 So this morning, I'm going to address you on the topic of calculation and socialism, which is a follow-up on Dr. Klein's lecture on entrepreneurship. In fact, as we'll see, Mises first began to glimpse the importance of the entrepreneur and the price system for all problems in the market economy when he hit upon the insight of calculation under socialism and how it was impossible. So let me begin by drawing your attention to probably the most important article in 20th century economic thought. And that was Mises' economic calculation in a socialist commonwealth. We have it here as a small pamphlet, but it was initially an article in German, later translated in the 1930s into English, a very notable epilogue you might want to look at that sort of brings it up to date, of sets it in context of today's debates within the Austrian camp. But basically, what Mises' article did was destroy the intellectual foundations of socialism. In a short article of less than 20 pages, he completely destroyed the economic basis for believing that socialism could be more productive than capitalism, and not only more productive, that it even could produce in a rational fashion. But he did more than that. It really represents a revolutionary breakthrough in economic theory. It was at this point that Mises showed the importance of prices to the rational allocation of resources. So it was an advance in economic theory that was applied to a certain economic system. And finally, he took the final step or one of the final steps in completing the system of Carl Manger, where he brought in the very important notion of monetary calculation. Monetary calculation plays a central role in the discussion of economic calculation under socialism. In other words, it can only be money prices that can be used, real money prices that can be used in calculating what goods that should be produced, what goods should not be produced, what goods enhance social welfare and what goods represent a waste of scarce resources. So let me start very quickly with the utopian socialists, Charles Fourier, Henri, Saint-Simon, and Robert Owen. They were the first group of socialists in the early 19th century who were reacting to the Industrial Revolution, and they were reacting in a wrong-headed way. So to give you the background of the debate that Mises started, actually ended before it started, he actually responded to all of his critics in the original article, even though the responses to Mises went on into the 1930s. So let's look at the utopian socialists. Here's the most prominent, Charles Fourier. He is as crazy as he looks. So the utopian socialists all had plans about how future human society would look, okay? They all had these utopias in their head that they were going to sort of impose on humanity. So here's his, it was called the Fallen Stair, the Fallen Stair. They were garden cities, they were modeled after a grand hotel containing 15 to 1600 residents, okay? They often say consistency is the hobgoblin of small mines, but the symmetry is a hobgoblin of crazy mines, okay? Everything had to be symmetrical. This was based on a Roman phalanx of 144 soldiers. Everybody, now you would buy in, okay? And there would be sort of different levels of standards of living in this community. Everybody would be a stockholder, but there would be collective production, everything would be produced within the Fallen Stair, and everyone would share meals and the dirty work would be shared, okay? Where'd he get this from? Well, he just had his own brain, that he sketched it out, that's what the Fallen Stair was gonna look like, okay? Notice the symmetry there, right? Very symmetrical. Here's a model of it. Here is one that was actually built in New Jersey, about 20 miles from my house in Mamathoo, Jersey. It lasted for about 12 years. It was built by the newspaper man, Horace Greeley, and some architect, okay? And as I said, it lasted for about 12 years. And here are some of the things he said. He said that 19th century France was in the fifth stage of advancement, okay? And basically, there were a number of stages, it started with confusion and savagery and so on, but he goes on and says, after passing through two more stages, it would approach the upward slope of harmony. The final stage of utter bliss, which would last for 8,000 years, a nice round number, right? You know, how does he know 8,000 years? How does he know? But however, history would eventually reverse himself, he knew that too, and he would regress back to the beginning, okay? And here's some of the things that would happen during this period of harmony, okay? Six new moons replaced one in existence. I mean, this stuff is in his book, okay? I like the seas turning to Kool-Aid and I like the fact that there'll be anti-lions that you can ride, that would offer themselves to humans to be ridden, roasted chickens would fly into human mouths, roasted anti-chickens, okay? And then number five might appeal to some people, human lifespan would stretch to 144 years and five-sixths of this time, okay? Exactly five-sixths would be devoted to the unrequited pursuit of sexual love, okay? That's Fourier. Now, the classical economists, even though they didn't have a very well-developed theory of value, were able to smash this nonsense. Basically, they said, who will take out the garbage under socialism? Who's gonna do the dirty work? Who's gonna do the difficult jobs, the unhealthy jobs, go down deep in the mines and risk cave-ins and explosions and so on? Who's gonna get up early in the morning and do the smelly jobs of taking out the garbage? Well, the Fourier and Saint-Simon, they said, well, it'll be