 My topic this morning is calculation and socialism and I want to start by bringing to your attention a very important article probably the most important economics article written in the 20th century and That's the article by Ludwig von Mises which appeared in 1920 in German wasn't translated until 1934 into English and It's called economic calculation in the socialist commonwealth We have a copy of it as a pamphlet Okay, and I highly recommend the epilogue by a modern Austrian economist Sheds a lot of light on the on the article But this article is important for two reasons one it completely destroyed the intellectual foundations of the case for central planning Okay, nothing was left standing after this article in fact in this article Mises answered a lot of Criticisms that he got later on he answered them in advance But secondly it also Pointed out the nature and necessity of the price system. It finally gave an adequate explanation based on on Mengers original analysis of price of Why just why we need the price system and what and what the role of the price system actually is in a market economy Now mark now Mises developed that further in in later works But he really did set it out for the first time This whole idea that prices real prices are necessary for calculation for figuring out costs revenues prices of profits losses and so on So that that's extremely important So even if they're even if there really was no Socialism the article itself as a piece of economic theory is is very important and it's also very accessible it's written in a very easy style and It makes its points very directly means this is a very good writer. So let's start off with Socialism as it developed in the early 19th century. It was developed by most notably to French men, you know the French and Yeah, thank you, Louie and a guy from Wales Who who migrated to the United States? So we have Charles Fourier Henri Saint-Simon and Robert Owen and they wrote in the first half Or even first quarter of of the 19th century and Basically, they were all crazy. Okay now Carl Marx even realized that they were crazy as we'll see and and more the way that Marx Carried out his project of introducing socialism and promoting socialism was to basically ignore or push a or To declare unscientific the utopian socialist and Marx really had a point here Now that's quite a disturbing image. That's Charles Fourier the craziest of them and his idea of socialism was to organize everybody into fallen stares, which It's based on the an ancient Greek military formation. Okay, rectangular military formation and so he developed models of cities That was where more or less developed looked like grand hotels or they were organized like grand hotels and He had very specific ideas about how humanity was was going to interact in these various fallen stares Each resident will be able to purchase commodities according to his or her to taste and income So there was still to be money All residents would be a stockholder in the city. They'll be collective production people produce things together There wouldn't be competition All meals would be shared in a communal kitchen. Okay, you had very specific ideas about this and the dirty work would be shared So, you know, people would take turns taking out the garbage cleaning out the pig's thigh and the horse stables and whatever else he had in mind That's a drawing of it. Now these guys all They're all like symmetry. They thought symmetry should be everywhere, you know, right? So this thing is very very symmetrical the sketch. Here's a model of it Here's the grim reality. That's near my house. Actually. That's an abandoned fallen stair in a few were set up in the United States Okay, pretty scary so needless to say these all these plants failed and At the same time the classical economists Showed that there were real problems even though they hadn't developed me's critique of socialism at this point So here are some of the things that that Fourier Said that this is a quote from a book on this you've economic thought by Bob a bear and Robert Eklund and Just look at that. So he's telling us now. He has some secret source of knowledge So he says that 19th century France went through five stages a confusion savagery Patriarchism and Barbarity and now they were passing through the fifth stage where they were advancing Okay, but there'll be two more stages. Now. How do you know this? God told him. How did he know this? Okay, they all of these utopian socialists were Gnostics in some broad sense. Gnostic is someone who believes that he or she has a secret source of intuitive knowledge That no one else has that somehow they're connected to the cosmos or something So notice what he says here the final stage would be a stage of utter bliss and that would last for 8,000 years Not 7,000 not 9,000 8,000 years He knew that for certain and then history would reverse itself and you run back to all the stages and go back to savagery, okay Okay, so that's an idea of his thinking here's some other crazy things So the stage of bliss was he called the stage of harmony The six new moons would replace the one in existence Gets better. There'd be a halo which sort of Shower a dew down upon the earth and it would circle the North Pole The seas would turn to Kool-Aid or some kind of fruit juice. I Wouldn't drink it All violent this is interesting all violent repulsive beasts would be replayed placed by their opposites There'd be anti-liens anti-whales Anti-bugs and so on okay, and you could ride lions and roasted chickens roasted chickens would fly into you your mouth Well, you can find this and there are still people Who who even is I found the bookings of his writings that was