 Good morning everyone and welcome to the lecture on calculation and socialism The title might at first seem a little obscure, but I hope to explain the importance of economic calculation By showing how its absence under socialism causes severe problems and actually the impossibility of socialism This is particularly topical because we have people now calling for socialism openly in the US once again Lesson or a little bit more than two decades after the collapse of the Soviet Union and the Eastern European centralized central planning regimes So Bernie Sanders for example The woman I don't remember her name who was elected as an open socialist in the Bronx in New York last week or maybe she was Nominated as a Democratic candidate, which is tantamount in New York to getting being automatically elected Okay, I want what I want to do is I want to start what I consider to be the greatest single economics article of the 20th century For a number of reasons and that was lovely Von Mises's economic calculation in the socialist Commonwealth It was published in 1920. We've reprinted it We have a pamphlet reprint with an epilogue by a quite notable modern Austrian economist So I urge you to to read it through make sure you read the epilogue Okay So what it did was first of all it completely destroyed in one fell swoop the intellectual foundations of socialism But as we've discovered Later on during the Austrian revival it also really Set out What exactly the nature and the function of the price system was in a capitalist economy? It really showed the importance of the price system That lesson was not learned Until of the what we call the Austrian revival The second lesson So let me start with the early socialists who wrote in the early 1800s the early part of the 19th century There were three big names if you've had to do economic thought you've seen these names before there was a French the two French writers Charles Fourier and Henri St. Simone and a Scottish Entrepreneur who set up socialist experiments here in the United States Robert Owen as Did as did Fourier's followers talk about that they were called the utopian socialists Okay, they had all these grand schemes that they would set out in minute detail about how people will live better if they just Go along with with their ideas and their visions We'll see Marx took a very different tack Okay, Marx was a brilliant strategist a brilliant tactician and he hated these guys and for good reason, okay That's Shaw Shaw Fourier. He's as crazy as he looks Seriously Okay, we'll focus on him as as the product as the stereotypical Utopian socialist He had an idea that there should be people should be organized into small communities of fallen stares Which is the the old military Formation of the Greeks the phalanx He said that there would be garden cities modeled after a grand hotel Okay, this is where people would live there to be 15 to 1600 people in these in these cities And it was based on the Greek military formation Everybody would be able to purchase accommodations according to his individual taste and income So he wasn't a leveler an income leveler necessarily Everybody would be a stockholder in the city. There'll be collective production now Everyone would would produce the same things together. Okay, they would all share the dirty work and share meals in the kitchen That doesn't look too crazy But then as you go on and you read more in Fourier, you understand why Marx was so embarrassed as a socialist Okay, so he actually sketched out. This is what it would look like These these crazy utopian socialists had this mania for symmetry. Everything had to be symmetrical All right, you know the phalanx was you know square or rectangle Okay, and he got one as far as to actually build a model of it. Okay, I mean, this is really bespeaks a mania Okay, now, there's one near my home in New Jersey There was actually a phalanx there that was built and people lived in for a while in New Jersey And it's been long since abandoned. Okay looks haunted to me. I don't go near it Okay, now here's some of his writings his ramblings See so he wrote that not said that 19th century France was in the fifth stage of advancement now How does he know this stuff? Okay? I mean, how does he know that it started with confusion in the world and then went to savagery Patriarchism Barbarity now and then he said at the point he was writing after passing through two more stages It would approach the upward slope of harmony now That's the final stage of utter bliss and that will last for 8,000 years Okay, 8,000 years knows that Okay, at which point of course history would reverse itself and you go back through savagery to confusion Okay, so these people are what we call Gnostics. They all have a secret source of knowledge within them that no one else shares So I mean this is this is every cult is is based on what we call Gnosticism. Okay, the Greek word for knowledge Meaning sort of a secret intuition that no one else shares marks had the same thing Other things he said would happen. So when you reach this stage of harmony, there'd be six new moons replace the one in existence A halo would surround the North Pole and it was showered dew on the earth The seas would turn to Kool-Aid. Okay, there's some kind of a juice. I mean It's all I've looked at a few books and I say Kool-Aid I don't think Kool-Aid existed back then unless he invented it and James James Jones, right? They're all fat way to Kool-Aid at Jonestown. I Don't know all violent or repulsive beasts would be be replaced by their opposites and be serviceable Anti-lines would offer themselves to humans to be ridden and roasted anti chickens would fly to human mouths And the human lifespan in the harmonic stage was stretched to 144 years. I mean, you know, they had these exact figures How do they know this stuff