Economic calculation problem

Economic calculation problem

The Economic Calculation Problem Solved
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Economic calculation problem discussion
Austrianism’s assertions of categorical indissolubility for its Economic Calculation (or Socialist Computation, or “Vienna”) Problem have become an exceeding popular literary form. One sees them nailed to the internet’s digital church doors everywhere – each with its defiant invitation to PROVE ME WRONG.

It is as if sufficient repetition of the case will someday prove what is obviously a general negative, i.e.: the efficient economic operations we see going on around us all the time will not be captured in a scientific metaphor. You will never do that to the satisfaction of sentient beings. All you can do is reject the principle of contradiction that has ruled Western science since Galileo.

The unprovable premise – premise, not anything in the way of realizable fact – of economic non-computability has been falsified by any number of counterexamples that have emerged since the internet opened up the possibility of contradictory demonstrations arriving from unauthorized sources.

I will choose one of the more developed specimens – specimens, i.e.: something specific that actually exists – of efficient economic calculation for our examination. One mouse-click will take you to the e-text, where you see a looped emulation of an input/output formulation proceeding efficiently, and with temporal continuity, through all the chaotic physical states and disequilibrium prices leading from one Pareto optimum to another.

If your installation of MS Office is sufficiently complete and current, you can run this demonstration on your own desktop. It is contained in an ordinary Excel workbook:

Instructions for operating the desktop prototype are on pages 9 to 14 of this (refereed!, academic!) paper:

The VBasic program for this prototype is open-sourced within the workbook. (It will alert anti-virus software.)

If EcoMod is not a distinguished enough source, you can consult the New England Complex Systems Institute:

If complex systems are not your thing, try Managerial Cybernetics:

And if you need more prototypes to establish the generality of this system, you will find them under EXEMPLARS at

Do not, therefore, let it said that you do not have ample instances of artificial economic calculation to examine to any depth you might care to pursue. Such an examination will reveal that the boundary conditions of these mathematical prototypes are nothing more than the production and utility tradeoffs with which Hayek (1945) defined the Vienna Problem’s solution:

“The conditions which the solution of this optimum problem must satisfy have been fully worked out and can be stated best in mathematical form: put at their briefest, they are that the marginal rates of substitution between any two commodities or factors must be the same in all their different uses.” [emphasis mine]

Here I would like to pause in anticipation of the objections usually raised at this point. Libertarianism’s leading “public intellectual” Stefan Molyneux will snidely intone “not an argument” – as if that settles anything or even adds anything. If economic science can only be an argument (per Rothbard) then demonstrations are indeed irrelevant. Right you are if you think you are, and there is no point in reading further.

A related dissent recalls Milton Friedman’s earlier finding that “SFEcon is a fraud as a mathematical possibility.” In other words, economic calculation HAS not been demonstrated because it CAN not be demonstrated. Again, if this is your position, there is little more to say. To say that little bit more, I note that Libertarian stage magician (and Mencken Fellow at Cato) Penn Jillette was once called-upon to pronounce B*llsh*t on SFEcon; but he did not uncover the mechanism by which this “fraud” is perpetrated.

If we are now at the point of agreeing that there exists objective embodiments of artificial economic calculation, I will proceed through your essay in order to contrast your assertions in comparison to what is to be seen in the operations of SFEcon.

Again and again you presume upon the inscrutability of market prices. This says nothing except that economic science, if there is to be such a thing, must be able to calculate efficient prices outside of equilibrium, and to demonstrate that these prices will guide the economic system to a stable general optimum. Mises, et al, says ‘this cannot be done and here’s why’; SFEcon does it shows us how.

You belabor the obvious fact that “economic calculation requires a common basis for comparison for all forms of capital and labor.” The presumption seems to be that no such basis for comparison (i.e.: constant measure of value) can exist. SFEcon internally transacts a constant value unit – Keynes’ Bancor – such that there is a calculable value for every commodity based on the optimal state implicit in the economy’s production and utility tradeoffs.

You separate the economic sectors for households, capital, factors of production, consumer goods, etc., in what is apparently an acceptance that a different causality must operate for each sector. This has you speaking in terms of different planning horizons, pricing mechanisms, etc.

In the alternative, SFEcon particularizes each sector in terms of 1) the same production and utility tradeoffs with which Hayek stated the calculation problem, 2) their stock of each commodity, and 3) nothing else. What the economy does is to ceaselessly build-up and work-off these physical quanta in pursuit of the optimal distribution of assets.

As production and utility tradeoffs change to reflect technical and demographic changes, so there comes into being a new, yet-to-be discovered optimum for the economy to pursue. With every economic sector defined by essentially the same variables, the emulator’s implied representation of the economy’s planning and valuation processes are actually quite uniform.

For example: the mathematics used to emulate the acquisition, using-up, and continuous redistribution of assets are the same mathematics one might use to predict future states of the system. Thus the whole model is a predictive mechanism. And, since the bases for prices is the current distribution of assets and the shape of utility tradeoffs, it is equally true that the same model is also a device for the simultaneous generation of prices.

As with Austrianism’s unexamined premise of inscrutable prices, so the premise of an indissoluble “knowledge problem” falls apart upon examination. It is merely asserted that knowledge must achieve focus before it can be acted upon.

Says who? If we are willing to view the entire economy as a thought process focused the achievement of general optimality (which Hayek eventually did) then the distributed points of economic decision can operate independently as nodes in network of distributed informational processing, with no more than discreet bits of information flowing through the network.

In explaining how the real economy “achieves data focus” the Austrian typically allows that prices constitute the informational packets in which all the economy’s diffuse data come together. But, where the Austrian insists that prices must remain mysterious, SFEcon discovers that they are fully derived from the gradients of, once again, those utility tradeoffs that are the agreed boundary conditions of economic calculation.

So who are you going to believe: a bunch of dead Austrian scribblers? or your lyin’ eyes?

replied to: Dirdene
Interesting analysis. So I agree with sometime points. Main the economy’s diffuse data come together