that was published in the late 70s or 80s and was used in a classroom Okay, there was used a classroom reading Yeah, probably Okay, and of course The human light human light span would stretch to a hundred and forty four years and Five six at the time would be devoted to the unrestrained pursuit of sexual love now all of these guys are If you read them most of them talked about were infatuated with free love. Okay, and they were all males so the the opposite by the way of Unfortunately females get stuck with the term nymphomaniac or nymphomaniac. Well, there is a comparable male Condition known as satiriasis and satyrs they all seem to be me to be that a satyr, right? They're all talking about free love and how everything be great and you know Partners would be shared and so on. Okay So that was an example Fourier very embarrassing to to to marks The classical economists really responded and destroyed them by pointing out, you know Who's gonna take out the garbage under socialism? You need prices to give people an incentive prices and profits to do the dirty grubby jobs Who's going to take out the get up early in morning take out the garbage? Who's going to go deep into into coal mines where it's dangerous and do this unhealthy and difficult work? Okay, well under social under a capitalism there's what we call wage differentials people who do these things all other things equal get paid more than people who do a similar job that isn't dirty or Hazard to your health The socialist said no, no, no, there'll be a new socialist man And woman who will work not for a profit not for grubby money profit or for money income But for the welfare of the community Unasked and unargued in all this was that socialism could be as Productive as capitalism if you could solve this so-called incentive problem That is that collective production would only fail because people don't have the incentive To produce they don't have the incentive to do certain jobs. However They neither the neither the classical economists nor the utopian socialists brought up the Idea that how would you know exactly what to produce under socialism? Okay, they both More or less believe that well under socialism if you could solve the incentive problem That's where it really stood then you you would have socialism being as productive as capitalism And this is where Mises is Thesis about why socialism is impossible Comes in onto the scene. Okay, so really as JB say the the great French economist pointed out Well, I call the Frenchman great but as he pointed out in 1802 Human beings can't create anything because it used to be said that they create goods that people create goods and services to Satisfy their wants they can't create anything they can only transform elements of their environment natural resources and labor Into things or consumer goods that are more useful and satisfying human wants So Marx wanted to shut these people up. He didn't want anybody to read them So he used a brilliant polemical ploy and I transpose the words inadvertently there one of the one of the greatest Rhetorical ploys in history and basically what he said was that That there's There's something called Scientific socialism under scientific socialism. You don't talk about socialism. It's like the rule of fight club first rule of law First rule of socialism is you don't talk about socialism. You only criticize capitalism So you get rid of all this nonsense that the utopian socialists were spouting right? He said well look the reason why you don't talk about socialism is because the inexorable laws of history as he called them Just as as we have inexorable laws of Nature just as an apple falls from a tree toward the ground all of all other things equal the same thing will have happens in history just as Greek and and and Roman slave societies were replaced by feudalism which in turn were replaced by commercial capitalism of of the middle of the late Middle Ages Which was then replaced by industrial capitalism Well in the same way capitalism will give way to socialism So there's no reason to argue about it Okay, anyone who argues about it doesn't understand the laws of history is stupid and unscientific So you should just all shut up about it And that that worked the utopian socialists just sort of faded away So you don't you don't speculate about the future and in fact look at what marks marks his writings were all a critique of capitalism His great work was called dust copy tall Okay, capital Didn't he never talked about socialism Almost never he made vague allusions to a Law of history that would cause socialism to be put placed by communism and he talked about everyone being able to Do all different kinds of jobs and he did did say that that The average human intelligence would rise above that of an Aristotle Or a Da Vinci and so on he said things like that But there was sort of off-the-cuff remarks and if you know you'll note that sort of harking back to the the utopian socialists But he gave no systematic statement of what Socialism would be how it would operate. Okay, what sort of of economic system it would be Okay, so what is what means is his argument against this is when Mises Responded Mises said that the rational allocation of resources is impossible without economic calculation using market real market prices So This was called the called the impossibility thesis Mises was saying that a socialist economy strictly speaking was impossible We'll go come back to that and to the criticisms of him for making that strong statement And his argument was very simple. He said look socialism abolishes private property in the means of production You could you can own consumer goods a non-durable consumer goods to