 OK, we're going to start the lecture. The lecture this morning is on calculation and socialism. And this is one of the most important topics in Austrian economics, calculation and socialism. Calm down. I mean, Shorin's wasn't that good. You're all excited. So as we'll see, calculation and socialism, the topic is really at the core of economic theory. That is at the core of Austrian economic theory. One of the greatest articles, or the greatest article written in the 20th century was written by Ludwig von Mises. And it was his article called Economic Calculation in the Socialist Commonwealth. It was written in 1920. I highly recommend you read it. It's in pamphlet form. The article completely destroyed the intellectual foundations of socialism, which is now a very hot topic and something you should be aware of, what socialism exactly is and what its problems are. But secondly, it also really was a revolutionary breakthrough which demonstrated the true nature and function of the price system. And the price system is at the core of the free market economy. I also note that there's a very important epilogue in this pamphlet by a modern Austrian economist that you might want to read. So it explains and updates Mises' article. So let me give you some background. Before Mises came onto the scene, there were two kinds of socialism. And the first kind was called Utopian socialism, so-named by Karl Marx. Utopian socialism was advocated by a number of people, but there were three very famous advocates, two French men and one Scott. So Charles Fourier, Henri Saint-Simon and Robert Owen. Now, they had some crazy schemes about how socialism would work. Each of them had their own view of what a social society would be. And it was very detailed. On the other hand, later on Karl Marx and his collaborator, Frederick Engels, came onto the scene and they criticized, as we'll see, the utopian socialist. Precisely for the fact that the utopian socialists were actually trying to elaborate and explain what socialism would look like. This is one of the greatest polemical ploys in intellectual history. As we'll see, Marx basically said, if you talk about what socialism is going to look like, you're unscientific. Because socialism is going to come whether we like it or not. And no matter what you do, you cannot speed it up or you cannot change what it will look like. Socialism will rise on the scene with the inexorable laws of history. Just as, for example, feudalism replaced the classical slave societies of Greece and Rome. Capitalism replaced feudalism. And socialism will inexorably replace capitalism. And then there was another stage of pure communism. But as we'll see, Marx didn't talk about any of this. But let's look at, well, now that face really betrays what this person is thinking, okay? That is, he's nuts, okay? So let me just focus on Fourier as a utopian socialist. So he had this idea that society would be organized according to Greek military formations under socialism. The Fallon Stair, which is a French word for the Greek Fallons. And he gave some specific information about this. He said, well, there'll be garden cities. They'd be modeled after a grand hotel. And each one would contain 1,600 residents, okay? Every resident would be able to purchase accommodations according to individual tastes and income. He wasn't an income redistributionist. All residents would be a stockholder in the city. There'd be collective production. Everybody would work together to produce for the city. All would share meals in the communal kitchen. And the dirty work would be shared. Now, he didn't say how this stuff would occur, but somehow this was the right way to do things. And so he was going to himself try to bring this about through his followers. Even he drew a sketch, okay? Now, all utopian socialists seem to have a mania for perfect symmetry. Notice how that's perfectly symmetrical, okay? That's one of the Fallon Stairs. And that is a model. He actually built a model of it, okay? An architect's model. But he was even crazier than that. Now, this is, by the way, near where I grew up in New Jersey. This is what some of his followers actually built a Fallon Stair. Now, that's, that compare the pretty picture that people paint of socialism or the model they build of socialism to what it actually turns out to look like, okay? A spookhouse, it's scary, okay? It's ugly, dilapidated. That's what socialism would do to the economy. Okay, so what are some of his ramblings? Okay, so he claimed that, as I told you, it's crazy, that France was in the fifth stage of advancement, okay? It passed through confusion, savagery, patriarchism, and barbarity. But after passing through two more stages, now he knew this all exactly, how did he know this stuff? Would he get all of them assume that they had some sort of an intuition, what's called a gnosis, a secret source of knowledge that no one else had or had access to. So after passing through two more stages, it would approach the upward slope of harmony. That would be the final stage, would be utter bliss, and it would last for 8,000 years, okay? Then history would reverse itself and run backwards to the first stage, okay? So people took him seriously. He also went on and pointed out that six new moons into this final stage would replace one in existence. There would be a halo, showering gentle dew around the North Pole. There would be seas would turn to Kool-Aid, okay? All violent or repulsive beasts would be replaced by their opposites. There would be anti-lions that would offer themselves to be ridden by human beings. There would be anti-chickens, roasted chickens that would fly into people's mouths