Economic Calculation

[EconMaven]

This post is prompted by Stefan Molyneux’s recent podcast in which he deconstructs Thomas Sowell’s townhall putdown of Donald Trump. In listening to this catalogue of Professor Sowell’s empty distractions and fallacious expository tactics, I found myself wishing to discover a forum in which my subject of economics might be discussed by people sharing Dr. Molyneux’s sense of decorum in argument. Having discovered a distinctly Rothbardian atmosphere at this forum, I would like to offer a number of exceptions to Austrian Economics for dispute and clarification.

 

1. A formal solution to the ‘economic calculation’ (or ‘socialist computation’ or ‘Vienna’) problem would fulfill, rather than refute, the Austrian School.

 

2. The Vienna problem was in fact solved, exactly as Hayek defined it, decades ago by a math prodigy at MIT.

 

3. Objections to the possibility of economic calculation citing a requisite a priori specification of commodity values misconstrue the proper boundaries of economic science: a science named “economics” should logically include a representation of how markets arrive at commodity values that continuously direct the macro economy toward its unique general optimum.

 

4. Though a solved Vienna problem would offer the efficiencies of buccaneer capitalism to a regime of economic command, this does not automatically bring scientific socialism upon us: if liberty is our shared imperative, then we should provide for the self-interested disposition of private property even if it were not efficient.

 

5. ‘Human action’ is a distracting impediment to understanding macroeconomic causation.

 

My point in having these discussions is to strengthen the Austrian School’s authority. I find their economic reasoning sound insofar as it originates in the marginalist thinking of Menger; but marginalism’s authority is mitigated by freighting it down with useless and arbitrary assertions, supported by snark and the inevitable associations of disagreement with Nazism.

 

I suggest that each post in reply address only one of the points enumerated above in order to keep the discussion organized.

 

[Guest Gee]

I tried google but could find the Vienna problem.

What is the Vienna problem and what's the solution?

[EconMaven]

The economic calculation problem was defined thusly by Hayek in 1945:

 

“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.”

 

That is econ talk for “the unique distribution of assets in which every economic actor experiences the same value for every commodity." If you google “economic calculation” instead of “Vienna Problem” you will find a Wikipedia article that should help.

 

Hayek’s formulation was a development on Mises’ “Economic Calculation in the Socialist Commonwealth” of 1920, which consolidated the Austrian School. Mises also wrote “Human Action” in 1949, which is a continuing impediment to solution of the calculation problem.

[Guest Gee]

The economic calculation problem was defined thusly by Hayek in 1945:

 

“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.”

 

That is econ talk for “the unique distribution of assets in which every economic actor experiences the same value for every commodity." If you google “economic calculation” instead of “Vienna Problem” you will find a Wikipedia article that should help.

 

Hayek’s formulation was a development on Mises’ “Economic Calculation in the Socialist Commonwealth” of 1920, which consolidated the Austrian School. Mises also wrote “Human Action” in 1949, which is a continuing impediment to solution of the calculation problem.

 

Thank you. I don't understand your last sentence though, do you believe there exists a solution which may be calculated by a central planner?

[EconMaven]

Yes, I think a practical basis for economic command will be developed out of the SFEcon algorithm, www.sfecon.com. Their homepage shows a looped emulation of a general, international input structure advancing efficiently through all the chaotic physical and financial states, as well as disequilibrium prices, leading from one economic optimum to another. If you have a complete version of MS Excel, you can run this demonstration on your own desktop. The workbook contains VBasic programs that will arouse your security warnings. You can download it from:

 

www.sfecon.com/M0.3.2.3.xlsm

 

‘Human Action’ states that, since only humans can interact to create economic circumstances, the macro economy can only be understood by examining individual behavior. This stance opposes a view of the economy as a ‘mind in itself’ that has a personality unrelated to individual economic actors – rather as a beehive exhibits macro behaviors of which the individual bee is unaware. The ‘mind in itself’ perspective is what enables economic calculation, together with every precisely-understood complex dynamic system.

[LibertarianSocialist]

The economic calculation problem was defined thusly by Hayek in 1945:

 

“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.”

 

That is econ talk for “the unique distribution of assets in which every economic actor experiences the same value for every commodity." If you google “economic calculation” instead of “Vienna Problem” you will find a Wikipedia article that should help.

 

Hayek’s formulation was a development on Mises’ “Economic Calculation in the Socialist Commonwealth” of 1920, which consolidated the Austrian School. Mises also wrote “Human Action” in 1949, which is a continuing impediment to solution of the calculation problem.