close on your back the food and so on But you can't even own homes and so on let alone factories and mines and farms and so on so the essence of socialism was the collective ownership of the means of production so we pointed out since these the Socialist state is the sole owner of all the means of production. Okay, the material factors of production there We're assuming that labor is not it's not slave labor though. It turns into that But Mises gave them the benefit of the doubt on that Since they own all these things They can't be exchanged if one group of people owns everything then there's there's no market Without exchange then there could be no market prices without market prices How can the state calculate the costs of production? How can it know in producing one thing whether it's using resources that are more valuable Used elsewhere. It can't know that okay, because it can't doesn't have any prices for the factors of production because they are Not exchanged because there's a sole owner of all of the factors of production So Mises concluded in the absence of economic calculation of Profit in law socialist planners cannot know the most valuable uses of scarce resources and therefore a socialist economy is strictly impossible Economy in a sense of mangers economizing using resources for their most highly valued ends That's not to say that central planners cannot set themselves up and produce something. Okay, but the production will be chaotic and Will not even serve the purposes of the planners That was Mises's argument so He focused not on on the fact that the planners might not have enough knowledge because they could always hire or impress Into service scientists engineers and various other technical people. Okay, what Mises won't want pointed out was that? So the problem socialism was the problem of one will Acting that is one person determining how resources were going to be allocated And if one person owned all those resources, there could not be prices So the essential mark of socialism is that one will alone acts. It's immaterial whose will it it is It could be somebody's very benevolent very smart. It doesn't matter The main thing is that the employment of all factors of production is directed by one agency only And he says you know one alone chooses directs and so on and that is the problem that There's no what he later called intellectual division of labor everyone in society participates in Creating and this is created the the price system okay ideas concepts certain social expressions of Interactions among people Can be created. There are new things under the sun The price system is something that does not exist before people interact and it cannot be Created by one person has it's a social creation I'll come back to that. So what are the preconditions of economic calculation? Well, first of all Mises says there has to be private property in all stages of production Including land mines factories and so on has to be they have to be privately also that they can be exchanged and they also have to be Permitted to be exchanged, okay So that's be private property. There has to be free exchange and there has to be sound money Money whose value doesn't fluctuate wildly as for example during a hyper inflation Basically money that whose value is not influenced or determined by the political authorities So those are the three preconditions and guess what socialism abolishes all of those conditions Okay, there is no private property in the means of production. There is no freedom to exchange and Finally money is not used there might workers are paid rubles but The rubles that they're paid are really vouchers to buy consumer goods. Okay, there are no commodities markets stock markets People trading businesses and so on money is not used for that purpose So it's not really money. It's just vouchers to go to the company store in this case a socialist company store and Buy the things that they may produce So so since socialism abolishes all of these three three preconditions it nullifies economic calculation and Therefore it destroys the social division of labor The interaction of people and specialization of people that brings up that that is directed by monetary calculation Okay, so let's show what the problem of socialism is and what it is not Let's say you have a problem of wanting to produce a car Okay Well, the socialist planner certainly will know the production function. That is the various resources that are Combined and transformed into the final good and in what proportions they should be combined You can easily get that from engineers and scientists and so on So if a car takes p tons of steel q hours of machine time or hours of unskilled labor Hours of engineering labor square feet of factory space kilowatts of energy gallons of paint and so on You cannot add those up under socialism to get a cost It's like adding apples and oranges. Okay, you use up certain different resources But there is no unitary cost. You cannot determine how much a cost to produce this Wonderful car Chevy SS don't very favorable to I own its forerunner, which is the old Pontiac g8 but let's say that's the car that the Socialist planner wants to produce should he produce that automobile or would those all those resources Be better used to produce 20 motorcycles, which he also knows how to produce. He doesn't know the answer to that He doesn't know which good is more valuable, which is a more valuable use of those resources So how can we calculate the cost of producing the car under socialism? In the market economy Everything that's needed to produce any good has a price at every moment So no matter what you want to produce You can look at the price structure