and so on. So I mean, he was taken, now you see why Marx was embarrassed by all this. Okay, okay. And the human lifespan in the last harmonic stage would stretch to 144 years and five, six of the time would be devoted to unrestrained pursuit of sexual love. All of these guys were sex maniacs. They all believed in free love, okay? Okay, so before we get to Marx, the class of economists just destroyed these guys, destroyed their writings just with simple supply and demand. They said, look, there's an incentive problem. Who's gonna take out the garbage under socialism? Okay, how are you gonna get people to take out the garbage? We know how we get people to take out the garbage or do dirty, dangerous jobs like going down deep into coal mines and breathing potentially noxious fumes. We pay them, okay? We pay them a differential above other types of work that require the same skill. But that wouldn't exist under socialism, okay? Well, socialists had an answer. They said, well, a new economic man would appear on the scene who didn't work for money but worked for the approval of society and the improvement of society. But what both sides implicitly assumed, even the classical economists, they assumed that the incentive problem, if it were solved, and they didn't think it could be solved and they were right, it can't be solved, but they assumed that if it were solved, well, socialism could be just as productive, as capitalism, okay? So everyone assumed that. Now Marx, as I said, he had a brilliant polemical ploy. He wanted to bury the utopian socialists. He wanted to shut them up and never hear from them again. And in a way, he succeeded. He devised his own theory of scientific socialism, okay? And basically what it said was, look, there's these inexorable laws of history, just like we have inexorable laws of the physical world like gravity and so on. And they dictate that socialism will replace capitalism. That's coming, whether human beings want it or not. Therefore, given that, it was unscientific to speculate about what socialism would look like and it was unscientific to try to speed it up or to try to come up with a scheme which it would follow when it did come on the scene, okay? So no one wanted to be known as unscientific so these other socialists will shut up. They followed Marx. They said, you know what? We're not gonna talk about it, okay? In fact, Marx did not talk about it. What was his great work? He only published one volume in his lifetime with the other two published after he died. The three volume work was Das Kapital, capital. What did he talk about? He only talked about the contradictions of capitalism and how capitalism was going to collapse. He never said a word about socialism, okay? Because he was scientific, right? Really, because he knew if he said anything about it, he'd be laughed at, just like utopian socialists were laughed at and destroyed by the classical economists. And that's where Mises comes on the scene with his great impossibility thesis. Basically he said that, look, in a developed market economy with hundreds, thousands and thousands of different capital goods with a multitude of different kinds of labor and other resources with technology continually changing, okay? You could not engage in rational production without economic calculation, okay? That was his thesis. It would be impossible under socialism to rationally allocate resources. That is to allocate resources to the most important uses of consumers or even of the planners themselves because they would have no test of whether this allocation of resources, whether producing some things and not producing other things, whether producing with a certain technology and not another technology, whether or not that was the most valuable, value-productive way to go about producing goods. So here's what Mises' argument, step by step. It was very simple, it's simple and straightforward to follow and it's surprising that no one else had come up with it before, though there were economists before Mises, some economists that came up with pieces of the argument. So basically point that, look, what is socialism? Socialism is the collective ownership of the means of production. So that means that socialism abouses private property in the means of production, factories, mines, farms, not necessarily in consumer goods, okay? You own your own clothing, you own your own food and so on after you've purchased, worked and purchased it, but only the state and the Central Planning Bureau owns in the name of society, of course, all of the capital goods and all natural resources. However, if the state is the sole owner of all the natural resources and all the capital goods, then there can be no prices for these things, okay? Because they can't be exchanged, right? You can't exchange with yourself. There has to be different values. People have to have different value scales for different things for these things to be exchanged, but if there's only one mind, there can be no exchange, okay? With no exchange, there's no market prices. If you don't have any market prices, how do you know your costs of production? You can't calculate costs of production. So even if, under socialism, consumers were paid, okay, let's say in the Soviet Union, they were paid rubles, and they therefore were free to purchase whatever they wanted, or whatever the state produced. There may very well be prices, let's assume the state didn't set the prices and actually they did, but let's assume they allowed price of consumer goods to be determined by the supply of goods they produced and the demand that the workers had for those goods. Even that wouldn't be enough, those