a new socialist man who will not work for money, but their incentive will be the approval of others. Now, what was implicit here was that if this incentive problem could be solved, socialism would be as productive as capitalism. Both sides more or less accepted that, all right? So now, so the classical economists sort of won on the common sense of the incentive problem, right? Who's gonna do all these dirty jobs and so on? Marx now came on the scene and he was totally embarrassed by Fourier and all the utopian socialists in their crazy schemes. So he wanted to shut them up. So what he said was, he devised this doctrine, which he called scientific socialism, and he said, first of all, the inexorable laws of history. Laws of history just like the law of gravity. Just like the law of gravity will hold inexorably for any body that drops from any height towards the earth or towards any other body. These laws dictated that socialism would replace capitalism just as capitalism had replaced feudalism, just as feudalism had replaced classical slavery and just as classical slavery had replaced some golden age that Marx called the gins where everybody lived together sort of like Fourier, but he didn't talk about that. And so therefore, okay, if this was gonna come about, it was unscientific to speculate about what the future of socialism would be, what it would look like, okay? Or, and it was also unscientific to try to hasten its arrival. It would arrive when the contradictions of capitalism had accumulated to the point where the capitalist system collapsed. And not one minute sooner nor one minute later and there was nothing anyone could do. Therefore, he was against the welfare state. He thought that sort of slowed down the movement in some sense towards socialism. He wanted unbridled capitalism. He didn't want minimum wages. He didn't want health insurance. There were against Bismarck, who introduced all of these sorts of programs in the 1870s into Prussia and Germany. So, notice Marx's own writings, okay? His main writing was a three-volume set of Das Kapital, only one of which he wrote, okay, because he was kind of lazy. Engels wrote the other two. But, Kapital, he wrote about the contradictions of capitalism. He didn't talk about socialism. There are very few passages in Marx where he discusses what socialism, and then some final stage that he alludes to communism would look like. It was brilliant. Everybody shut up. The argument then became whether socialism ethically was better than capitalism or not. So, it worked. I mean, it was a great ploy. And the utopian socialists disappeared pretty much, because nobody wanted to be called unscientific. And that was until Mises presented his argument on the rationality of production under socialism. So, what Mises said was that socialism abolishes private property, okay? In capital goods and natural resources. Even if the labor's left free to choose what job he or she would like to pursue, the state still owns all the factories, all the machinery, all the raw materials, and all the natural resources. So, the second step is if there's only one entity, in this case, the socialist state, owning all the material factors of production, they can't be exchanged, okay? You can't exchange with yourself. There aren't different wills, as we'll see. There's only one will acting under socialism. Whether it's a collection of, let's say, bureaucrats, or as it was in the Soviet Union when they were economically planning, or it's one dictator, it doesn't matter, it's one will, there is no exchange. And third, without exchange, of course there can be no market prices. And in the absence of market prices, no one can calculate costs of production. We don't know what the prices of steel or the prices of electricity is, or the price of electricity, and all the other goods that the state owns. Since there are no markets, there are no prices for these things. So even if there was a market for consumer goods, let's say consumers were paying some sort of quasi-money in the form of script, and certainly in the Soviet Union they were, so they're paying rubles. They can bid for consumer goods, but those prices aren't imputed, we talked about menger, imputed back, they can't be imputed back to the capital goods and the natural resources. So you might have prices, but you have no cost of production. So you don't ever know if something that you're producing is going to be a social loss or a social waste of the factors, scarce factors, or whether it's going to be beneficial. So finally, in the absence of economic calculation and profit and loss, socialist planners cannot know the most valuable uses of scarce resources, okay? And therefore a socialist economy, economizing resources, using them only for the most important ends is literally impossible. It's not impossible to produce stuff, to set up a Soviet economy that can produce stuff, but it's impossible to know whether you're producing according to, even the dictator's own ends, whether or not the dictator himself who's deciding on what to produce, whether he's doing it most efficiently, whether he's producing those goods, he doesn't know the opportunity course of his goods, okay? And I'll get into this in more detail. So this is Mises' statement here. The essential mark of socialism is that one will alone acts. I mean, it can't be exchange, it can't be different valuations that you need for exchange. It's immaterial whose will it is. The main thing is that the employment of all factors of production is directed by one agency only. One will alone chooses the size, directs, acts, gives orders. The distinctive mark of socialism is the