I would also be very interested to know how this calculation problem has 'been solved'.

 

Also, I couldn't PM you, but would you care to talk economics? We could continue perhaps in my thread about the reworking of the ltv? I am always interested in sythesising criticisms from other economic schools.

[EconMaven]

For the LibertarianSocialist:

 

Intriguing cyber handle. We might have a useful discussion on a one-to-one basis. Before I give out my private email, perhaps you can spell out your interests at greater length in a message to [email protected]. If you make EconMaven the subject of your email, it will be forwarded to me, and we can take it from there.

[B0b]

Is this your website?

[LibertarianSocialist]

Okay, so I have been reading the theory section of your website. I have little time to check the formulas and it is quite academic and dense, and so difficult for me to understand, but I will ask questions as I go.

 

My major issue with austrian economics is its poor predictive ability. That is, its definition of value formation as a product of scarcity and utility only provides a snapshot of the CURRENT market prices, not of any theoretical equilibrium price.

 

As I understand it, neoclassical economics recognises both the existence of such an equilibrium price and the role of cost of production in this (and value formation). The section on value seems to indicate you believe in such neoclassical assumptions.

 

I also find it hard to find a distinction between the principles behind the labour theory of value such as made by proudhon or marx, and that of adam smith or the later twin scissors of marshall.

Surely such an acknowledgement of the dominant role of cost of production within long run price formation must also concede to the principles of the ltv also being true?

 

What is your opinion on this?

[Mister Mister]

My major issue with austrian economics is its poor predictive ability. That is, its definition of value formation as a product of scarcity and utility only provides a snapshot of the CURRENT market prices, not of any theoretical equilibrium price.

That's because "equlibrium" price changes based on factors which are impossible to predict.  But Austrian economists can and have make predictions, from the failure of the welfare state, to the failure of the war on drugs, to the financial crisis in 2008.  Their humility in admitting the limits of human knowledge in the area of economics, is what makes the field so valuable, and proves why central planning can't work.

 

Your criticism doesn't say anything about validity of Austrian econ vs. other theories.  If a bunch of voodoo priests claims to predict the weather down to every detail by reading chicken entrails, always making excuses when they are wrong, then along comes the meteorologist who actually understands how the weather works, but admits that his ability to predict the weather is limited...saying "my issue with meteorology is its poor predictive ability" doesn't mean anything. 

 

Why is it important to you to predict future prices anyway?  And if you could, it seems to me the market would adapt to your capacity to predict and then your method wouldn't work anymore.

[LibertarianSocialist]

That's because "equlibrium" price changes based on factors which are impossible to predict.  But Austrian economists can and have make predictions, from the failure of the welfare state, to the failure of the war on drugs, to the financial crisis in 2008.  Their humility in admitting the limits of human knowledge in the area of economics, is what makes the field so valuable, and proves why central planning can't work.

 

Your criticism doesn't say anything about validity of Austrian econ vs. other theories.  If a bunch of voodoo priests claims to predict the weather down to every detail by reading chicken entrails, always making excuses when they are wrong, then along comes the meteorologist who actually understands how the weather works, but admits that his ability to predict the weather is limited...saying "my issue with meteorology is its poor predictive ability" doesn't mean anything. 

Why is it important to you to predict future prices anyway?  And if you could, it seems to me the market would adapt to your capacity to predict and then your method wouldn't work anymore.

Using a weather analogy, the austrian theory would simply state that rainfall was dictated by the concentration of moisture in the air. Now, this is true of course, but it doesn't explain why moisture levels are as they are. Was it the natural result of the suns evaporation, or perhaps through artificial intervention by man? If we spend all our time seeding clouds, we cannot say these are natural rainfall patterns. We might not ever be able to predict the weather 100%, but we may get closer to an understanding of natural rainfall levels than by simply refusing to acknowledge anything but the present conditions.

[Mister Mister]

Using a weather analogy, the austrian theory would simply state that rainfall was dictated by the concentration of moisture in the air. Now, this is true of course, but it doesn't explain why moisture levels are as they are. Was it the natural result of the suns evaporation, or perhaps through artificial intervention by man? If we spend all our time seeding clouds, we cannot say these are natural rainfall patterns. We might not ever be able to predict the weather 100%, but we may get closer to an understanding of natural rainfall levels than by simply refusing to acknowledge anything but the present conditions.