prices, right? Because what do you compare them to? What do you compare the output prices to? There are no prices of the resources that produce these things. And so therefore the state cannot calculate the cost of production. And the absence of calculation of profit and loss, socialist planners cannot know the most valuable uses of different resources. So you would have chaotic production under socialism. That was Mises' argument, okay? Once you abolish ownership of the factors of production, the non-material, rather the non-human material factors of production, okay? All the factories and machinery and mines and farms and so on, then there can be no market prices for these things. So what is the essential mark of socialism? It isn't force, it isn't the fact that you have a dictator, okay? The essential mark of socialism is that there's only one will acting in production. One will determining, even if it's a collective of people, okay, they all own these resources and they're trying to determine what to produce. So Mises says the essential mark of socialism is that one will alone acts. It is immaterial whose will it is. It could be very benevolent, angel-like dictator, or it could be an evil Stalin or Pol Pot type. It doesn't matter, okay? The main thing is that the employment of all factors of production is directed by one agency only. So it could be an agency of human beings, but they all come to a collective judgment about how to organize and produce. One will alone chooses, decides, 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. So Marty Rothbard, by the way, took this further and said that's why on a free market you could never even have one huge firm, one very successful entrepreneur, a group of entrepreneurs organizing all production in one firm because at that point they would abolish the markets for different capital goods and natural resources and there would be no prices and the whole thing would fall apart. So what are the preconditions of economic calculation? The preconditions, as Mises pointed out, was that there was private property in all the stages of goods including capital goods of every kind. So we have private property. The freedom to exchange, not only can you own things but you can exchange them, you can alienate them by exchanging them with someone else. You can give them up in exchange for other goods and services. For example, in medieval England you could not exchange family land even though you could own it. The land had to stay in the family. It couldn't be broken up and sold. And there had to be sound money, money which was not unduly influenced by political factors, money which retained its value so that entrepreneurs could use it to calculate costs and benefits. But socialism abolishes all of these preconditions and therefore socialism abolishes the market for factors of production and it abolishes the division of labor which we've talked about. And as a result of that, as we'll see, society cannot exist above a very primitive level under socialism. So let's talk a little bit more about this problem. A production function is really a recipe for how to produce a good, how to technically produce a good. So let's say a socialist planner wants to produce a car. He knows the amount of, there's p-tons of steel, there's a certain number of hours of machine time, certain number of hours of unskilled labor, there's engineering labor, there's certain square feet of factory space, kilowatt hours of electricity and gallons of paint and so on. And this is the car that you get which is a Chevy, Chevrolet produced a number of years ago, three or four years ago. So the problem wasn't knowing how to produce this car. In fact, the problem is that there's a lot of different ways of producing this car. And the socialist planner could not know the correct way to produce this car or even if he should produce, let's say 100,000 of these cars or maybe use the resources to produce a million bicycles or 50,000 apartment units, he wouldn't know which was the most profitable, which was the most valuable use of those resources. So how can we calculate the cost of producing this car and the socialism? So let's contrast that with capitalism. So under capitalism, how do we know whether we should produce this car or not? Well, there are always at every moment in time, prices of the factors of production, every ton of steel has a price, every gallon of paint has a price, every kilowatt of electricity has a price. So if you wanna produce something and you know the production function, well then you simply add up the prices of all the different factors of production and that becomes your cost of production. So let's say that GM in producing this car forecasts at the future price and remember car from the drawing board to the time it's produced, it takes in the US four or five years. So let's say they know exactly or they forecast the price at $55,000. Well then if the costs of production are calculated at 50,000, then they go ahead, they produce and if they're correct that they may be wrong about the future demand for this car, they earn a profit of $5,000, they earn a pure profit. So they go ahead and produce the car. On the other hand, if they determine that the future price is only $48,000 and yet it's $50,000 to the cost of production, then they don't go ahead and produce, because they'll lose money. Now, can they make mistakes? Sure they can. They can think that the price will be $55,000, five years hence. They're looking at a future market, but it could turn out to be $48,000 or $45,000. And they would then therefore make a mistake and lose money, and they would know that they made a mistake. They