oneness and indivisibility of the will directing all production activities within the whole social system, okay? So I think that's the key to Mises' argument. It's not about knowledge, it's not about how a dictator or a small group of bureaucrats can find out what people really want, because Mises even concedes that, let's assume they themselves think they know what people want and they're gonna produce what they want. Even they cannot produce in an efficient manner, because they can never know if they produce one more bicycle, whether those resources would have been better used according to their own values in producing, let's say, 10 skateboards. So here are the preconditions of economic calculation. There has to be private property in all stages of goods, not just consumer goods, but capital goods of every kind. There also has to be a freedom to exchange so that prices can emerge for these goods and there has to be a sound money. Socialism involves result three, all three preconditions of economic calculation. It therefore nullifies economic calculation and it renders rational allocation of resources impossible. That was the word Mises used, okay? Others sort of backed off a little bit, and said, well, it's highly impractical, very, very inefficient, but Mises said, no, no, it's impossible. You can produce stuff, but you don't know whether that stuff is the most valuable things that could be produced at any given moment in time, given your own values. Okay, let's see how this problem is solved under capitalism. Let's say you wanna produce a car on the capitalism. Well, both a capitalist producer and a socialist producer could hire engineers and so on, and they do, and they would know that it needs a certain amount of steel. You would know the technical requirements for producing your automobile. A certain number of hours of machine time, certain number of hours of unskilled labor, engineering labor, certain number of square feet of factory space, certain kilowatts of electricity, and so on. You put these things together, you combine them, and then you transform them into the finished automobile. Okay, it's my favorite car, Chevy SS, which just came on the market this year. I have one of the forerunners to that, is a Pontiac G8, very nice car, but in any case, they could produce, I mean, the Soviet economy or a totally socialist economy could produce a car like that because they know all of that stuff. What they don't know is whether or not that's a waste of resources, those resources are being wasted in producing that car, or whether that enhances social and economic welfare by producing that car. All right, under the market economy, right, we do know whether or not it is worthwhile, it is rational to produce the car because all resources, steel, engineering, service, electricity, and so on, they're exchanged and they have market prices. So firms can calculate the cost of any conceivable production process. They can know their costs, and they know their cost in the terms of cardinal numbers that is money prices, which can then be compared to the value of the output that is as given by prices that consumers are willing to pay. So for example, if the average cost of the car is $40,000, okay, the per unit cost, and let's say the entrepreneurs forecast that the price that consumers will pay for certain quantity of these cars is $44,000, then that is an efficient decision. Those resources could have been used in other production processes that consumers were willing to pay $40,000 for. They were valued at a cost or at some of money prices of $40,000, alternative uses of those resources. More bikes, more motorcycles, more ball bearings, more of other things. However, if the expected price is only $38,000, then the resources are being wasted. They're being used to produce something that has a lower value than the resources. That is they're being diverted to more valuable uses from the point of view of consumers to less valuable uses. Now entrepreneurs make mistakes. As I mentioned, I think in my first lecture, I went through the amount of the number of firms that lost over $2 billion in year 2011 yesterday. Firms lose money all the time, but that's not because they can't calculate. It's because the future's uncertain. The future's uncertain both for entrepreneurs and for socialist planners. That is not the point that issue. The point that issue is that the entrepreneurs can know what the costs of their actions are today. They can know the costs of producing. They know the opportunity costs of producing one thing rather than another thing. The better ones are able to forecast the future more accurately, the ones that aren't as good don't forecast the future as accurately. As Mises points out, there's a selective process which weeds out those entrepreneurs who continually and repeatedly misforecast the future. But there is no such mechanism under socialism because no one knows the value of what's being produced. And also, there's a question of technology. I mean, how, you know, what, the cars can be produced in many different ways. Is it better to produce a car as it was produced in the 1890s where all the parts are manually produced with a lot of labors and then the labors together put the car together, assemble the car? Or is it better to produce in the way that, GM and Ford and so on produce in the 70s and 80s with plants with assembly lines? So you had a lot of capital, but you also had a lot of labor. Or is it better to produce like the Kia plant that is just up the road on Route 85 here, which is highly capital intensive? There's a lot of robots putting together the automobile. And there's a lot