Monday, July 4, 2016

Robert Murphy on Economic Calculation

From EconLog.
"In Mises' view (later elaborated by his follower Friedrich Hayek), a modern economy is far too complex to be centrally planned. Even putting aside concerns about dictatorship and shirking, a socialist system cannot implement an efficient use of society's scarce resources because the planners would have no way of evaluating their blueprint--even after the fact--from the standpoint of citizen preferences. To be sure, engineers and chemists could accurately report how much steel, glass, rubber, and labor hours of various qualities went into (say) a particular automobile factory and how many cars came out at the other end. But without a way to translate these disparate quantities of heterogeneous items into a common unit, there would be no way of telling whether the factory's operations had been efficient during the period in question.

These two paragraphs are from the Econlib Feature Article for July. The article, by Robert P. Murphy, is titled "Monetary Calculation as a Scorecard." Bob applies it also to a major lesson he learned in Haiti when he volunteered there after the horrendous earthquake:

We were all very motivated "to help," but beyond that, we didn't have much to guide us. At the end of each day, we could say with confidence that we had made the Haitians better off than if we had done nothing, but it wasn't at all obvious that we were helping them as much as we could have with the resources at our disposal. For example, we all had to choose which team we would join during a given block of time, but there were rules so that nobody hogged the "cushy" jobs (like staying inside and assembling poles that would be used to prop up tents). Indeed, everybody had to sign up at least once for the disgusting job of cleaning the bathroom at our camp. Even though these rules made sense from the perspective of "fairness" and maintaining team morale, they probably stifled our overall "output." I noticed that I was very adept at assembling the poles for the tents, whereas I was unprepared for the heat of Haiti in April and therefore not particularly adept at breaking apart concrete blocks with a sledgehammer in the hot sun. (The earthquake had reduced many people's properties to a pile of rubble.) To be a "tough guy," I volunteered for "rubble crew" more than necessary, but I probably would have contributed more had I focused on pole assembly. Yet nobody but me (the professional economist in the group) was thinking like this. None of the team leaders had to provide an account of the resources (including the labor of the volunteers) used during a particular day and compare that to the amount of "help" (however quantified) their team had provided to the Haitians. In other words, there was no way for the team leaders to apply a cost/benefit test to their respective operations."

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