and five six of the time not six sevens or four fifths Five six would be devoted to the unrestrained pursuit of sexual love free love is always a part of all of these schemes Okay, all of which of course have been made up by men No, it's it's true though To the left always You know says a capitalism mistreats women But but in all the schemes that the left has come up with those crazy schemes over the centuries, you know You know, you always have these sort of free love schemes Okay, so what were the response of the collapsible economists? Well, they were able to smash this stuff very easily They said look who's gonna take out out the garbage on this utopian socialism. Okay, there's gonna be still dirty work to do Who's gonna go deep down into the mines? Who's who's going to do unhealthy jobs? Potentially Dave of dangerous jobs if everybody gets paid the same So they pointed out obviously the price system provides and needed incentives and and signals and that's through the profit and loss system which would Induce the right amounts of goods to be supplied To to to society whereas you don't have that under any of these crazy socialist utopian socialist schemes But the social stance was there'd be a new socialist man and woman Okay, that is that they be seriously transformed and they'd all want to work for the community Well, that argument went on for a while But of course the classical economists who were smart people and brilliant people got the better of it However, there was an underlying Assumption that If it wasn't for the lack of incentives under socialism Socialism could be just as as as productive as capitalism. Okay. Now. That's as we'll see what Mises challenged Okay, that it was just incentives that the incentives weren't right Unfortunately in today in today's modern economic mainstream People have sort of focused on incentives as a core of economics when in fact, it's not as we'll see really truly calculation Okay, even if you know or even if everyone has the right attitudes And if everyone sort of was an angel in their disposition and wanted to help society You would still have socialism not being able to work Okay So now marks as I said was was a brilliant Strategist and tactician and he saw how clearly the utopian socialists had been smashed by the classical economists So what he said was look Utopian socialists aren't scientific don't listen to them anyone who Tries to tell you they know what's going to how the future is going to look Or tries to devise a plan to implement in the future is is not scientific They're just crazy. Don't pay attention to them because according to Marx It's the laws of history that's going to drive society regardless of what anybody thinks or wants it's going to drive society from the beginning in in classical slavery through feudalism through capitalism Through a stage of socialism and then ultimately to the bliss of communism He said this is going to come about as inexorably as the laws of nature Dictate that an apple if it falls from a tree will fall downward and not upward Okay, there's nothing that human beings can do about it. There's no way that human beings can hasten the coming of socialism So forget about it If you if you say any if you try to describe what it's going to look like then you're not scientific Okay, so it's unscientific to speculate about what a future social society would look like or try to speed up its arrival even though later on in his career Marx was contradicted himself because Marx was someone who was an agitator and agitated for for socialist measures He was even against minimum wage laws. He was against unions Because he actually thought that those things would make the working class more amenable to capitalism He thought that he wanted things to get as bad as possible Just through the working out of the laws of history and then we would just pass in the socialism So he was actually Marx was an anti interventionist in some of his writings So his writings weren't that was his great work called what's it called socialism? Okay, what's it called communism was called capitalism das kapital He didn't write a word about socialism about the social future what it would look like Okay, he just spent all his time talking about the economic contradictions that would cause capitalism to collapse With the inexorability of the laws of nature So this is this is where we stood When Mises wrote so what Mises focused on was not the incentives He focused on the function of the price system and what he what he said what this is his thesis will start with these thesis He came out and said socialism a socialist economy, and I'll explain what I mean more by that But right now let's just say that when Mises uses the term socialism he means an economy in which a one collective the The gut let's say the government whether it's a dictatorship of the proletariat or not The government owns all of the physical means of production That is all the factories all the natural resources all the machinery all the tools Okay, there can be consumer goods that were privately owned under socialism Okay, even some durable consumer goods. Okay, though. It's not clear about housing for example Okay, if that would be owned be able to be privately owned But certainly all the factors of production or or non-human means of production labor would be free I mean Mises allowed that labor could could be free under socialism to choose different jobs and There could be a limited sort of money Where the laborers were paid vouchers which they could then turn into the stores that are all owned by the state For different kinds of goods so let so Mises Granted that okay We would have some consumer choice given what was produced that people could choose between different things that were produced But the key is that every all the productive apparatus throughout