The Impossibility of Economic Calculation, in One-Syllable Words

More economics in one-syllable words, this time Economic Calculation in the Socialist Commonwealth by Ludwig von Mises. Here is a two-paragraph summary:

Cash is the one thing that all of us in the world want. This trait of cash is what lets us use it with math: if the cash I pay to build a good is less than the cash I will get when I sell it, I can make the choice to build the good in a clear way. For cash to have this trait, though, it must trade among all goods in the world, and each trade must be a free choice. This way, each price lets us know how much a thing is worth to all the folks in the world.

But in a world where all a large chunk of the goods are owned by one group, then that group can’t trade what it owns with things that it also owns to get a cash price. It would be mad. Since these goods can’t be priced in cash, we can’t know how what they’re worth to the world! Thus, to use math to learn if our yield to build a thing is good or bad would be vain. This is bad!

And a longer, section-by-section summary of the whole essay:


What if you and me and the rest of the world shared all the things we owned? Each of us would give what we could, and just take what we need. Lots of folks seem to think that if we were to live in a such a world, no one would be short of food, homes, or the things that would bring the most joy to their life. We would all be friends.

It’s true that in the past, some have gone so far to say that in such a world, roast birds would fly straight to our mouths and the seas would be made of juice. Most see this as dumb, so guys like Marx claim that their own views are based on the real world. So that’s what we’ll look at here: the science of trade, and what it would mean if we just owned things as a group.

Sure sounds nice, right? But while much ink has been spilt to tell us what good things we can hope to see, there’s been a dearth of proofs for how such a scheme work day to day. This post will try to fix this.

1. Who Gets What?

Let’s close our eyes and dream we live in a such a world where we, as a group, get to choose two things when it comes to what to do with all the stuff we have: who makes what, and who gets what. Can our choice for each be “fair”? This is the main test.

But keep your shirt on. First, let’s sort out how we will choose as a group. A vote by all in big groups, so it will have to be a vote by some. Who gets to be in that small group might change, but (to start with at least) there will no doubt be some who will have their voice and their choice count more than the rest. Let us call this group the state.

The state needs to take from those who can give, and give to those who need it. The trick is how they can know who to take from and who to give to; and they need to know what to give, what to make, and how much of give, take, and make.

There are two ways the state can dole out the goods. (We’ll have more to say on each of these soon, so this is just a sneak peak.)

  1. They can let the folk use cash to trade the goods they eat or have fun with or wear. They can’t buy or sell goods that can be used to make other goods though, since this might lead to a lack of some goods but a glut of other goods;
  2. They can use the thought that a good is worth as much as the toil you’d need to make it. But we don’t all toil the same — there are some who can with more speed on three grounds: we have more skill; we have more gifts for that task; or one part of a course to build a thing may just need less skills. Should one hour of work for a teen who tweets all day be worth the same as the best heart doc in town? If not, how do you know? (Hint: you can’t know this.)

2. What is Cash Math?

If you ain’t got no cash, you can’t do the math you need to learn what’s worth more than what. This is cuz cash is the one thing we all want. It solves the task of how to weigh the wants and needs of you and a man you’ve never met in your life.

Cash earned this trait due to how it came to be born. In a world with no cash, trade takes place if you have a thing that I want, and (at the same time or at a later date) I have a thing that you want. Trade this way is slow. But folks are smart; soon they’ll learn that some things trade well, while some things don’t.

What makes a thing trade well? Here’s a list:

  1. High worth-to-weight;
  2. Light to move from here to there;
  3. Can be split up in to small chunks;
  4. Each piece looks the same;
  5. Keeps its worth for a long time;
  6. Hard to fake;
  7. Lots of folks want it.

If a thing has all of these traits, then folks will start to use it as cash. Once this starts, more and more folks will want to use the thing, hence it seals its fate as cash — the thing that all folks want.

Thus, when we see a thing with a price, it is a mark of how much its worth to all the folks in the society. And this is the crux of it all: cash lets you learn if the things we use to make a good are worth more (or less) to “Us” than the end good.

And if you find a way to buy and sell things such that you end up with more cash than you had at the start, then you can know that you have used those goods in a way that led to add to “Our” net worth. This sort of math must use cash as marked above.

Here’s a way you can think about it. Say you want to know if a train should go from here to there. Should it go there at all? If so, what should the tracks be made of — steel or gold? If there’s a hill in the way, should we blow it up and go through it, or go round it? Should the train run once or more times a day?