would know that it turns out that the resources they used had a more valuable use in producing other things than in producing that car. The socialist planner doesn't know any of that. So they keep on doing the same thing over and over again. There's no reason to change. There's no test of whether their production plan is correct or not. Also, how do we know how we should produce this car? Should we produce it with factories, traditionally, an assembly line and labor, or is it cheaper to produce by having robots produce it and having only a few guys in the plants to maintain the robots and to operate the computers that run the robots, okay? Which is the more efficient way of producing. We don't know. What kind of bumper should we put on the car? Should we put titanium bumper on the car? Okay, which is very strong. Or should we put a steel bumper like we use in the old days or should we use plastic like we do today? Well, I mean, an engineer might use titanium. But the problem with that is titanium has much more valuable uses, the scarce amount of titanium in society in aerospace equipment and airplanes and other things, okay? So you wouldn't put them. That's why we don't see them on automobiles. So they wouldn't know whether or not to produce the good, how to produce the good, what's the cheapest way of producing the good, what resources to use in producing the good because they can't calculate. Again, that's not to say that the market economy or the entrepreneurs are infallible, okay? They do make mistakes because the future's uncertain. But the future's just as uncertain for socialists, okay? For socialist planners. But yet, they have no way to determine after the fact whether or not they made a mistake or not. Okay, this is a home built in Montana. Now, I had a friend I grew up with who actually wound up marrying a real cowboy and living on a real ranch in Montana. And they actually had cattle drives and so on. So one day, she called me up and we were talking and she said, oh, we got a new house. I said, oh, you moved out from the ranch? She says, no, no, we just had the house brought in. I said, what are you talking about? She says, well, you know, the house was built. House was built in Omaha and it was shipped 687 miles to Biddle in pieces, you know, in large modular pieces. Now that's kind of strange, right? But that was the cheapest way of doing it because in the Northeast or here in the Southeast, there's a lot of labor. So you have labor come to the site. Labor is cheap, okay? Or cheaper than building a factory. However, Montana is like 12 people and they're all cowboys. So they don't have the comparative advantage in building homes. So what do you do? It's actually cheaper to have it built in a factory in a city where labor is less scarce and then shipped 687 miles to the site where it's then put together by the people that built it. Okay? Now, would a socialist planner be able to figure that out? An entrepreneur figured it out because they saw profits. They said, you know what? It's actually cheaper to do this, okay? Okay, so these are the types of problems that cannot be solved by socialism. That results in tremendous waste and inefficiency. Now, what was, a couple of things about what, criticisms that Mises faced here. One was that, well, you know, people don't have to calculate in their, in all their actions. Well, it's true. Mises only said, this applies to an industrial economy, okay? With a multitude of capital goods and other kinds of factors of production, okay? If there was a very simple Crusoe economy where there was only one or two scarce factors of production, like Crusoe's labor and maybe the land where there was near where you could fish and pick blueberries. So there was hardly, there was really not much, not many different kinds of factors of production. Well, then you could figure out your costs, okay? Without money, by directly valuing. Because that was one of the arguments. Why can't we directly value the goods that are being used to produce a social society? So take this example. Let's say this person works 12 hours a day and works in three hour increments, spends three hours fishing, three hours picking wild mushrooms. And that's his value scale. Or obviously Crusoe in this case then values all of these things more than whatever else he could use his labor time to produce. But now let's say he determines that he finds rabbits on the island and he wants to vary his diet so he wants to catch rabbits. What's the cost of catching the rabbit, okay? And let's say it takes six hours to catch a rabbit, okay? Well, he knows his costs directly. He knows that that's six hours. The opportunity cost of catching a rabbit would cause him to lose the lowest valued use of the six hours, which is eight coconuts and one sack of berries. So he simply says, do I like a rabbit better? Or do I like eight coconuts and one sack of berries? You can compare them directly. But once you have multiple stages of production, different orders of goods, and all these different capital goods, you can't do that anymore, okay? It's impossible to do that. Mises recognize that. Okay. The other point I want to make before I talk about the former Soviet Union is that, well, actually let me talk a little bit about this and then I'll make the point about the Soviet Union. So in the former Soviet Union, we had gross output planning under an agency, a central planning agency called Ghost Plan. And so what happened in this gross output planning scheme was that each ministry that oversaw an industry was given a certain target, certain amount of nails to produce, certain amount of chandeliers to produce, certain amount of