the economy would be owned by the government Okay, so be collective ownership of the means of production. That's how it's usually phrased So what he said is that in a developed industrial economy with complicated production processes Okay, as we have here in the United States and we've had since the industrial revolution many different kinds of capital goods Many production processes and many different kinds of capital goods the rational allocation of resources in is impossible Without economic calculation using actual market prices a socialist economy is impossible because it cannot generate prices for capital goods And natural resources. Okay. Well, let's parse Mises's argument Mises said step one socialism abolishes private property and capital goods and natural resources. Okay, one will controls them It's either, you know a set a single central planner or a group of economists or others that Technicians and so on that come up with the set of the central plan Number two since a socialist state is a sole owner of the material factors of production They can no longer be exchanged, right? You can't exchange with yourself Okay, if there can be no exchange there could be no markets and no market prices So be no prices for the factors of production therefore The state without prices of the facts of production cannot calculate the costs of production To compare to the prices if there are if consumers are given free choice the prices that consumers willing to pay for consumer goods So you would have no cost of production In the absence of economic calculation of profit and loss Therefore socialist planners cannot know the valuable uses of scarce resources and therefore a socialist economy is strictly speaking impossible And Mises said it's like a man standing in the middle of a desert And you know he has his equipment and so on and so forth To last him to get out of the desert, but he doesn't know which way to go. He has no compass There's no the best way to go to get out of the desert. Okay? He there's many different ways to go Different directions. Well, that's what the socialist planner is like. Okay. There's no calculation. We'll go get this in more detail And very interestingly he said the essential mark of socialism. Okay. Now. He didn't say That the essential is his compulsion or is the fact that You've abolished markets. He pinpointed that there's one will alone acting if there's one will alone acting It means all the different values expectations tastes Ideas about how to produce all those different things can't come into play in markets Can't be there can't be an interchange in markets of different values Which then establish prices of every single order of good. Okay going from Mining iron ore and mining diamonds all the way down to consumer goods. Okay, the stores that provide consumer goods So he says it is immaterial whose will it is so it could be the will of an angel could be the will of the best of Benign dictator somebody really wants to help decide The main thing is that the employment of all factors of production is directed by one agency only one will alone chooses Decides directs acts give orders The distinctive mark of socialism is the oneness and indivisibility of the will directing all production activities within the whole social system Okay, it's not incentives. There's not a word about incentives in there Okay, which is so So much the central focus of economics today It's this one will so what means is said is in order to have economic calculation You need private property not just the consumer goods, but in all stages of goods including capital goods of every kind You need to free to exchange these goods You know in past history you had certain laws that allowed people to own property But they couldn't sell sell the property. Okay, the family couldn't divide up and sell the property But you have to have freedom to exchange as well as private property and a sound money A money whose value is independent of the will of politicians And their machinations so socialism abolishes all three of these preconditions and therefore it nullifies economic calculation and as we'll see Society itself So let's look at why calculation might be a problem Let's say that we have a production function, which is a fancy word that economists use for recipe If you look at Murray Rothbard, he has no qualms about using the word recipe in man economy and state He uses production functions sometimes, but it's just simply a recipe every good has a has a numerous technical recipe Each good can be produced in many different ways So let's say you have a car That requires p tons of steel q hours of machine time or hours of unskilled labor and so on Engineering labor square feet of factory space kilowatt hours of electricity and paint and so on The socialist planners can know all this they can know all the recipes they can know all the technical production functions How to produce all goods, but without prices and without costs. We'll see that this is a Doesn't doesn't help them to produce the right quantities and kinds of goods that people demand or that even that they themselves Want people to have Even a problem if they try to substitute their own values because they can't put prices on on on those things So how can we calculate the cost of producing this car into socialism? Okay, you can't add up kilowatts of hours tons of steel gallons of paint. It's not a common unit There's no single unit to express costs of production How do we do it on the market on the market? Okay, all resources at every moment have a price because they're all privately owned and they're all continually exchanged So they have a price and so therefore you add up the prices of those quantities given by the production function of goods and inputs that you need to build the car and You come up with some kind