I haven’t read the wiki article on economic calculation before. But this subject is one on which I have spent ten years of work, and Caplan’s quote in the wiki as it’s written bothers me because it’s too easy to misinterpret.
1) Caplan’s argument is reducible to this statement: “between price signals for planning and incentives for coordination, the greater problem is the one of incentives.” The problem of incentives without prices manifests itself in a multitude of behaviors. That multitude of manifested behaviors renders a planned economy impossible. He has stated repeatedly that his criticism is one of subtle priority between incentives and prices.
2) The dispute between the priority of prices and incentives is an artificial distinction. Just as one cannot have a principle of voluntary transfer without the institution of property, one cannot have the institution of prices without human incentives. And prices have no meaning without incentives.
The two concepts are inseparable. Incentives require choice, and prices are required to choose between multiple alternatives. Just as voluntary transfer has no meaning without property. While incentives can exist without prices — fear, want, belonging, security, barter and the like — they are limited to simple goods that we can use or consume ourselves. In and industrial economy those goods are abstractions that we cannot grasp the use of with our senses (specialty metals, chemicals, tools). They require special knowledge that one must have an incentive to acquire.
So without prices, planning in an industrial economy consisting of factors of production that can be put to multiple purposes in real time, cannot be organized into any rational plan by the multitude of people required to produce any single good. (See I Pencil/I Hamburger). ergo: while the human mind can conceive of an artificially constant organization of individuals, resources and means of production once it is already known, and once individuals possess the appropriate knowledge — an industrial economy is impossible to FIGURE OUT and it is impossible to SUSTAIN without prices and the impact of those prices on incentives. Companies organize to create production all the time. They then have to reorganize in order to suit changes in the market that are signalled by prices of the factors of production AND their outputs. This last bit is important, because producers find a market price for their goods and services then alter their production processes (their cost structure) to satisfy market prices.
Humans lack the information to make decisions, but decision making is only important given that they need to have incentives in order to perform the work. Mises doesn’t so much overstate his case, as he is simply more concerned about the problem of money and calculation given the events of his time.
3) The problem for any economy functioning in an equilibrium (competing with other economies) is that competition forces constant recalculation of the use of factors of production, and the organizations that such factors of production are used by. The problem for any economy dependent upon natural resources (food) as a means of production (feeding people), and where production requires time (seasons), is that nature does not adhere to plans and is subject to black swan effects (natural disasters). And it may be impossible to ‘re-plan’ in real time without irreparable effects (starvation) because of the lack of prices and incentives.
4) We might also put Caplan’s statement in context: GMU’s Austrian Economists are in an identity clash with the Rothbardians from the Mises institute. The rothbardians have appropriated the terms ‘libertarian’ and ‘austrian economics’ by adopting Alinsky’s marxist model of propagandizing. Because the Rothbardians have been so successful in doing so, this has caused the only university department in the USA that actively promotes Austrian theory, to defend its theory from ideological if not intellectual abuse, for market reasons. (I am not criticizing the rothbardians, just pointing out the motivations involved. All publicity is good publicity.) In effect Caplan is not commenting about Mises and his economics, he’s commenting about the Rothbardians and their political movement.
5) A paper by Boettke supposedly refutes Caplan. Accusing Caplan of not understanding the arguments Mises was making about Socialism. This is somewhat of a comedy of errors, because in his attempted refutation, Boettke makes that mistake, and Caplan does not. Caplan is not arguing against Misesian era socialism, and the stipulation by socialists that the problem of scarcity would be solved by state ownership of property.
But he’s from a younger generation. He is arguing against his generation’s problems of social democracy (private ownership of property, public ownership of profits, which we call redistributive or progressive social democracy.) In this new context he’s saying that incentives matter more than prices, and that there is too much being made of the price issue, rather than the behavioral issue. He’s addressing current issues. In particular the Rothbardian over-emphasis on prices in relation to current socialistic arguments over maximum taxation, and the impact that such taxation would have on the economy. So Caplan’s critique stands to date. And if we were to ask Block, Herbner and Solerno, who wrote most of the papers on the subject, and all of which I have read repeatedly, they would say that the debate has closed. (I know. They’ve told me in person.)
There is no meaningful difference between the price and incentive arguments. The importance of each has more to do with the emphasis needed to address each generation’s attempts to protect private property, because the two instantiations of socialistic behavior (socialism and democratic socialism) attempt to appropriate different aspects of property: the means of production by socialists, and the results of production by democratic socialists. Socialism failed because of the inability to both plan and provide incentives.
Democratic socialism to some degree continues to survive because it allows (rental?) ownership of property which allows economic calculation and does not appropriate so much of the proceeds that we fail to have the incentive to work. (in most cases.) In fact, in the literature to date (and there is a great deal of it) economists on the left attempt to figure out how much more can be taxed without negative aggregate effects on the economy. They estimate it is much higher.
6) In Why I Am Not An Austrian Economist, Caplan makes the following material errors: a) That probability and uncertainty are the same thing. This is the [glossary:ludic fallacy]. (wiki Ludic Fallacy) And b) that we can predict highly disequlibrating events (black swans.) Or that models can accomodate for black swan effects.
7) Caplan is fundamentally wrong in his understanding of Mises, Rothbard and Hoppe, and Section 2, which attempts to articulate why the neoclassical economists are correct and why models are viable, is a confused set of prevarications I am surprised that has not been better refuted. I do not propose to do full justice here. But while I agreed with Caplan years ago, I have come to understand that he’s simply making excuses for using mathematical models where Mises, Rothbard and Hoppe were trying to discover human nature, so that a better system of government, if any, could be resolved.
I don’t think Caplan’s critique is valuable any longer. I think the world has moved on. But at this point in my life I’m pretty sure I can dismantle his arguments as presented in WIANAAE, by demonstrating that Boettke’s argument that Caplan does not understand is actually true. 🙂 And I think Caplan’s later waffling only prove it. But I’m in the middle of a dozen other ideas that are more valuable. Hopefully it’ll be a nice bit of work for some grad student someday.
So I’ll stick with my assertion that his arguments have political not material motives. That his single observation about the relationship between incentives and prices is true. That Boettke’s criticism is wrong. And that Caplan’s broader understanding of mises, rothbard, and hoppe are wrong.
Everyone is conducting a research program. We’re just scratching the surface.