The prices of goods that you're interested in okay And they're not they're not exactly present price They're the prices that have just been paid you can look at those prices and you can extrapolate what they would cost you to produce This particular good by combining those resources, so you'll always know your cost of production now We're not saying that entrepreneurs because they can calculate do not make mistakes. Okay, certainly mistakes can be made Okay, so a firm can forecast that the price of this automobile will be $44,000 once it's produced once it's and on the showroom floor At the deal or three years down the road So so the entrepreneurs always forward-looking the future is uncertain So he may very well be wrong It may turn out that that car was a waste of resources that he used resources that could have produced Things worth $40,000 because other on trip he has to pay $40,000 for the inputs into the car because other entrepreneurs are bidding for those resources also and wanting to use them For other goods and services building houses constructing factories, whatever it may be So he knows his costs, but that doesn't mean he cannot make Forecasting errors so entrepreneurs can make forecasting errors, but the point is they know that they've made a mistake Or that they've been very successful if the car turns out to be $38,000 Then they've made a mistake then they stop producing if they think conditions are not going to change and they shift resources to other products, okay? or the firm goes bankrupt and resources are Liquidated and used elsewhere But the problem with socialism is that socialism cannot figure out the cost of Any product that it produces because there are no prices So they never know whether they're producing things that have more value than other things that could have been produced or whether they're just wasting resources Another problem with socialism, which is you know related to all of this. What technology do you use? Remember cars up until 1914 or 15 cars used to be put together by hand So they were usually produced in small bicycle shops or places where you produced Buggies blacksmith shops where where blacksmiths put shoes on horses and produced buggies and so on They should be produced in those small shops by five or six technicians that together produced all the parts and then assemble the car So that was very labor-intensive a lot of labor was used very little machinery was used okay in today's world we have Plants automobile assembly plants that are completely you know robotized where there's a few guys you have to push buttons on the computer and The the robotic equipment assembles the automobiles Okay, so do we use? Should we use a lot of labor in a little of capital or should we use a lot of capital a little labor? That depends on prices that depends on prices showing what things are scarce and what things are not as scarce So in this example should we use a titanium bumper, which is absolutely Impervious to any sort of Denson and so on or should we use a steel bumper or a fiberglass bumper? Well, it depends on the cost of these things and the cost of repairs But the socialist planner can never know those costs. So that's the problem with socialism Now what Mises did not say Was that all economies need calculation? He didn't make that claim so he talked about a Crusoe economy to look if you don't have it in a highly complex industrial economy with a lot with many many complicated processes of production and heterogeneous Forms of capital goods if you simply have a simple economy where there's you know labor and some natural resources then you can Run the economy rationally. That is you can produce the things that have the highest value So take this example of Robinson Crusoe Okay, let's say he allocates his labor in three-hour lumps and so he works 12 hours a day Well, then he'll produce those things that are most value to him that will exhaust the 12 hours Because you have something that you can easily add up hours of labor. That's basically the only factor of production there Um, but what's the cost of producing a rabbit that requires six months hours to hunt and catch? Okay Can he allocate his labor rationally in that case? Can you figure out the opportunity cost? Yeah In this simple example, certainly you can you know that the least valuable use of your labor is to produce eight coconuts And one sack of berries that's the least valuable use of the six hours that cost you to get the rabbit So you would produce if the rabbit was valued higher than the eight coconuts and one sack of berries You would produce the rabbit. Okay, you would change your production plan But that in an economy like the United States Okay, it of present day. That's just not possible There are thousands or there are hundreds of thousands and possibly millions of different types of goods in the economy And you cannot figure out the values of these things without money prices So what capitalism does I'll show you in a moment? Go back here that pictures out of I want what I want to do is well, let me let me talk about socialism for a moment because like I did I did sort of get to the socialist The problem with socialism and then I'll come back and I'll talk about the market economy a little bit more but um, okay So let's look at Sort of the applied problem of socialism So social social central planning is called gross output planning or at least it was in the USSR and Eastern European economies And what gross output planning was was the assignment by the central Planning agency and in the Soviet Union. It was called ghost plan GOS PLAN And what ghost plan did was to assign to the various commas ours of the different industries