of a cost of production So let's say the cost of the car is thirty thousand dollars All right now you don't know for sure what consumers will be willing to pay for the price That's an entrepreneur pay for the item. That's an entrepreneurial judgment. You have to look to the future for that Entrepreneurs can make mistakes But when they make mistakes unlike the socialist planners, they know they make mistakes because of profit and loss so if they Project the price of thirty four thousand dollars Let's say this car is just being planned in the US It takes about five to seven years to get a car from the drawing board onto the dealer's floor Okay, so you're looking five years in the future. You produce a car Thinking you're gonna get thirty four thousand for it. It's cost you thirty thousand to produce and Yet by the time you get that car in the market Some good Competing cars that people might prefer so you're only able to sell them for twenty eight thousand. Yeah entrepreneurs make mistakes That was a waste of resources because they use resources worth thirty thousand dollars in other lines of production Remember other entrepreneurs are bidding for the steel the paint and so on the labor hours And they're willing to pay up to thirty thousand dollars because they can produce goods and services worth about thirty thousand dollars to consumers Well, this guy believed that he could make a better package of The thirty thousand dollars and turn it into thirty four thousand. Well, he was wrong. That's fine That's that's that's not that Devastating to running an economy. Okay, if he continues to make those mistakes So she continues to make those mistakes as an entrepreneur. They drop out. Okay, they lose their capital So there was a woman a number of years ago back in the 1990s who came up with something called a top topsy tail and what that was was simply a hoop a knitting hoop and a Needle a plastic hoop and and a long needle that she put together in a way that women could easily braid their hair if they had long hair Because she had long hair and she was always worried about doing this that cost her about a dollar. She quit IBM Took her five thousand dollars of savings and started to advertise eventually went on TV on QVC and She was selling them for fifteen dollars and at the end of making them for fifth for twenty five or thirty cents Okay, so that back she calculated that look I can make it for less than a dollar and yet I can I I project I can sell for ten or fifteen dollars and she became a millionaires and Her subsequent endeavors failed but but in any case So so calculation made her come up with this item that no one else had thought of using Inputs that were worth only twenty five cents to make something that was worth ten ten dollars or fifteen dollars now What about Can can socialist planners do this type of thing? No because they don't know the cost of production. They don't know what anything costs They never know if they're using resources that are more valuable than the goods that they're they're producing. Okay, so Also, do you use a titanium bumper on a car a steel bumper on a car? Or do you use a fiberglass bumper on a car? Well titanium is stronger than steel, but it's lighter than steel But we don't use titanium bumpers because it's calculated that the cost of the titanium bumper which would Prevent you know prevent denting of the bumper at much higher speed accidents that that cost is too high People will not pay the extra amount to avoid You know the paying for the accidents paying for the accidents or the reduction accidents, okay? But in fact we've gone from steel to to a fiberglass bumper. That's kind of counterintuitive. Why have we done that? well because the Repairing the fiberglass bumper Isn't as costly as as the extra weight of the steel bumper that reduces your gas mileage And so all of these things are done through calculation Socialistic Planner could never figure this stuff out Okay now There's a story behind that house. I have a friend who I grew up with and she Married a cowboy a real cowboy who actually had a ranch With cattle and stuff on it and they actually had cattle drives. So she moved to Montana and One day she called me and she said though we have we have a new house I said oh you moved from your engine. No, no, she says though We just had the old house removed and we replaced it with a new house. I said what do you mean? It's a seven bedroom house. This isn't actually her house. This is a modular house. So I said What do you mean you replaced it with you know, you bought in another house? She's well in Montana because it's like 18 people in Montana. So there's hardly any labor labor. It's extremely scarce So people don't come to the it's very expensive to get people to come to the site and Build the house. They don't do that. What they do is They have the house built in Omaha. Well actually in Nebraska somewhere And I happen to look at Google it today and there's a number of house building firms all throughout Nebraska so they had it shipped about 700 miles to their house and Shipped it on trucks and then they put it together there Okay, they only had to spend a few days putting it together. So, you know scarce labor was economized on Would a socialist planner ever figure that out that a house should be built 700 miles away? How does it figure out here? By prices by notice by saying hey the cost of actually building this thing 700 miles away with a lot of machinery and few laborers in a factory is less than having a lot of laborers come and You know stay for four months five months and build here in Montana Okay, and there literally was less than 20 people in that town of Biddle where she lived They they her family was the postmaster. They ran the store I I never visited I just couldn't could bring myself to go there Okay, all right, so