of computers that control these robots. So there's a lot of capital and very little labor. Should you use a bumper that is fiberglass or should you use a stronger bumper that will be less expensive to repair, that's steel, okay? We see that automobiles are beginning to use and have been since the late 70s and 80s, fiberglass bumpers. Why? Because of the price cost comparisons. It might be counterintuitive, but in fact, it is more efficient to have fiberglass bumpers and have them repaired at a higher cost than to use steel and weigh the car down and reduce gas mileage and so on. A socialist planner could never figure this stuff out. Now let me give you a counterintuitive example. I have a friend who moved to Montana, married a cowboy, a real cowboy, and she lives on a ranch. Number of years, this was probably back in the 80s. And so sometime in the 1990s, she called me up and she told me that she says, we're getting a new house. I said, oh, you're moving off the ranch? She said, no, no, no, we're not moving. She said, we're having a house shipped in. So I said, oh, really? So she said, yeah. So in Montana it's about 12 people, okay? So it's hardly any labor. And the people that are there are, since there's a lot of land that's good for ranching and raising cattle and so on, they're ranchers. So houses aren't built on site. It's cheaper to get the house built in Indiana in a big factory where she did have the house built a five bedroom house and then have it shipped by truck in modular pieces to Montana and then assemble. So in other words, instead of building the house as it's done in the Northeast where I come from, on site with a lot of laborers and some capital, you have a highly intensive process where you have a factory that's automated that builds the modular pieces and then has it shipped via more capital goods, trucks and so on. And then use a little bit of labor just to assemble it because labor is so expensive where it scares in Montana. Now how did the entrepreneurs that built this plant in Indiana figure all that out? By knowing costs, by knowing prices of the factors of production, by knowing prices that consumers will pay for homes and so on. That would never occur in the Soviet Union. Now let me just mention one other thing here before I go on to the Soviet Union. Mises wasn't saying and I'm not saying that there can't be production without calculation in very simple economies without much capital with very short processes of production and with very few resources, maybe labor and just a little bit of land, you can have direct valuation. You don't need market prices. So we'll take Robinson Crusoe. So if he allocates his labor in three hour increments, these are the highest valued types of products that he would want to produce in a given day. So let's say he works 12 hours and then has leisure for 12 hours. Let's say he discovers that there are rabbits on the island and that he wants to hunt a rabbit but it requires six hours to hunt and catch. Well, he doesn't need prices. He can directly say, well look, I can spend six hours producing eight coconuts and one sack of berries and I know my own values. I know how I value that, the satisfaction that will bring me or I can spend six hours producing a rabbit. So he compares the rabbit to the satisfaction from the rabbit to the satisfaction he would get from the eight coconuts and one sack of berries. And he makes a direct comparison. If the rabbit has a higher value to him then he knows the opportunity cost. I have to give up eight coconuts and one sack of berries. That's what it costs me. Okay, now, so for very simple economy for economies, household economies, nomadic tribes and so on, you don't need money prices. But where there is a tremendous amount of capital in the economy, where there are many different types of resources and a tremendous amount of consumers, you absolutely do need money prices of all goods, including resources in order to rationally allocate resources. Okay, let me come back to that. Okay, so let me say a few things about the Soviet Union. Let's take examples of irrational production. Let's take the Soviet Union. So during the 1980s, as the Soviet economy was crumbling, while Paul Samuelson and other economists and also the data gatherers at the CIA were telling us that the Soviet economy was gonna catch the US economy by 2011 or 2012. It was gonna be as big as the US economy. It was crumbling around their ears. And what you saw was people starving. There was a famine. Yet there were fields full of grain. Fields of unharvested wheat. There were tractors that were rusting in the field. Why was that the case? Look, people were hungry. Why couldn't they get the wheat to the dinner table in the form of bread? Well, because they had allocated too much labor to producing steel, which was producing tractors, which were then being sent to farms, which then would rust in the fields because there wasn't enough labor to drive them and there wasn't enough gasoline to power them. So it was complete, as Mises called, it was planned chaos. They were trying to plan the economy and all they were doing was planning chaos. And their system was something called gross output planning, where they would give various industries a target. There would be a minister of an industry and they would give him a target of how many building nails you have to produce, how many chandeliers you have to produce, how many tractors you have to produce and so on. And this was a system of mutual lying, of course, because what they would do, see, they would know that the minister, if the minister exceeded his target, he would get some kind of bonus. If