tractors to produce, certain amount of gasoline. And then each industry head then went and allocated to all different factories, the factory managers, they were given targets, okay? So this is a system of mutual lying of course, right? Because the factory managers would always want to say that they couldn't produce as much as they really could. They would always, because they know on the other hand that the ministers would always try to get them to produce more than they could produce, okay? So what they wanted to do was to get the target as low as possible and then exceed the target and get a nice vacation on the Black Sea, okay? But if the target was too high, well then they wouldn't meet the target and they get a more rigorous vacation in Siberia, okay? So they would lie. So the incentive was to lie about on the one hand, the managers lie, but of course the ministers and ghost players knew the managers were lying so they would up the target so they would give very low targets and the others would give high targets and eventually they'd settle on some target, okay? But it was very difficult to specify, okay? Without prices, to specify not just what goods produce and how much, but what kinds of goods, what qualities of the goods to produce, okay? So let me just give you an idea of some of the problems that were faced with this way of planning. For example, there were a lot of structures in the Soviet Union, a lot of industrial buildings and homes that were completely finished and ready for people to move in, except they didn't have any roofs on them, okay? Why didn't they have any roofs? They didn't have any roofs on them because the nail industry only produced very big nails, very heavy big nails. They didn't produce the smaller roofing nails that you need in construction. Why did they do that? Because it was easier, because the target was given in terms of tons, so the bigger the nails you produced, okay? Producing bigger nails was easier to do to fulfill your target of certain tons of nails and here's a famous Soviet cartoon. There's the manager telling the minister of the industry, well, comrade, I filled my target, okay? With that huge nail, okay? What were some of the other problems? Women continuously complained that there was no clothing that fit them, petite women in the Soviet Union. The reason, because the apparel industry was, they were given a target in terms of yards of cloth, so everybody made huge dresses, okay? And it was very difficult to get children's clothing for that reason. Whereas in a capitalist economy, of course, you have prices, okay? If there's few children's clothing or not enough clothing for petite women, not enough dresses and so on, the price of those things shoot up, right? High profits will be made and resources are shifted, okay? So that was another thing. Then there was a very famous comment that was very cryptic at first, that Khrushchev, who was the Soviet premier in the 1960s, early 60s and the 50s, he was giving a talk about the state of the Soviet Union and its economy and he began berating the chandelier industry of all industries. Now, why would he do that? Well, it turns out that chandeliers, okay, when you produce them, your target was a certain number of tons of, hundreds of tons of chandeliers, so they made them very heavy. And who had chandeliers? Well, party members, the apparatchiks, and they had them in their vacation homes on the Black Sea and they were falling and killing people when they had dinner parties, okay? So they're pulling the feelings down, okay? They were so heavy. Then there was a famous joke in which, well, this part isn't a joke. When Khrushchev gave a talk at the United Nations, he banged his shoe, famously banged his shoe on the table and said, we will bury you, meaning our economy will outproduce your economy, we'll bury the capitalist economy. So Western economists that were there were talking to the Soviet economists and the Soviet economists said, yeah, we'll bury you, except for Hong Kong, because we'll leave Hong Kong as a capitalist nation so we can copy their prices. And that's exactly what the Soviet Union did. So when people say things like, well, Mises said that socialism was impossible, but the Soviet Union lasted for 75 years, so Mises was wrong, okay? But the point was that the Soviet Union wasn't a true socialist economy, okay? It copied prices from the West. There were stories of Maoist China sending away for catalogs from Sears, which was a mail order place, a mail order retailer in the United States. The Soviet Union lasted because it was like what Mises would say, an island in the middle of a sea of capitalist prices, okay? So it copied, it also traded electricity, traded gold and so on on the market, so it had prices for those things. And it also copied Western prices. Now, these prices were inaccurate when applied to the Soviet economy, okay? Because it didn't reflect the true scarcity there, and that's why it eventually broke down. But it wasn't a true socialist economy. It was like the post office, which was terribly inefficient, okay? And still is, but it was terribly inefficient before FedEx and UPS and so on. But they could still operate semi-efficiently. Why? Because they had the prices of all the goods that they needed, even though they weren't using calculation, okay? Even though they weren't aimed at profits, okay? That's very important. Okay, so let me just say a word about what's called the social appraisement process. So the lesson that we should learn from Mises is that costs of production cannot come out of one mind, okay? Cost of production involves everybody interacting in society. You and me and