now A couple things that Mises didn't did not say Mises didn't say that if you had a small economy one person or a small household Living in isolation that they couldn't run a rational economy So he said you don't when when people are acting in isolation or there are small groups acting and you don't have Very complicated production processes and a lot of producers goods many different capital goods You can use valuation you can simply just value things directly which you can't do under socialism An industrial economy, so let's say you have somebody who has works 12 hours a day and This is their value scale is how they value the different things that they could produce Okay, and let's say that's what they produce every day to fish three pounds of wild mushrooms and so on And all together it absorbs at 12 hours. Let's say now they find rabbits on the Island, this is this household or Robinson Crusoe What's the cost of producing a rabbit that requires six hours to hunt and catch they can figure that out pretty easily Because it's just just a few people there and they can say well, you know what? It'll cost us the satisfaction from the eight coconuts and one sack of berries So with the six hours that we use to catch a rabbit we value the rabbit directly more than the eight coconuts and one sack of berries means so Mises didn't deny that you always needed calculation or didn't deny that that that sometimes you Could have a situation where calculation wasn't wasn't as important But he even said in that case he said Crusoe would not think and act like a man who could calculate Okay, he would even miss some opportunities because he couldn't calculate, but you could you could have a sort of a rational economy Okay, because you could direct these you could directly know your opportunity course but in a complicated economy with with Very very complicated technological processes and many many different kinds of capital goods that can be used in many many different ways There's literally an infinite way if you take the United States today, and you were put in charge Okay, as a central planner You would be very difficult for you to even absorb all of the different types of Goods that you had at your disposal to produce to serve people's wants you could know what you would like to have people Produce consume you could also know the lists of all the all the capital goods and factories and natural resources But you there's no way you could use prices You couldn't figure out your cost of production producing any one thing should I produce? Let's say a thousand more bicycles or one more car Or let's say ten more cars you could you wouldn't know There's no way to rationally make the decision Okay, how did they do in the former Soviet Union? There was the central planning agency called ghost plan they use a growth gross output planning I'll just give you some examples of how this went awry What goes plan did was to set? targets for each particular industry and then the Manager in charge of the whole industry the director of the industry himself would then allocate a Targets to each of the different firms or factories that Constituted that industry, okay, but it was very difficult if you give people a target you have to give it in terms of Homogeneous units so if you tell people to to produce tons of nails what happened in Soviet Union they produce these huge nails Okay, and and as a result many buildings that were done didn't have roofs because roof roofing nails Are very very small so it was easiest to fulfill the plan by and and of course you wanted to fulfill the plan because the incentives were there incentives didn't lack If you if you if you fill the fulfill the plan and went a little bit above it, which is what everybody tried to do You got a nice bonus if you fell short of the plan a few years in a row You got a nice trip to Siberia to the Gulag so they were incentives They set up the incentives and so but it was mutual lying, of course The the the manager would say the the director of the whole industry would say well, okay You have to do X tons of nails And he knew that they couldn't possibly produce that amount because he knew they were gonna lie back to him And they said no we can only do one fourth X amount of nails We can't produce that much we don't have that capacity and they would bargain like that They'd lie to one another and they come out with some figure Which the which the the manager of the factory hoped he could just succeed and get a nice bonus and not go to Siberia Okay. Well, I had problems with women's clothing were all oversized Okay, there was a huge market for American jeans blue jeans because They fit everybody Okay, they could you know fit any body shape to so many different sizes and the actual the Soviet government looked the other way Okay There were children's clothing was in short supply building nails in short supply Well one once Chris chev was giving a Public speech and suddenly to the Westerners who were listening to the speech. They were surprised He started bashing the chandelier industry turns out that chandeliers which were produced for the the Dashes the vacation homes of the comrades were so heavy because they were the plan was in terms of tons That they were falling killing the comrades that they were pulling the ceilings down Okay Here's a very Interesting joke That's the Soviet planner telling the Soviet manager telling the director. I fulfilled my My target for the year. Okay that huge nail because it was specified in terms of tons There was a joke that was often told about When Soviet economists met American economists at international conferences, they would say Well, just to go back for a moment when Chris chair at one point in the 1950s Chris chev the Soviet dictator at that point back took his shoe off in the in the UN meeting and banged