he fell short of his target, he'd get a quick trip to Siberia. So they knew that and he knew that. So what would he do? He would say, well, with our capacity and our labor and so on, we can only produce X amounts. So he'd lie much less than he could really produce. Which means that he knew they would give him a higher target, so if they gave him a higher target and he could still hit it, well, then he'd earn bonuses. But they knew he was lying, so they would say, no, no, no, you have to produce X plus Y amount. So there'd be a mutual bickering and so then you'd have the target finally set. The key was, though, it was very hard to specify quality and different levels of quality and so on. So Russian women for a long time had, the dress size were all big, they were all wearing tents. Women that were smaller in the Soviet Union wouldn't be able to find clothing to fit them because it was easier and you met the target easier when they said certain yards of clothing, certain yards of women's dresses, to make giant dresses. And that's what that picture tells us. There was a shortage of building nails in the Soviet Union. There were a lot of structures that had been built but there were no roofs on them. Or roofs, there were no roofs on them, I think that's. Because even though the materials for the roofs were there on site, there were no nails that could be used to put the roofs on. And that was because of gross output planning, my ghost plan. So this is a famous Soviet cartoon. The commissar of the industry is on the right and there's the manager of that particular factory who also got his own target. And he's pointing up and saying, I've met my target. Okay, so because they specified the target in terms of tons of nails. So you make a 50-ton nail or something like that. There's also a famous speech by Khrushchev where he was talked to the Politburo and he suddenly started bashing the chandelier industry. The reason was that during the 50s, a lot of the comrades were getting crushed by these heavy chandeliers that were pulling down the ceilings of their dashas or dakas or their vacation homes because they were so heavy because they were specified again in weight. So you have all these crazy things going on. And one famous joke that Western economists would hear when they went to the Soviet Union in the 70s and 80s was it was a take-off on a speech that Khrushchev had given in the 1950s where he said, we will bury you at the UN, meaning we'll bury the West. He meant economically. He didn't mean that we're gonna rain nuclear weapons on us. He meant economically, we will bury you. So the Soviet economists would laugh and say to the Western economists, we will bury you but we're gonna leave Hong Kong so that we can see the prices in Hong Kong because what they did, as we'll see, they copied the prices in Western countries. So they at least had a crude way of calculating. They weren't the correct prices because there were different scarcities, relative scarcities in the Soviet Union, okay? So the question then becomes, how did the Soviet Union last as long as it did? And that was a criticism of Mises. Why did it last from 1917 to 1991, I guess? How did it last that long? Well, Mises in his first article pointed out that a socialist economy is an economy in which there are no prices. Since there is no, to exchange, as I said, but like the post office, which really doesn't calculate, the post office, as Mises said, is owned by the government and it's set in a sea of capitalist enterprises so it can always look at the prices that the capitalist enterprises are charging or are paying for different things and it can crudely calculate what technology it should use and so on, even though it's grossly inefficient. The same thing was true of the Soviet Union. It was an island of chaos, but in a sea of prices. So they did use electricity prices from the West. They did use prices of steel and so on. They weren't the correct prices but they could crudely calculate. Socialism in its pure form did actually exist for about five years during war communism or maybe four years, from 1917 to 1921 during the war of the whites against the Reds in the Soviet Union. The Soviet economy abolished prices and so the commasars were all trying to plan without prices and the economy completely collapsed. People were moving out of the cities. Well, before they moved out of the cities they were literally destroying capital because it was worthwhile to burn your furniture and to begin to burn parts of your home to stay warm because production had just completely collapsed. So at the end people were going into the countryside and just foraging for food and so on. So that's what socialism can support. It can support small groups. Without calculation you can have small groups producing at a subsistence level just to stay alive. You have the example of Pol Pot who emptied the cities and people just died, millions of Cambodians died because of the Kamor Rouge. But he was following an insane communist program of abolishing prices. There was also stories of, well, I mean in the press they're not just anecdotes, they're actually reports of black markets in the Soviet Union where consumer goods were being sold and the Soviet Union, the Soviet authorities tolerated it because it generated some prices for them, Beatles albums, American jeans, US jeans and so on. Also among the Soviet enterprises themselves who were trying to meet their targets there was trade, they would trade different things. And at least there'd be prices of if you had too many nails and you didn't have enough wood if you had too many ball bearings. There were brokers, I