Targets so let's say this was the nail industry. Well, we want you to produce X million tons of nails or if it was a clothing industry We want you to produce let's say a yards of a Let's say million yards of women's clothing and and be million yards of men's clothing and children's clothing So they would give a sort of an output target that that the Produces were supposed to meet so then the commas ours would would then go to the factory managers The factories that existed in that industry and would tell them what their targets were now Of course, this is a system of mutual lying right because what was the incentive to produce the incentive would to produce and Meet your target and exceed your target was that you got bonuses okay, you got more vacation time on a Dasha on the black sea, okay You got more vacation time or you might might get more ration tickets or rubles to buy food and so on But on the other hand if you didn't meet your target you got a ticket to Siberia, okay, so What was the optimal strategy the the manager would say well, you know, that's a very high We can't meet that target. That's too high because he wants to talk as low as possible so we can meet it And maybe exceeded a little bit of course then the commas are and and the central plans They know that everybody's gonna lie about this so they always make the target higher Then then the manager will tell them They can accommodate but of course the manager knows that they know that they're gonna be lying So they lie and make the target even lower. So it's so it's a sort of mutual lying Okay All right now it's very different you can tell you can give people a gross amount of the good to produce That's that's fairly simple fairly straightforward, right? But it's hard to tell them the exact variety specify the exact varieties and specify the exact kinds of things and Qualities of things that you want So there were numerous problems that continually cropped up in the Soviet Union just to give you some examples It was a shortage of Many many Soviet structures were built, but they were missing. They were missing roofs Okay, they didn't have a roof and The reason why they didn't have a roof even though everything else was complete was because there was a shortage of building nails in The Soviet Union roofing nails roofing nails are very small nails It takes more resources per Weight of a small nail to produce a small nail than it does to produce a big nail So the Soviet typical Soviet a nail plant would produce a lot of big nails and that's where I wanted to show you This is a Soviet cartoon, right? And so that's the plant manager telling telling the commas are well I met my my output target this year produce one giant nail But that's sure that's obviously a cartoon, but it makes the point that That they don't care about quality all they care about is meeting the quantitative target. That's given to them other examples with women what walked around in basically tents if you were petite woman in in In ussr. It was very difficult to get clothing that fit was very difficult to get children's clothing that fit Why because it was easy to make a few big clothes, you know fewer big size clothes Dresses and so on then some small size dresses And also, of course, there was no fashion and so on sub up for the same reason, okay? Why put why take more time and resources to make the clothing more fashionable? Which would risk missing your target Cruz Cruz chev the Soviet dictator Once made a cryptic remark At least to the Western observers when he in the middle of a speech he began berating the chandelier industry and The chandelier industry of course they were given gross output targets So they made their chandeliers very big and very heavy and they were pulling down the ceilings and crushing the the commas are the crushing the comrades The you know the rich Soviet Apparatrics that had them in their homes and in their vacation homes. Okay, so that was a problem just making chandeliers was a problem Okay, and of course you had the the Soviet famine in the mid-80s. You had a lot of tractors They were sitting in the fields. They were rusting. There was a lot of unharvested grain Okay, but you use too many resources to plant the grain to make the tractors. There was a shortage of gasoline There was a shortage of laborers To to drive the tractors because they were all in the factories making the steel and making the fact and making even more tractors So it was a crazy machine that just ran to no purpose. Of course our CIA Took these so they would add these all these things into their GDP even though they were useless rotting rusting They would add them into the GDP so the CIA and many American economists Back in the the 80s and 90s were saying that by 2012 the gap between The Soviet economy and the US economy will close and the Soviet economy would be bigger than the US economy after 2012 That was all shown to be complete nonsense because what was being produced Were were were mal investments were anti-products were products that had no use And there was a joke that used to go around among Soviet economists when they met their Western counterparts at meetings They would say they would use Khrushchev's old line We will bury you. Okay, so so Khrushchev once famously or infamously banged the shoe took a shoe off I don't want to be there for that and banged it on on the table at the UN and said we will bury you meeting We will bury you economically to the West So the Soviet economists would say oh, yes, we will bury you, but we'll leave Hong Kong so that we can see the prices So so we have an idea at least of of things to produce. Okay, so one of the objections to Mises's Impossibility thesis was