 So in the last part I talked about very basic price theory, that being how prices are formed through a good supplier's ability to satisfy the most demand and the equilibrium price. And this leads us nicely onto price mechanisms, namely how prices are signals sent out from the market to indicate supply and demand levels between buyers and sellers, and this is what's known as economic calculation. It's incredibly important to us because Ludwig von Mises really put the Austrian School on the map when he devised this process in his 1920 essay, Economic Calculation in the Socialist Commonwealth, which was absolutely the nail in the coffin for socialist economics. Precisely because without the property required to have a free market and free formation of prices, like you have in socialism, organising an economy requires a central planner to extract all of the consumer demand and then put the pieces in place to satisfy those demands. Simply put, that is impossible. The ECP as it's known is the fundamental reason why you shouldn't say socialism has failed every time it was tried. You should in fact say socialism will fail every time it's tried. But we're going to get back to the economic calculation problem after we explore economic calculation in a capitalist system, which in fact is not a problem at all, it's the shining grace of it. As we established previously prices always tend towards the market equilibrium as that is the point where the most producers and the most consumers of a good are satisfied. This is an act of immense cooperation between these two categories that sum up the entirety of economic action and it's important that you try to reconcile how massive that implication is. When you pick up a birthday card in a store and pay £3 for it, within that £3 is the price of cutting down a tree, transporting the tree, refining it into paper, transporting the paper, printing ink onto it, having it folded and packaged, transported to the warehouse, transported to the store, put on a shelf and then finding its way into your hands. In each stage of that process workers had to be paid, ties and oil had to be produced in this whole process themselves to then be changed on the trucks which also needed to be fuelled, ink has been produced and transported to the right place, chainsaws have to be made and maintained, and all of these processes have their own prices tending towards equilibrium through mutually beneficial agreements between buyers and sellers. The sign of any good economist is someone who can observe how many millions of microscopic inputs go into making a birthday card of all things, that each one of those inputs has an input process going into itself, thousands of people are involved, yet you just pick up the card and pay for it. Then you send it in the mail and this whole process starts again. Then when the recipient throws it in the bin and it has to be transported, processed, recycled, made back into paper and begin its new life in this ginormous merry-go-round once again. To sum all of that up, the economy is such a complicated machine that requires the brain powers of millions of people acting in tandem to fulfil their desires. Now imagine handing that massive thing over to the government that can't even keep track of its own nuclear missiles and expecting it to go well. Only organic and spontaneous action can facilitate this process and the actors need to have some skin in the game, namely their property. These processes all have the element of risk and reward in them as well, and if things go well, everyone is rewarded, even if one person makes a bad decision and makes a loss, everyone else has still gained by going to a competitor as clearly they had a more preferable choice. The role of the entrepreneur in this is to assess consumer demand and find areas to satisfy it greater than others. If people are paying a higher price than they'd consider reasonable for battery packs, someone could start making them in their shed and selling them on eBay at a price that undercuts larger manufacturers. If the quality is good, they could soon afford to invest in capital goods to speed up the process, increasing their revenue, expanding into a warehouse, employing workers and so on, until now they are an established firm too, constantly innovating in order to keep their prices low so that their market share isn't taken by some young upstart like they were not too long ago. The way to make money is to make people happy. If you want to be a millionaire, help a million people. In all facets of these processes, all the participating parties are benefiting as workers and entrepreneurs alike are fulfilling their desire to have an income and consumers are fulfilling their desires for goods at the best possible price. The best possible price can only be known when all of these factors are taken into account in forming prices organically by allowing all of these people the ability to choose their most preferred outcome that's possible for them. If a worker feels underpaid, they can look elsewhere and if a competing firm agrees with them, they will take them on for a higher wage as this firm will benefit from having higher skilled labor by providing higher quality goods and being able to make more revenue from that. If consumers feel cheated, they can put their money where their mouth is and go to someone else, now being better off than they were before. You should see from this explanation that with the labor theory of value already being disproven, any Marxist claim of capitalist exploitation of workers is just laughable. Capitalism only exists by making as many people as possible as well off as possible. It's very easy to point the finger and say, this person isn't earning enough money. When their wage is incorporated into the giant structure of trade that I outlined before, no single person can ever decide what price is the best, let alone what price is evil or not. The very nature of an economy is the thing that dooms the economic planner. The process of production and consumption must inherently be decentralized and unpetrified to allow competition to work and grant innovation, making all market participants better off each year. This is what gave us the hockey stick growth of wealth after the industrial revolution and is the only thing that can allow it to continue. And in the 20th century, we saw the rejection of this process most notably of course in Russia and then China, as socialism gripped about half of the world. That would have been a