Sorry I don't follow.  You seemed to be implying that AE is invalid or at least incomplete, because it is limited in it's ability to predict future prices.  I am saying this does not make it invalid.  It is better to admit your ignorance than to be certain and wrong.  And again, I have to ask, why is it important or necessary to be able to predict future prices.

[LibertarianSocialist]

Sorry I don't follow.  You seemed to be implying that AE is invalid or at least incomplete, because it is limited in it's ability to predict future prices.  I am saying this does not make it invalid.  It is better to admit your ignorance than to be certain and wrong.  And again, I have to ask, why is it important or necessary to be able to predict future prices.

Well, you can either say the current price is correct, or else say another is. Failure to speculate on true values is, in a practical sense, to accept the current as true, or what amounts to the same. I cant say your argument is wrong, but we are both taking stances that are little more than educated guesses, I that theoretical price is closer to true price, you that current price is.

 

Having said that, i personally believe that even centralised planners are better at approximating 'true price' (that is a true free market price), than are the prices found in an unfree market. For example, take the case of Martin Shkreli, no one would say that the amount he charged was a fair price based on scarcity and utility, and nearly everyone would maintain that the prices he asked would soon (and did) get reduced by market competition. This is the important point. AE makes no attempt to ascertain this 'true price' which market competition is always trending towards in the long run, because it ignores the factors that create scarcity. But we see everyday this tendency towards equilibrium, even if the equilibrium point is sometimes severely distorted.

[LovePrevails]

I tried google but could find the Vienna problem.

What is the Vienna problem and what's the solution?

[Guest Gee]

 

 

Thank you LovePrevails.

[LovePrevails]

Thank you LovePrevails.

 

my pleasure

[EconMaven]

As I said in my opening post, my attraction to this site was based on the hope that a discussion about economics might proceed within what philosophy has established as the rules for productive discourse. But it would seem that I need to be taken to school by some of you stud-bucket philosophes on how these rules are to apply in economics.

 

Correct me if I am wrong, but all I have seen here is argument from authority in reply to an argument from arithmetic. “Bob” wants to know if the SFEcon is mine. While that is an answerable question to which I will politely reply, but I do not concede the place of this inquiry in respect to a question stated in algebraic terms.

 

Now for full disclosure. SFEcon’s site is (as clearly disclosed at www.sfecon.com) the property of a California public benefit corporation. I have contributed materials to that site, but I am not connected to its operation. I was among the students who were in the graduate seminars at the University of San Francisco where these materials briefly surfaced in an academic setting. My motive (if I may presume to know it) is to make these materials respectable so I can use them in my research and teaching without being ridiculed or shunned.

 

I see nothing more questionable in this than in Tom Woods’ public advocacy of a point of view in which he has a personal AND FUDICIARY interest. I note that Dr. Woods has already been given more time in a priori refutation of SFEcon than is required to consider an objective counterexample to his premise.

 

Correct me again if I am wrong, but Dr. Woods’ entire construction is a) exclusively verbal in nature; and b) founded in its totality on a premise that the Austrian School will not (trust me) examine, viz.: prices are not knowable because prices arise only from markets, which are both omnipotent and inscrutable. That sounds to me like a circular argument intended to conceal a bald assertion (argument from authority) that economic science is not to include an elucidation of how markets generate efficient prices.

 

From there, it seems that Dr. Woods runs out the clock on the patience of his audience in describing the processes of economic adjustment that are much more effectively presented in any of SFEcon’s instructional videogames. Every economic activity DESCRIBED by Dr. Woods in ENACTED by an SFEcon emulation. Every motive Dr. Woods ASCRIBES to economic activity is seen OPERATING to keep SFEcon’s dynamics stable and efficient while progressing toward economic optimality.

 

The length of Dr. Woods’ performance being what it is, we might forget that he begins by asserting that the processes of economic adjustment are categorically unknowable. What, then, is there in the intelligence behind his pie-hole that enables HIM to describe economic adjustment? How is HIS description superior to that generated by the artificial intelligence embodied in an SFEcon emulation? Are we to agree that economic processes are best described with prices left mysterious? as opposed to when they are understood as co-extensive with the economic processes themselves?

 

Examining (for once) the premise of unknowable prices, have we not here a specimen of the general negative? In what logical dispensation can a general negative be proven? This is not to say that general negatives do not have a useful place in science, only that he who founds his science on a general negative obligates himself to the scientific premise of contradiction by counterexample. In categorically refusing to be contradicted, Dr. Woods again argues in the vanishing small circle around his presumption of authority.

