, we would have the equivalent of 200-1500 extra human minds.7 That is, turning all of the world’s hardware into human-efficiency minds at present would increase the world’s population of minds by at most about 0.00002%. If we select the most favorable set of estimates for producing large numbers, turning all of the world’s computing hardware into minds as efficient as humans’ would produce around 50 million extra minds, increasing the world’s effective population by about 1%.
The economic calculation problem is much too high a hurdle for central planners to climb over.
What are your thoughts?
Submitted April 13, 2018 at 04:03AM by dcman00000
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