it on the table and said We will bury you meaning economically we will bury you so the soul later on Soviet Economists would say the American economy. Yeah, we're gonna bury you but we're gonna leave Hong Kong so we can see some prices So so we have they so so so and we'll get to that in a moment. Okay Now People have criticized well before I get that people like criticized Mises for On the following basis. They said look Mises said socialism was impossible yet socialism lasted in the Soviet Union for 75 years Okay Well, Mises never denied that you could carry on production. It just wouldn't be rational production and eventually would break down So what means is and what he pointed out was and he said this in his first article Okay, he said the Soviet Union is not a truly socialist nation And the reason is it's like the post office in the middle of a regular Free market economy a post office is owned by the government is extremely inefficient Okay, and they used to be long lines and it was terrible to deal with Okay Now now it has some competition But it still could roughly calculate because it could use the prices of the things around it It knew basically what its costs were okay, and he said the Soviet Union is the same way It's a socialist island in the middle of a world of market prices So they so the Soviets did use prices They did they did use western prices for steel and and they traded their electricity To Eastern Europe and there were there were prices There was also bribery between the factories some factories had a surplus of certain things that they didn't need and on the other hand There were Factories that needed that had other things and and that was called blot and so those things were traded So so there were prices and and they sort of used them And that's what kept it going for a while But so One other quick thing let's tell you oh Yes, was there was it to socialism ever? Amidst said yeah, there was from about 1918 to 1921, which is the period of war communism when there was the white Russians fighting the the communists the supporters of the Tsar at that point they they tried to let and tried to abolish all prices Okay, get rid of any reference to it to a money price and they did that and what happened was that? shortage of shortages of everything just emerged and people at the end people were beginning to burn their household furniture just to stay warm and Then they're parts of their houses and then they just left and went to the countryside and just foraged for You know food and shelter and so on so socialism Yes, it can work among nomadic tribes among households as we pointed out. Okay, but that means a starvation of you know most of the population Okay, so Let me just talk a little bit Let me skip over this. Okay, what I just I just want to mention something there's something called the social appraisment process That's really the market operating to both Have Generate costs and prices so the entrepreneur and Peter Klein will talk about the entrepreneur I think maybe later today or tomorrow the entrepreneurs at the center of this whole process that generates prices and makes production rational So what the entrepreneur does is look to the future? Okay, he sees what consumers are buying now and he thinks to himself how this will change He makes a judgment about a year from now or two years from now will people like tablet computers for example, Steve Jobs iPhones and so on and so you make a judgment based on what consumers are buying say they might not the problem the The product might not be in existence today Okay, but yet you need the resources to begin building the the product today So based on what you believe the prices to be of consumer goods in the future The entrepreneurs then bid against one another Okay, because they're all looking to produce different things for the resources today And so that determines the structure of prices So if you want to produce anything many of you are would-be entrepreneurs You can always freely use the existing price system to know what it's going to cost you You can always know the cost of something you want to produce you may make a mistake because you misjudge the future prices But you can always know the the cost and that's extremely important. That's what is lacking under socialism So what means is talked about was the intellectual division of labor He said everyone is involved in generating the price structure Consumers capitalist entrepreneurs and laborers. Okay, they meet on markets and on markets they exchange and underlying those exchanges are everyone's valuations choices and which leads to those exchanges and those are what generate prices So prices are a social phenomenon Okay, or a social phenomenon. Okay One mind cannot generate prices. That's the failure of socialism Okay, everyone all of us contributes a little bit to the formation of the whole price structure But no one human will could ever come up with a price structure on his or you know, his or her own So it allows everyone to compute money course of any conceivable production process Okay, I want to just talk a little bit about the social response. You had these nitwits in the 1920s One guy a fanatical Marxist named Neurot said well, we can just calculate in kind We'll just add up the tons of steel and the gallons of paint and so on. Okay Mises Mises just smashed that argument right from the beginning. Okay, others said let's calculate with labor hours That is a homogeneous unit. Well as you saw with Roger garrison's Talk the other day. It's not a homogeneous unit. Okay is the labor hour of someone who does Heart surgery the same worth the same as a labor hour of someone that runs a backhoe and for a construction company I think not is Even in the same industry is a labor hour of LeBron James the same as the gawky guy 12th man sitting on the