frightening prospect unless you listened to Mises. Then you wouldn't have been surprised one bit when the Soviet Union collapsed and China took on just enough capitalism to not collapse and at the very last minute. The new trend for the reinvigorated socialists of our time who give out the meme real socialism has never been tried is to lord so-called market socialism, trying to take some of these aspects and apply it to their system. Except that was tried in Yugoslavia for a while until Tito realized not even that was working and put a stop to it. Then we had IRL Fortnite, fantastic track record for the market socialists. Because when all actors are not able to make organic choices on how things must cost, including the price of labor, you don't have a market at all, you're just lapping as one. If prices cannot be freely formed, then the market is obviously not free. And if the market is not free, then it is planned. And no single body of humans can plan the most intricate network humanity will ever see because it is the network of humanity, of infinite individual actors acting in accordance with each other. It should be blatantly obvious how trying to centralize all of this into one office with one head who talks to the supreme leader is only going to end in catastrophe. To perfectly illustrate this, let me give you some examples. A Soviet nail factory was given a quota to produce a given amount of nails. So they produced thousands and thousands of tiny nails so that they technically beat their quota but the nails were useless. Then the government changed the quota to be based on weight output. The factory started producing massive and unwieldy nails. When told to make male shoes, shoe factories would make ridiculous amounts of boys' shoes because you use less material than men's shoes so you can meet quotas much quicker. However, the most relevant example for us lies with a factory in Tambov that made capital goods for producing tires. The machines they were producing were outdated but they were adequate for the job. The government proposed that they switch to producing a new kind of technology and gave them a fixed sales plan, saying how many they should produce and how much they'll make for the year of 1968. However, when the factory took into account the government's prices for the following year in 1969, they found that they would make half of the revenue than if they just stuck to the old machines. With naturally formed prices, it's a sure bet that switching over to machines that are quicker for you to make and more efficient for the end users would be a very profitable move to make and through the mechanism of finding prices through satisfying wants, you and everyone else would be better off than doing it. But when the prices for the whole economy are arbitrarily chosen by a committee who holds no risk nor gives input into the market, of course the results are going to make as little sense as anything else the government does. This ridiculous top-down, centralized and thoroughly artificial system is literally the exact opposite of what an economy is supposed to be and it leaves little to the imagination for why socialist countries became destitute had to invade their neighbors to acquire wealth because they couldn't make it themselves and ultimately fail. Yaron Brooke has an example I love when explaining to young adults the necessity of a free market. He holds up his smartphone and asks the room if they all have one to which they say yes. He admires the beauty of it, its color, the design, shape, the computing power it has, the clarity of the screen, the many cameras and so on. Then he asks you to imagine what a smartphone would look like if the government made it and the room shudders. You know you can't count on the government to do anything half as well as an entrepreneur who has both something to gain and lose in the pursuit of satisfying your wants. A government has no risk or reward, you must take what you're given or else they'll put you in prison. Doesn't sound like a great deal. The fictional economic committee in charge of designing phones gets a marginal bonus for doing well and next to no punishment for doing badly. Leaders will be appointed purely depending on their political power and not their ability. None of them have to put their own money on the line as an investment and when the government starts making something they ban any competition and make themselves the monopoly. So yeah, if Apple was nationalized and monopolized you can so easily picture the iPhone 13 being a vomit inducing beige, being the size of a brick, having one camera, barely ever any signal and of course being bugged by the NSA to track every single thing you do. Now imagine the entire economy becoming nationalized like that, it's the stuff of nightmares. So to summarize economic calculation, you need the economy to be decentralized in order for actors to determine where resources are best allocated and this is done according to consumer demand. Prices are the signals for resource allocations, when demand increases for a good the price will rise, indicating increased resources are necessary, the profit motive will bring more resources in through entrepreneurs and then return the price to equilibrium. A central economy probably could have made an iPad in the 1950s if it brought every single one of the resources at its disposal together. Great, now you have an iPad but it costs the entire GDP of your country and now nobody has any water. Good job allocating those resources, probably should have left it to the market. A centralized body cannot have the economic rationale required to calculate prices and allocate resources to their most effective point. And market socialists aren't free market at all because they don't want a market for labor and especially credit, due to their magic sky fairy determining that an abstract labor theory of value meaning that none of the prices down the line from labor are organic so no prices are. It's just dressing up a planned economy as a market try to make yourself look better but you're not. If you're an anarchist market socialist you're even worse because you expected this abstract value to be held up without a government. Yeah, good luck with that. Anyway people, thank you for watching this installment of Austrian economics basics. Next time around we're going to have the Austrian business cycle theory which takes some lessons learned here about economic calculation and applies them to money itself. Take it easy.