everyone else interacting as consumers, laborers, producers, landowners, and entrepreneurs. Okay, so everyone is involved in this, okay? So let me just give you a little schema. So how does this process work? Well, you have the entrepreneurs in purple in the middle there. They look at what they think future consumer prices are. Now, they know what consumer prices are today for these various items, and they have to forecast, they have to use their judgment of how people's values will change, of how technology will change, to focus on or to figure out, forecast and predict what prices will be in the future. Now, given that what they think prices will be in the future, they then go into the factors of production markets, the markets for labor, the markets for steel, and all the kinds of capital goods, markets for resources, and they bid according to what they think the value of the output of those resources will be. So at every moment in time, you have a structure of consumer prices, and you have a structure of factor of production prices or cost of production, okay? Everyone's involved in this, okay? Everybody's involved as consumers in the market for consumers goods. Their values are different, and they interact in markets, and prices arise at every moment, okay? There's never a moment when there aren't prices for scarce goods, and the same is true in the markets for resources, the factors of production, all right? So what Mises says is that, although all of us contribute to the price structure, the structure of prices, it transcends any one individual's contribution, which means that it is a truly social phenomenon. It is truly an outcome of society. One person could never replicate the price structure that is used to calculate costs, costs and prices and losses and profits, okay? So Mises called that the intellectual division of labor, and it's just repeating what I said. Everyone's involved in generating this price structure, okay, through their various roles in the market economy, okay? And the prices are a genuine social phenomenon for the reasons that I mentioned, okay? So getting back to the Soviet Union, there was a period when there was true socialism in the Soviet Union, and that was under the war communism from 1917 to about 1921, okay? And that was when there was a civil war between the white Russian forces that were in favor of restoring the Tsar and the Red Army, okay? And so the communists have always blamed that period, the poverty during that period on that war, but it wasn't really the war. What happened was that they decided they were not gonna look at any prices, they were gonna produce without looking at prices at all. And they tried to do that, and things did not work out. In fact, by the end of that period, people were taking their furniture, like family heirlooms and so on, and burning the furniture just to stay warm. And then they began to burn parts of their apartment buildings, and eventually the city's emptied out. There was no food being produced, and people would then scavenge the countryside for food, for shelter. And it was at that point that the new economic plan was introduced by Lenin in 1922, which was a five-year plan in which there was limited private property and gardens and so on so that people could grow food, and they were beginning to look at Western prices. So true socialism, when it was tried, what did it break down into? It broke down into bands of small groups roaming the countryside. So socialism can exist on that level, on that very primitive level. So what were some of the responses to Mises? People took this challenge very, very seriously. As I said, it was a straightforward and clear argument. So in the 1920s, there was a number of German Marxists that responded. This debate between the Socialists and Mises didn't really hit the English-speaking world until the 1930s. So the first was, well, you know what? We can have calculation in kind, okay? That is, we'll just add up gallons of paint, tons of steel, kilowatts of electricity. This was proposed by the fanatical Marxist, Otto Neurat, okay? And of course, it was just stupid. I mean, he didn't learn, you know, as we all learn in elementary school, that you can't add apples and oranges, Otto. So, you know, he didn't, so Mises had already dismissed that, had already refuted that fallacy in his original article. The second was, well, let's calculate with labor hours, right? Okay, because labor is what produces value, according to Marxists. And Marxist's work, by the way, picked up the value theory of the classical economists, okay? But now what's the problem with that, okay? Is labor really homogeneous? Is every hour of labor like every other hour of labor across all human beings in the labor force? Of course not, okay? You have McDonald's cashiers, you have the software engineers, brain surgeons. How do you figure out the difference in value between an hour of a brain surgeon's time and an hour of a cashier's time, okay? It's impossible, right? So the hours are, even though they are, you can say they're an hour of labor, they aren't identical, right? Also, even in the same industry, for example, a basketball team, you have LeBron James, and then you have the gawking 12th man sitting on the bench in a basketball on a basketball team. Okay, so that didn't fly. Also, it didn't account for the different capital goods. You can have two people, one working with a shovel, digging a ditch, another person working with a back home, okay? Who's gonna be more productive? An hour of the guy who's working with a back home. So you leave out of account the value of capital, the value of using capital. That's not counted, and so