think it was called blot. It was a mutual system of sort of bribing one another to get the things that you needed. Okay, so they were striving for prices. Anyway, war communism was so bad that Lenin then abolished it and established the New Economic Plan, the NEP which was the same plan that Nixon introduced when he imposed wage price controls. He called it the New Economic Plan or New Economic Program, I forget what the exact name was. That's interesting. Also, China, one last example was ordering, the CIA found that China was ordering hundreds and hundreds of Sears catalogs to figure out what everything cost in the 1950s and 60s. And of course the Soviet Union was really, what it was was state capitalism. They owned some natural resources that they traded. They owned oil, they owned diamonds, gas and electricity that they sold on world markets. So it was really just a state capitalist system. It wasn't true socialism. Let me just go a little deeper into the market economy. I want to talk about something called the appraisement process. Appraising means to determine the value of something but to determine the value of that thing in cardinal numbers, in this case in prices. So it's a process by which the market economy, which is driven by entrepreneurs, determines the money prices of all resources to be used in the economic calculation of cost of production. So right now, every single thing on the market, let's say in the US, has a price. Everything has a price. So no matter what kind of crazy scheme you have, you come up with to produce something, you can always at least find out the cost of production. You may be wrong about how much people are willing to pay for it when you finally completed it in the future, but that's an entrepreneurial error. That's not an error of an absence of calculation. And here's how appraisement works. I think this fits with Professor Klein's lecture. If you look at step one, what does the entrepreneur do? He looks forward to the future and he figures out based on what consumer prices are today. He knows consumer prices today, but they're not ultimately relevant. They're only indirectly relevant. So he looks at them and then he forecast changes in supply and demand. So when Steve Jobs looked forward, years before the iPad came out, that didn't really exist. There were goods like it that existed. He knew the prices of laptops and so on, but he had to have an image of the future and not just of the future, but of future prices of what people would be willing to pay for the iPad. And when it first came out, I think it was between $500 and $1,000. And then based on the prices that you're forecasting, that's the appraisement. You then impute those prices or you appraise the factors of production. I don't want to use the word impute because it means directly imputing values, but you appraise the prices of the factors of production. That is all the entrepreneurs who are looking forward to producing other things. There are many entrepreneurs in the economy who want to use the same resources for different things. They then all begin to bid for the resources. So what you get then is a whole structure of prices at every stage of production. So anyone who wants to produce anything can purchase resources. Now the key, however, is who are those people who do not get the resources or only get a certain amount of resources? The entrepreneurs who do not see them as being more highly valued by consumers. So the people who get all the steel at any given moment in time are those who believe that the steel has the highest value in the uses that they're prospectively going to use them in. So you have the appraisement of future prices and then those prices are, we can use the word imputed backward, but it's done in the common denominator so you can always compare prices and costs. So just basically summing things up here. So resources are rarely allocated to their most valued uses by that process. And the entrepreneur is right in the middle of that process and Mises saw that. So I think his theory of the entrepreneur, which he didn't develop really fully until 1949, the seeds of that theory are in this calculation argument. Okay, so that just sums up the result of social appraisement on Lennis. Okay, so what were the socialist responses to Mises? He first, in Germany, had some naive Marxist responses. So what the naive Marxist said was, well, Otto Neurath, who was a fanatical Marxist, said, what's the problem? Why do we need money prices? We can just have calculation in kind. We'll just add apples and oranges and men's suits and kilowatts of electricity and gallons of paint. Okay, he was an idiot. Okay, you can't add apples and oranges. They're heterogeneous. It's the first law of arithmetic. Okay, Marxists, who are a little bit more on the ball than he was, said, you know what, labor hours are homogeneous. We can add labor hours. How many hours it takes to produce something? We can calculate in terms of labor hours. And someone who works will get a script or quasi-money that says he's worked these many hours, and then he can trade it for goods that have cost these many hours, the same amount of hours to produce. So we can have some sort of an economy. Couple problems with that. Is LeBron James really, it's an hour of his labor, really equal in value to that of a cashier at McDonald's? Or is the, or even in the same profession, is LeBron James' hour of basketball really equal in value to that of the 12th man on the bench, the guy who never gets into the game? Of course not, even in the same profession, the quality of the hour's different. So they're not really homogeneous units. And then