[EconMaven]

For the LibertarianSocialist:

 

It is commendable that you would tackle the nuts and bolts of SFEcon theory: it is indeed dense – as is economic causality itself. The materials at www.sfecon.com are from a two-semester graduate seminar on International Business Economics. The attendees were mostly MBA candidates with technical undergraduate degrees. If you want a ‘sparknotes’ summary of the theory try:

 

http://www.sfecon.com/Economic%20Calculation.pdf

 

As to the predictive abilities of Austrian Economics, I have found them to be quite strong. It is the Austrian economists who cannot predict anything. If you go down the THEORY OUTLINE to “AN EMPERICAL STUDY” you will find a brief summary of my contribution to the SFEcon seminar at USF. Because SFEcon is a mathematically determinant model, it can be ‘run in reverse’ to reveal its underlying utility parameters. Having found these parameters to be readily predictable, I would assume that the theory operating on them would also be a useful predictive model.

 

As for your questions on price and value, and your exchange with RoseCodex, I feel a need to venture some epistomology based on the way dynamic systems are understood by technical people who are not economists. There are no equilibria in the real world; and movements along the dimension of time are a fantasy. Everything is ‘current’; it is always now; and events unfold with indifference to expectations. The ‘future’ only projects an abstract extension of the past.

 

SFEcon is not an ‘economic model’ as such are currently embodied because it is an ordinary piece of engineering dynamics, like a videogame. These emulators only know their current state, and their rules for projecting that state to some slightly advanced point in time. Think of an exponential average: all this structure ever ‘knows’ is the current average, and its rule for incorporating the next arriving data point into a new average.

 

If prices are to be integral to such a mundane model, they must be brought down from their Olympian omniscience and inscrutability. Contra Dr. Woods (whose degrees are in history – not economics) prices are not understood by economists (Mises was a lawyer) as mere creatures of the market. Markets are understood as mechanisms that reveal value, and the value that a commodity has for a given economic agent is an expression of the utility function by which the agent is described – specifically, his utility function’s slope with respect to the axis along which his use of a commodity is measured.

 

The neoclassical and Austrian schools agree in that the economy’s order and stability owe to its spontaneous tendency toward the general optimality that is the object of economic calculation. SFEcon is an objective demonstration that two things are necessary and just sufficient to calculate the economic optimum: 1) the shapes of the production and utility tradeoffs implicit in Hayek’s statement of the calculation problem; and 2) the premise of general optimality that is known to arise from the self-interested disposition of private property.

 

SFEcon enacts the economy’s search for the optimum implicit in its utility parameters by building-up and working-off physical assets in order to move the economic agents around on their utility functions, thus encountering different slopes, until every agent presents the same slope with respect to any given commodity. This process is further constrained in that the agents must also operate where mass is conserved throughout the entire system: current outputs must be just sufficient to regenerate all the inputs currently being used in creating the outputs, just as markets clear.

 

With all of the above as background, we see that concepts such as ‘equilibrium price’, ‘long-term value’, known ‘marginal costs of production’, etc., are just not part of the analysis. Prices are nothing more than expressions of where the agents are on their utility functions. If you run an SFEcon emulation against constant utility parameters, the model will subside into an essentially optimal steady-state after about four years, and continue to refine that state forever. Prices are ‘equilibrium’ to the extent that the model is in equilibrium; they express long-term value to the extent that the utility parameters are not going to change; and they approach equality with (equally variable) marginal costs of production.

[LibertarianSocialist]

 

I tried to read your empirical study, but did not understand it. I will read the .pdf.

 

I understand that we only have the present, that any future expectations are only expectations, but I disagree that we cannot make probability claims on what the equilibrium will be. For instance, a disturbed vessel of water can be expected to return to its equilibrium given a time that can be estimated from what we know about physical laws and the physical properties of the vessel. This is not to say it cant be disturbed or factors would otherwise prevent this expectation from being true. This sloshing of water clearly a movement over the dimension of time. We might only experience the present, but the present is not static, and moves on a linear progression. Is this what you are arguing or have I mischaracterised you? *Okay, just read the next paragraph, then we are on the same page assuming the future is currently unknowable, yet we can make probability claims that are better than chance.