well, what are you talking about the Soviet Union lasts for over 75 years? Okay, but Mises had already met this objection in his original article In which he pointed out that the Soviet Union today is not a true socialist economy And it's not a true socialist economy because it exists in a sea of capitalist prices Just like the US post office is not a is not a socialist entity because the US post office exists in a sea of prices as inefficient as the US post office Had been before FedEx and so on I mean still inefficient but but back before FedEx and UPS and so on It was extremely inefficient But it's still it's still operated. It's still more or less responded to consumer demand Okay, though very very inefficiently. So that was Mises's point that look the Soviet Union was really a monopoly It was a monopoly capitalist entity in some sense. It's sold coal. It's sold electricity You know there was foreign trade. It sold diamonds and and other things. It used capitalist prices Now those prices since they were were formed in a different location and with different people with different values those prices did not Truly reflect the scarcities of resources in the Soviet Union, which is the reason why the Soviet Union eventually did break down Okay, they were using Prices from capitalist economies and there was a story that during the 1950s and 60s that the Chinese of central planners Seers noticed that they were sending a lot of catalogs to China Okay, and and and one of the reasons for that was that the Chinese were using the prices from the seers catalog Get some idea of how to price things the only true period of socialism that Existed in the world was from 1970 for a semi-industrial country was from 1917 to 1921 it was a period of war communism when the whites were fighting the Reds in Soviet Russia and Was during that period that Lenin outlawed all prices told His planners not to use prices not to refer to the West's prices Just to to plan without prices. What happened? Well, what happened was that? Production became totally chaotic People began burning there wasn't even enough firewood or coal or anything to Fuel to keep people warm during the winters. They began burning your furniture Then they began burning part of their houses then there was food shortages And and they moved out to the countryside and you had just a nomadic Predatory groups of people trying to find food just that's what so now socialism can't support an economy like that An economy of small groups That have very few processes of production that aren't aren't very complicated or very short So socialism Results in the complete destruction of the social division of labor of people cooperating to produce goods and services Okay, so socialism destroys society as we know it if you if you Realize as Western economists do that society is based on the division of labor among human beings then in fact You'll you'll you'll understand why that that happened Okay, oh, let me mention another small anecdote just to show you a Show it show or illustrate the problem with calculation. I had I have I had a throw I have a friend but a number of years ago. She moved from New Jersey to Montana and married a real cowboy somebody actually lived on a ranch and actually had cattle and road horses and So a few years they lived in a big house But they had a growing family. So she called me up one day and said well, you know, we just got a we just moved We just got a big a new house. That's how she put we just got a new house And I said, oh really I said we did you moved off the rancher. Do you have another bill? She says well No, she says we we we ordered one and we just took our other one apart and replaced with a new one So what what happens out there where there's about, you know, 12 people in Montana? Labor is very scarce has very high price unlike the Northeast or the Southeast where we're people when they build the house come To the land where it's being built and actually construct the infrastructure and then the house itself Out in the Montana people order houses from factories the factories are in Nebraska There's factories in Nebraska. They put together the house in pieces So it's done with a lot more capital a lot less labor They put together the houses in modular pieces and then they ship the houses on on these trucks on these wide-load trucks and so now would a central planner ever figure out that it's more economical to build the house to or a thousand miles away Of course not But this was a cheaper way of building the house when when you when you know your cost of production you can come up with these innovative ways of Producing products Okay, okay, so now I want to just talk a little bit about the the sort of the essence of the market economy Which is a which means is called the intellectual division of labor not to be confused with what Hayek called on the division of knowledge The intellectual division of labor tells us that everyone everyone No matter what your status is what your job is What sort of a Income you have everyone participates in Creating the price system the price system which allows calculation Means is called as the social appraisement process. It's what allows Prices of resources to emerge Emerge from nowhere these things are created They're created out of the interaction of human beings. No one human being Can create a price system price system isn't the outcome of a single human will or a single human mind, okay? It transforms it transcends human beings so all of us contribute to it and Here it is you have the entrepreneur always at the center of the market economy the entrepreneur is seeking profit and In order to do so he has to have an idea of what consumers