With cash math, we can add up the costs and then guess how much cash we might make if it’s built. We can then try to think of lots of ways to make our costs less, or to raise more cash from sales.

Without cash, we could not have such thoughts. To make a choice sans cash would be to grope in the dark.

3. Cash Math in a World Where No One Can Own A Thing that Makes More Things

There is a big snag in a world where no one owns a thing that’s used to make more things (that is to say, a world where the state owns all such goods): there can be no cash price for those goods. This is because no cash can be born when trade can’t take place as fast as one where all are free to make their own trades with their own stuff.

With no cash price, no cash math can take place. With no cash math, no mind in the world can know if the things the state makes are worth the cost! If you can’t know the cost to make a thing, how can you know if it’s worth it to make at all?! You can’t; you’re bound to end up with too much of some stuff that folks “want”, and a dearth of stuff that folks “need” — with no way to know how.

Some folks will claim that we can do this with “work hours”. They’ll say that all goods need work hours to get done, so we just do “work hour math” in the stead of cash. The snag is solved, right?

Wrong.

Look at the list of traits for cash: one of them is “each piece looks the same”. This is not the case with work hours. There are some folks who can make more goods per hour of work than others. There are some folks who have fans, and their fans want to pay more for a thing made by them.

This is the case with a thing like gold. Pure gold is pure gold; it don’t make a diff where it comes from, who made it, who found it. Of course, gold is also light to move from here to there, has high worth-to-weight, it can be split up into small chunks, and so on. It should be no shock to learn that gold used to be cash for a long, long time.

4. Who Will Take Out the Trash?

In a world where the state owns most the things, cash prices could not be used. This ought to be the death blow to any such plans. Yet, it is far from the sole block in the road to this world.

The first hitch in plans like this tend to be much more ho hum, like “who will take out the trash?” If we all get the same stuff per hour of work, and/or we are not free to choose on what to work, then why would we try hard at what we do? From whence would we draw the joy, care, and dreams we’d need to build new things, try new ways, or get good at what we do?

This is a deep point. There are two ways it has been dealt with.

First is to shrug and say, “we will breed a new kind of man,” a man who is more keen to please the state than he is to please his own kin. States have tried to mold such a man for years and years and failed.

The next way to deal with this is a bit more slick. One might point out that lots of firms are not run by the same folks to own most of their stocks. That is, there are many firms where neither the boss nor the folks who do all the work own any stock. Hence, the claim goes, that just cuz the state owns a firm does not mean that those who work there will have a change of heart re: how much they’ll toil on the job.

This, too, is wrong. The crux is this: those who run the day to day tasks of a firm will do well if the firm does well. They may earn to keep their jobs; they might get poached at a high wage by new firms; or, if they own a small part of the stock, they too will reap some of the cash yield that comes from good work.

When the state owns the firm, the threat of ruin is nil. Any boss picked by the state to run the place will do the least work he can get by with. Since they will own no things, the state must chide them or kill them for bad acts.

In our world where folks can own things, a third choice exists for what can take place to those who do bad things: they can lose cash.

5. New Ways to Tune Out the Cash Math

Since Karl Marx, and the rise of states that claim to be on the same page as him, there has been faux heed paid to how a such world would run day to day. Yet all these works seem to have missed the role of cash math.

Thoughts on a lot of this stuff has been a mess. Take the case of the banks. Some want to merge all the banks into one big one. But what would be the point of a big bank if the role of cash is changed? No one seems to know or care.

How ‘bout the case of the Slav states in the east? At the time (a year since the Czar coup), they were a mess. What used to be a mere poor part of the world wealth chain, is now in dire straits. Vlad says this is just a phase. (Side note: this phase would last for six times ten plus ten more years. Lots would die.)

Vlad, too, in his books and tracts has yet to talk on why there should be any cash at all in a state such as his. He talks a lot on how each town would set its own plans; and how banks would be the nodes to keep score of who’s owed what. Yet he thinks he can get by the cash math trap with lots of stats. We should know by now that this is a bad plan.

6. End

There can be no doubt now that any large group needs cash math to get things done. Yet all the folks who want the state to own all the goods think they can get by with just their stats and threats. This will not work.

Of course, this fact by its own will not change all minds. Some may want to burn our world as we know out of pure rage, or love. But those who think that what will rise out of the dust will be a world that could make use of cash math as we know it, must change their views.


See other one-syllable summaries of Bureaucracy and Human Action.