then production becomes chaotic. Or we can, the Marxist came up with another solution. They said, look, what we'll do is on the last, on the first day of socialism, we'll tell everybody to come to work and do the same jobs in the same way you did it the day before, the last day of capitalism, okay? So we'll tell the managers to manage it in exactly the same way, okay? So what are they saying here? Anyone can do that, but that ignores the fact that the whole point of having an economy is to be able to move resources to their most highly valued uses, which are continually changing, okay? People's values are changing, there's fads and so on. Technology is continually improving. This would only work if people were just robots who bought the same things every day and no one discovered any new process and we never had any more natural resources and the natural resources that we did have never ran out. Everything would have to be exactly the same for every day in the future for this to work, okay? So of course it was just nonsense. And again, Mises refuted this in that first article. Now there was a little bit more of a sophisticated response from neoclassically trained economists. Economists were not Marxists, but who had a leaning towards socialism and these tended to be in Great Britain and in the United States, okay? So they were well trained in neoclassical economics which was becoming in the 1930s, starting to become mathematical, okay? So there was the trial and error method in which the socialists said, well, you know, capitalism isn't perfect. The prices are often wrong on their capitalist. They have to be changed. People make mistakes by looking at these prices and so on and so forth. That's all true, but we know that entrepreneurs can figure out that they're making mistakes. Under socialism, how would they find the right prices? There's no way to find it. Mises said, look, with trial and error, if a man loses his wallet, okay, he knows exactly what he's looking for. He knows in advance what the wallet looks like. So when he comes upon it, okay, he'll try different areas where he, let's say he'll backtrack and find out where he went. Remember where he went and go to those places. And when he comes to it, he'll know that he's found it and that's the correct solution, all right? But under socialism, they don't know what they're looking for. There are no prices, okay? So you have trial and error, okay? And you keep making mistakes. But how do you ever know when you're right? Okay, you don't. Then there was more market socialism, which was put forth by a Polish economist, Oskar Lange, and by a British socialist, Abel Lerner. Oskar Lange was the one that said that Mises' argument was correct and that a statue should be placed in his honor in the hall of socialism or in the hall of the Central Planning Committee in Poland, okay? Of course, the sarcastic remark. But basically what they said was that, look, we'll have the Central Planning Board will set prices both in consumer goods and capital goods, okay? And if there's shortages, then we'll raise the price. If there's surpluses, then we'll have the planners lower the price. And then we'll tell the managers to look at these prices, whether they think they're right or wrong, look at these prices and calculate how much to produce, okay, and calculate how to produce at the lowest cost using these fake, phony prices, okay? But the whole problem with that solution is that's what Mises' call playing market. They're kids playing market. Who owns all those resources? People that own all those resources are the planning board, okay? They're the ones that set up those prices. Now, and it goes deeper than that, Mises pointed out that to have prices, you already have to have goods and factories and so on. But how do we know that these factories are the right factories? How do we know that what they're equipped with is the correct equipment? The most productive use of resources. So Mises pointed out that capitalism isn't a managerial system where you set up fake prices and you have the managers calculated according to those prices. It's a system of destruction. That is you destroy firms that are inefficient and you move capital into firms where there's greater efficiency, okay? So it's an entrepreneurial system. Some people, different people have to own the different resources and actually what Mises said exposed their destiny to their decisions, all right? They can't just play at market. And last is a mathematical solution. I'll just mention it very briefly because we're almost out of time. There there would be a system of equations set up of a general equilibrium economy in which there were supplies and demands and the simultaneous system of equations would then have emerged from it, a system of shadow prices, okay? So what Mises pointed out there and I'll stop here is that in fact, the goods that they were talking about, the supplies of goods that were existing, okay? And the demands for those goods aren't the goods that are relevant to production because those are the goods that will come into existence and that have to come into existence as you move towards what the consumers want because there are always mistakes. So you cannot stop today and take all the things that exist today and then set up your supply and demand equations because what exists today, many of those things were produced in error. Too much of, too many railroads were produced in the past. Not enough highways, okay? Too many trains, not enough airplanes and so on. So you don't want to use those supplies in your simultaneous, your system of simultaneous equations, okay? So I'll stop it here. Thank you.