Furthermore theories of value serve as 'physical laws', though not empirically proven as true. For example, the theory of gravity says objects which meet a certain set of assumptions, will always fall, and that this is an inherent tendency of all objects. It does not say all objects must fall if there exists stronger confounding forces, but that they are always subject to gravity.

The same is true for a law of value. If the conditions are met, and the law is a true law, we MUST see the situation play out as expected. This is not to say we currently know the future conditions.I disagree with your claim that the future unfolds with indifference to expectations. The future MUST follow exactly the conditions set by the past. Everything is precalculated and inevitable, the future only appears to be unknowable due to our limited comprehension. But on a pragmatic note I will concede your point.

 

When you say "markets are a mechanism that reveal value" what is your definition of a 'market' what are its basic assumptions? Furthermore, what type of value are you referring to? Is it an exchange value or an individual use value, or perhaps an aggregated use value? If value solely on personal utility, what can this tell us about market price? Furthermore, how is such a 'utility value' established within a centralised, top-down economy (such as in the economic calculation problem society)?

 

So when you talk of general optimality, do you mean pareto efficiency? What is the measure of such an 'optimum'? Economic prosperity, aggregate wellbeing, etc.?

 

The two necessary factors of the calulation of the general optimum seem like assumptions only. What are the shapes of the production and utility tradeoffs, and how are they established empirically? Furthermore, what is the evidence or logical basis for the claim that what we understand as 'private property' under capitalism creates the impetus for a move towards 'general optimality'?

 

I dont know what a utility function is, nor why they are the only factor in price formation.

 

Given your quote: "Prices are ‘equilibrium’ to the extent that the model is in equilibrium; they express long-term value to the extent that the utility parameters are not going to change; and they approach equality with (equally variable) marginal costs of production."

 

This sounds like the labour theory of value. Are you suggesting that an indivdual is motivated to purchase commodities up until the point where his marginal utility falls below the exchange value of the good, thus fixing prices at this point? And that the prices tend in the long run towards an equality with the cost of production?

 

I will assume that marginal utility is dynamic and falls towards a static* cost of production, so that it is cost of production, and not utility that is the baseline.

So what dictates the cost of production? Are we to assume the market price of capital and labour? But at what level are these set, and why?

 

 

Looking forward to another great reply.

[EconMaven]

You have a lot of good questions – and they have answers that might interest you – but it would be difficult to supply the answers in the order that the questions have occurred to you. I would just be re-typing a lot of stuff from the SFEcon site. Two points are, however, easily addressed. 1) A utility function describes diminishing marginal utility of a given input to a given economic agent’s output. 2) General optimality is Pareto optimality.

 

Since you have ventured into the .pdf, I suggest that you pose questions one at a time as they are suggested by the text, and allow your acquaintance with SFEcon to develop in the order that they present it. I can answer one question at time, or guide you to the elements of the SFEcon site that has the answer.

 

Once again, if you approach inquiries-at-sfecon-dot-com, they will provide a tutor at no charge, no registration, no return spam. If you prefer, you can email me directly at ‘inquiries’ if you mention econmaven, and I can become your tutor. I would be interested in knowing what you mean by LibertarianSocialist, and how a solved computation problem by forward any agenda you might have.

[Worlok]

I find the question a little queer in that it seems you are asking a question to which the answer is not necessarily an answer. Austrian school is to economics as the uncertainty principle is to quantum mechanics.

[Matthew Ed Moran]

Price in economics is not synonymous with historical data that are called prices. Price in economics is an abstract theory. Economic calculation is not a problem in reality. It is a scientific description of what money does. Money fluctuates relative to the desires of people and the opportunities they see. If there is a formula which can tell people what the prices will be in the future, it will then be used to create new prices. It won't ever falsify a theory of economics. Economics is an abstraction. What exists in reality are numbers depicted through signs, paintings, LED lights, TVs, poster board.. and fiat paper designs which are traded..

 

Numbers are abstract, and prices are an even more abstract category.. Economics explains what the numbers and symbols represent from a scientific theory standpoint. It explains in abstract theory why the numbers are there in the first place. If you have a mathematical way of doing it that is probably obtuse, and it certainly isn't a replacement for individuals making decisions in reality. That would be like saying because I can accurately define "price" in abstract terms, then I necessarily know all the ways people should spend their money.

[Mister Mister]

Well, you can either say the current price is correct, or else say another is. Failure to speculate on true values is, in a practical sense, to accept the current as true, or what amounts to the same. I cant say your argument is wrong, but we are both taking stances that are little more than educated guesses, I that theoretical price is closer to true price, you that current price is.