when you go into other professions, of course, you have this problem that they're totally, you know, a brain surgeon versus a cashier at McDonald's. You can't compare them, okay? The market can compare them, but no individual without market prices can compare their values or the usefulness. Also it leaves out of account capital. Obviously labor is more productive when there's more capital. So a labor will produce more when he's aided by let's say a robotical machine, then he can by hand. The farmer in today's world driving a tractor that is computer controlled or harvested or whatever is much more productive than the guy, the American farmer in 1900, with a team of horses and a plow, okay? Even though they physically may be just as skilled, okay? So Mises smashed that. He already crushed all this stuff in his original article. Let's assume it's stationary economy. This is a little bit more credible. So some of the German economists said, well, wait a minute, what we'll do is we'll simply, the last day of capitalism, when we take over the first day of socialism, we'll call all the managers together and we'll tell them, just do the same thing you were doing. We'll leave everybody in place. Do the same thing you were doing the day before. Of course, everybody will be paid equally, okay? Well, now that actually might work. Let's say they're a new socialist man and the incentive problem is solved and everybody says, yeah, we'll just do the same jobs. Okay, we wanna help society. However, that assumes that you're gonna live in a changeless world where there's never any new technology, where people's tastes don't change, where there's no fads, where there's no depletion of natural resources and you have to look for other resources. So as time goes on, it might be rational for the first few months and so on, but as change goes on and accumulates and time goes on, this becomes a totally irrational system, okay, to assume a stationary economy as we do it for certain purposes in economic theory. And then a few more minutes will go on to the more sophisticated neoclassical responses. So this debate moved to the English speaking world when Hayek moved to London School of Economics in 1931 and he collected the articles that were written during the earlier debates in the 1920s by Mises and George Holm and others and wrote some of his own articles. And so we had some sophisticated neoclassical responses. One was the trial and error method, look, entrepreneurs don't always get the prices right. They have to figure out the right price, they make mistakes, there's losses and so on. We'll just do the same thing, we'll just try to figure out prices as we go along. And Mises points out that the problem with that method is that trial and error is only applicable when you know that you're looking for something. So before I lost my iPhone just before I came in here so I ran out, I know what I was looking for, I know what my iPhone looks like, okay. The socialist managers don't know what the right price looks like. They have no way of knowing that. There is no calculation. They just can't come up with the price out of their heads. So when there's an identifying mark that says this is the right thing, yeah, yeah, trial and error works perfectly, okay. And you have that under capitalism. The entrepreneur knows if he suffers losses, then there's a mistake that was made. He's looking for those prices or those costs of production, that production process, let's say. He's looking for that process, trying to identify that process that brings profit. Whereas the planners don't know what they're looking for. Then there's market socialism under market socialism. These economists, Oscar Langa and Abba Lerner, they basically said, well look what we'll do is we will have the managers of the firms produce at the lowest possible cost. Now we ourselves as planners will set the prices. We will set consumer goods prices and we will set the price of the factors of production. If with these prices, let's say there's too much demand at a certain price for steel and people are lining up for it, we'll just raise the price. And if there are, let's say, women's dresses on the market that are in oversupply, then we'll lower the price of that and so we'll just experiment with that. A couple of things wrong with this. From Mises' perspective, this is just playing market because the managers are not entrepreneurs. The capitalist system is an entrepreneurial system. It is not a managerial system. I don't have much time to go into any of this. But basically, Mises called this playing market, like children playing market. He said it would be just as scientific to pick prices out of a hat because you've already set up the firms. But under capitalism, the whole point of the entrepreneur is to create new firms and destroy old firms. So there are no, without investment markets, without capital markets, without stock and bond markets and trading of these things, okay? You can never figure out what combinations of capital goods should exist. What firms should actually exist? They're assuming that the firms already exist and they can just tell them, okay? You know, we'll set this price and so on. But the point is under capitalism, it's a process of creative destruction. So when firms become losing propositions, they're just liquidated and their assets are split up, that would not happen under socialism. That could not happen under socialism. So I will stop here. There were different arguments by Hayek and Robbins. Hayek and Robbins stressed that all of this was impractical, okay? Whereas Mises basically said it was impossible, okay? Okay, thank you very much.