bench No, of course not. So they're not really homogeneous. Okay, just by saying the word it applies to a variety of different types of hours and different qualities and finally that leaves out Machines and natural resources So capital goods and natural resources are used the more they're used the more productive labor is Okay, so a guy digging a ditch with a Spade and and and a shovel is not the same as a guy Or your camp reduces much as a guy who's running a backhoe. All right labor hours very very different productivity also Assume a stationary economy. This is a favorite of these naive guys what they said was you know what on the last day of? Capitalism we'll just keep the managers and the foreman on and we'll just tell them on the next day the first day of social Just do the same thing come to work the same time and so on Well, of course if every if nothing ever changes if people's tastes never change of technology never improves if you never find more natural resources or if Natural resources aren't depleted you can do the same thing over and over again But that's not the real world the real world the real economic world is dynamic. It's continually changing Okay, and in order to know what to do in the real world you need to have profits and losses Okay, look before there was an iPhone. I mean You wouldn't have an iPhone here, right? You wouldn't have any new new technology coming in right in a socialist world And then there were sophisticated responses In the 1930s in the 1920s those naive responses that I was talking about to Mises they were mainly by German economists But then when Hayek went to Great Britain from Austria He he brought with him some of the ideas of the socialist calculation debate that Mises had had developed and he developed them on his own and published a book of writings on on socialism and by himself and Mises and and others and So the neoclassical economists In Great Britain became interested and in the US became interested in this question. So one of the things they said was Take the mathematical solution what we can do is we'll just collect all the information About resources all different types of resources the amounts and so on quantities and qualities and we'll collect the information about people's the amount of labors we have and labor potential labor hours that can be used and About the capital goods and then we'll put them in simultaneous supply and demand equations And then we'll solve those equations and we'll get the right quantities and the right prices for all these goods, okay? Okay There's a real problem with that which I'll get to I just want to talk about the market socialist before I get to the problem market socialist said that what we could do is tell the managers of the factories that they should minimize their costs, okay, and Set their prices at their average cost so they won't earn profits, but they'll be covering their cost and they'll be selling Producing goods just up to the point where the cost equals the price Now who's gonna set the price the prices were going to be set by the planners themselves through a trial-and-error method So they would set the price of steel at a certain level Let's say six hundred dollars a ton if there was a surplus of steel Well that meant steel was just too much too much That the price is too high they'll lower to 200 and then you might be assured and eventually through trial and error They'll find the right price. Okay. That's what they claim. All right. So what were the responses? Hayek and Robbins was a British economist. They said well, this is impractical Okay, by the time you collect all that knowledge that's necessary to solve all these equations and by the way in the 1930s There were no computers it would it would take months and months if not years to solve one set of equations By that time things would have changed already and that knowledge is absolute obsolete and those prices and quantities would be up obsolete Okay So there was a really it was impractical to change prices in a timely manner and also you wouldn't be able to get all of the information That people have their heads about how to produce different things. Okay, because it all had to be centralized and what Mises said is that first of all the socialist market Or market socialism is playing with numbers. Okay, it's just playing But he called the playing markets like children trading back and forth Okay, but because the things that the decisions the children make are really made by their parents Their parents have bought them certain things certain toys their parents have decided You know what they can play with and how much time they have to play with it So when they're trading that's just determined ultimately by the ultimate decision-maker So what Mises says is that look the market economy is not a managerial economy We can't just have managers making these these low-level decisions and say that's the market In fact, you want people who's going to make the decisions about liquidating certain firms Destroying them and creating new firms Who's going to do that Mises says in the market economy? That's done by entrepreneurs It's done on the stock market and bond market and commodity markets And there would be on the market socialism there would be no A stock market, okay, because the government would own everything so the prices would not be real prices They're not real market prices Just by setting up the firms as they do and hiring the managers that they do and telling them to produce certain amounts Or or setting the firms up at certain size They are determining the outcome and they're determining it without knowing any prices. Okay, so There really is no way around If you want a rational economy and rational allocation of resources, there's no way around Having a laissez-faire economy. I'll stop there. Thank you