 

Sorry I have no idea what you're talking about.  You can say any price is "correct", nobody really cares what you say.  The question is, is someone willing to sell at that price, and is someone willing to buy at that price?  If someone offers me a price, and I think I can get a better deal, I make a counter offer.  I never thought to negotiate a price with someone by saying "sorry, that price is wrong.  the calculations of my obscure economic theory actually say the CORRECT price is $4.72".  Do you realize how absurd that is?

 

  AE says there is no such thing as objective value.  If you want to disagree, the burden of proof is still on you to prove that.  But otherwise you are just saying AE is wrong because it doesn't go about trying to discover objective value, which obviously you prefer because, if value is subjective, then socialist theory falls apart.  Which is to say that you a have a preference for theories which support the idea of objective value.  But again, you haven't proven that the Austrian description of subjective value is wrong.  And you can't.  Because it isn't.

[EconMaven]

RoesCodex has twice touched upon a point that has remained unaddressed, but deserves exposition and response. In economics courses taught to business students, one inevitably finds the observation that ‘anything accurately predicting the market becomes the market’. I accept the reasoning behind this finding and in fact commend it to my students’ attention. It then becomes useful to ask ‘if SFEcon theory predicts prices, then why have not SFEcon’s intimates already exploited their superior knowledge to the end of owning everything?’

 

My response articulates price computation in two parts. Part one requires that primitive data about what the economy is doing be abstracted into an expression of the economic agents’ production and utility functions. Part two proceeds from these expressions of technical indifference by way of direct computation for a vector of prices that will efficiently guide the distribution of economic assets into Pareto optimality.

 

As noted in my post #3 above, Hayek’s 1945 statement of the Vienna problem presupposes the availability of references for technical indifference: “marginal rates of technical substitution” do not exist except in reference to production and utility functions.

 

In putting SFEcon forward as having solved the Vienna problem, I assert that it continuously regenerates prices that quickly move an economic system from chaos to the general optimum implicit in its technical parameters.

 

If there is to be an argument with this ALGEBRAIC assertion, I hope it will proceed in replies to THIS post. Such arguments might take the form of poking holes in the algebra, pointing out a sinister backdoor in the programs that animate the algebra, etc.

 

I will be making other posts regarding such things as the possibility of estimating technical indifference in an effort to keep the discussion organized. Please understand that putting all one’s responses in one post and expecting a response to each is not a productive way to organize an argument. Mere articulation of a blizzard of questions suffocates, rather than illuminates, a discussion.

 

[Matthew Ed Moran]

"Mere articulation of a blizzard of questions suffocates, rather than illuminates, a discussion."

 

Nice word salad without providing any example.

 

So can this math equation tell people how they should spend their money or not? If not, then it's not telling you anything practical about price. Nobody cares about what a replication of price is in math, they want information on how to satisfy their desires for consumption. That is the only reason investment exists in the first place.

 

People don't build businesses to capitalize according to some predetermined calculation which they are just trying to maximize, you dork. Businessmen  find new ways to create wealth. Every time a new business enters the market a new opportunity for customers appears for them to potentially profit from. Their decisions to chose some products overs others is the basis of price and why price fluctuates and never stops fluctuating. New information enters the market everyday which the old prices couldn't possibly have captured. The idea you have some math equation which knows how to maximize human wealth is probably the funniest idea I have heard in a while. You crack me up. 

 

I guess it makes a nice hobby to be passive aggressive on the internet about some math problem which you claim has figured out how to completely optimize wealth but which isn't already being incorporated into the market is.... well frankly you'd have to be a giant conspiracy theorist. And honestly with how poor of a communicator you are to say things in plain english, it wouldn't surprise me.

[EconMaven]

In my previous response to RoseCodex I divided price computation in two parts: 1) establishing the economy’s production and utility tradeoffs, and 2) proceeding from utility to efficient prices. Part 2 is an algebraic assertion that Austrian Economics rejects based on the necessary complexity (e.g.: the polynomial factoring problem) of the calculations involved. Please post responses to this second assertion in response to my post #24.

 

This post is intended as a target for assertions (based on whatever logic or data) that the economic order’s underlying production and utility functions are unknowable (or perhaps even categorically non-existent).