will pay for his product not today And in fact, it may be a completely new product by the way But what they will pay for the product a year from now six months from now maybe even five years down the road from planning stage to Dealer for a showroom It takes five years for a new model car to get get produced. So you're looking at supply and demand down the road So since we have prices and there are prices of automobiles today The entrepreneur uses that experience of present prices or if it's a new good like a tablet computer that hasn't been produced before the iPad You look at other goods that might might be Substitutable for it you get some idea of what people might be willing to pay for it. You could be wrong But now what do you do you and all the other entrepreneurs were producing a variety of products the multiplicity of products that make up the entire Economy they all are looking forward at their particular goods that they want to produce and then they all Yes, they all go to the resource markets and they bid for resources land labor capital goods and so on So what the social appraisal process does Is on an individual level the entrepreneurs appraise future prices? Okay, these prices emerge out of people's Quot out of qualitative knowledge of people's value scales The entrepreneurs have to know how they value these things they have to forecast them So this process transforms qualitative knowledge. It's in people's heads and that's expressed through behavior on the market into quantitative Ratios that is price ratios the prices necessary for resources Okay, so this is what permits The market economy to calculate it encompasses everyone. Okay, and it is a transcendent process It transcends any human being. It's a true social phenomenon Just as the the division of labor where people are specialized is a true social phenomenon the intellectual division of labor Actually is Superimposed them on that it actually directs and allows to exist the the division of labor and cooperation And I think I have a minute or two more Okay, this just summed up what I said, okay Basic lesson that you could always matter what you want to produce you can always figure out the cost of production And you can always forecast what you think the price will be so you can always Decide whether or not you'll be using reason you'll be wasting resources or using them in a way that benefits Consumers and benefits you in the form of profits So there was a number of responses to Mises's original article by some German economists Some naive responses one was by the fanatical socialist Marxist Marxist auto Neurot and he said what's the problem? We'll just add up Things in kind will add up kilowatts of energy will it will add up tons of coal gallons of paint And we can do accounting without money of course. That's crazy. Every schoolboy knows it. That's crazy and Neurot I actually was a student in Vienna with Mises in the great of Oigen von Bomberk's seminar who was the student of Menger, okay? He was an idiot. I mean I can't say what else can I say? Calculating with labor hours, okay? Well, everyone works and everyone has labor hours, so we can figure out What you know how many labor hours it takes to produce a good they got this from Ricardo the classical economists And we can then determine the cost that way well is the labor hour of the just retired Let's say Kobe Bryant equal in value to the labor hour of the 12th man who sits on the bench and in the NBA Of course even in the same profession the labor hours aren't of the same quality But when you start comparing labor hours of a brain surgeon to labor hours of a software engineer to labor hours of Someone on a construction crew you can see that they're heterogeneous. It's just like again adding apples and oranges Also that solution leaves out Capital goods and land labor is more the same labor will be more productive if instead of shovels and picks He's equipped with with a backhoe. That's that's digging the the foundation for a home. Let's say So Mises already addressed this before the criticisms came Assuming a stationary economy. This was a little bit more sophisticated, but not much Basically, they said well look here's what we're going to do We're going to tell on the last day of capitalism Or rather on the first day of socialism We're going to keep everybody in place tell the managers do exactly what you did yesterday And tell all the workers to do the same thing Okay, they just keep doing that But of course that would work in an economy of Dead people or people of robots that this is the same thing and had the same taste and so on okay? It does not Does not work in the real world. There's technological breakthroughs people's values are continually changing The whole purpose of an economy is to shift resources from lower to higher valued uses So a stationary economy assuming a stationary economy assumes the problem away doesn't solve the problem Okay, and I had it. I'll just show you a few others the more sophisticated ones market socialism mathematical solutions and so on Mises basically said that Market socialism where the government sets prices is playing market. Okay playing with prices. It's like children Playing with prices. He said you could get the right prices or the prices are the same as picking prices out of a hat Okay, and a mathematical solution mathematical solutions very sophisticated But it applies as Mises pointed out only to a stationary economy where there are no profits Okay, so it can tell you exactly what to produce if people's tastes if the technology and if the resources were frozen forever into the future There's more to be said about that but I'm out of time so I will stop here. Thank you