 

While awaiting refutation of my post #24, I continue to assert the existence of a mathematically determined path from utility to optimality by way of cardinal money prices. Such a path can of course be traversed in either direction: observations of how agents are arranging their assets in response to observed prices can be used to infer the shapes of agents’ technical tradeoffs.

 

In my post #18 above, I referenced a statistical study in which I calculated a series of the UK’s production and utility parameters from 1992 to 2002 by running the SFEcon algorithm ‘in reverse’. I assert these results are strongly indicative that the admittedly abstract utility idea is adequately expressive of an economy’s technical potential for purposes of economic investigation.

 

Objections to this assertion would logically take the form of citing my study’s limited scope, its statistical insignificance, its dishonest treatment of the primitive data, etc.

 

To close the question ‘if SFEcon is so smart, why aren’t we rich?’ I would ask: if Fermi and Szilard were so smart about the potential of atomic weapons in 1933, how is it that Japan did not surrender until 1945?

 

The answer is of course that theory requires development before it can be put into action. The world’s national statistical agencies do not organize their observations in a form that would readily animate an SFEcon emulator. Distilling the necessary parameters from available data is like refining U238 from uranium ore; and the bomb does not go off without enough U238 to reach critical mass.

[EconMaven]

Several posts have tacitly asserted what economists generally accept as “foundational microeconomics” – a belief that the behavior of the macroeconomic whole sums the behavior of its microeconomic parts. This is of course the gravamen of Mises’ Human Action. I observe this notion to have been properly rejected in every science other than economics; and offer this post as a target for those who might wish to tell me why economics should not do the same.

 

To convince me that I am wrong, please articulate one observable instance of systematic behavior that in any way resembles the behavior of any of its constituent parts. What PART of your wristwatch tells you the time? What PART of your automobile transports you from place to place? Which of your body’s constituent cells moves, nourishes itself, or reproduces itself in the same way as you? What is it in the behavior of an isolated honeybee that tells you anything about the organization of the hive?

 

The point is that if you slide your frame of reference around over a vast range of experience, you will never explain anything. If, for example, you confine your observations to sub-atomic behavior, you can readily falsify Newton’s mechanics. If you assert the categorical reality of mass and velocity, you can falsify everything Schrödinger said about the atom.

 

Bringing us back to economics, everything in our familiar, microeconomic surroundings does indeed tell us that prices are subjective. Some people buy tons of a given commodity at the market price, while others buy none. But consider this same sort of behavior in respect to a more macro question, such as the experiment in which a large number of people guess at the number of beans in a bottle.

 

Any given person’s guess is subjective – his estimate and his alone – based on who knows what. No guess has a systematic relation to the objective number beans in the bottle; and few guesses will be anywhere near correct. But these is, via a completely separate causality having nothing to do with any individual’s guess, a well understood process by which ever larger populations of guessers will converge on the objective truth.

 

It does not seem to me a stretch that free markets are properly understood as a similar process by which subjective articulations of a commodity’s value will co-align with the objective cost of the commodity’s production. If the macro economy is understood as the cooperation of all such process, then it is a phenomenon that is causally separate from the subjective valuations apparent at a micro level of observation.

 

I find Mises articulating these processes in a manner completely separate from any specifically human action in his description of macroeconomics as . . .

 

“. . . something operative which power and force are unable to alter and to which [people] must adjust themselves if [we] hope to achieve success, in precisely the same way as [we] must take into account the laws of nature.”

 

I also note Lew Rockwell’s observation that . .  

 

“Ludwig von Mises didn’t like references to the ‘miracle’ of the marketplace or the ‘magic’ of production or other terms that suggest that economic systems depend on some force that is beyond human comprehension. In his view, we are better off coming to a rational understanding of why markets are responsible for astounding levels of productivity that can support exponential increases in population and ever higher living standards.”

 

As a “rational understanding” of that “operative power”, I find SFEcon to be an extension of Austrian thinking insofar as it pertains to macroeconomics.

[labmath2]

If i am following this correctly, austrian economists nthink you cannot predict the future of markets, you can only ascertain the current conditions. While its explanatory power for current state of affairs is useful, its limiting. Others think you can come up with systems to make prediction.

 

Using the weather analogy. Its great to know why its raining, its beter to know when it will rain.

 

The problem now is what counts as predictive power. What level of accuracy would it take for austrians to admit some level of predictive power in some other system?

 

To go back to the weather analogy, how good would you have to be at predicting rainfall (time between prediction and rainfall and percent accuracy) for others to take you seriously.