Economic Calculation; B. Summers

the actions of individuals, then The only way to decide these ques one understands the actions of tions in the manner society con society, for society moves only as siders most efficient is to know its individual members move. the price society places on resource The movement of rational be-A, resource B, process X, process ings is purposeful. People choose Y, and the final manufactured those courses of action they think widget. will better their own situations How does society determine from their own points of view. Of prices? Most people seem to think course, people make mistakes. that free market prices are de Sometimes, due to a lack of under-termined by merchants. It is true standing, they choose the wrong that the merchant is the one who courses of action. The purpose of actually writes down a specific economics is to provide underprice. However, in a free market standing that reduces such wrong the merchant's hand is guided by choices by men seeking to maxi-society.

mize prosperity. That is, econom-The widget manufacturer is well ics helps men to be efficient. aware that he cannot arbitrarily set his price. He must constantly take into account the prices being charged by competing widget man602 1974 ECONOMIC CALCULATION 603 ufacturers,m8nuf:l(~turerg of sub stitute products, and all other merchants competing for the con sumer's dollar. As the manufac turer raises his price, customers take their business elsewhere. As he lowers his price, customers return. Free market prices of con sumers' goods are determined by the merchant's anticipation of the consumer's reaction to his price. Pricing the Factors of Production In a free market, consumers also indirectly determine prices of the factors of production: labor, na tural resources, and capital goods. Businessmen, anticipating future prices of consumers' goods, bid among themselves for factors of production. Thus businessmen, in the role of competing buyers, de termine the prices of the factors of production in the same way consumers set the prices of con sumers' goods. However, the busi nessman is merely acting as an agent for the consumer, for he is guided by his estimation of the future prices of consumers' goods.

Using free market prices, the businessman attempts to calculate the manufacturing procedure that will maximize the difference be tween his final selling price. and total production costs. That is, he uses society's prices to try to max imize his profits. Because his final selling price is set by competition, this means that the businessman tries to maximize profits by mini mizing costs of production. This, from the point of view of society, is what it means to be efficient. That is, in the free market the most efficient producer is the one earning the greatest profits. Of course, many businessmen do not earn profits. Those busi nessmen whose balance sheets show losses are soon driven from the market and forced, by eco nomic necessity, to try their hands at something else. This is how society, acting through the market, discourages the inefficient use of labor, natural resources, and cap ital goods.

Those businessmen who do earn profits are encouraged by their profits to continue in business and use their profits to expand their operations. This is how society encourages the efficient use of factors of production. Interfering with Trade The system of economic calcula tion just described presupposes that the market is free from gov ernmental interference. When the government does intervene in the economy, inefficiencies are the in evitable result. The government can only influence the prices of consumers' goods and of the fac tors of production by overriding the prices determined by society 604 THE FREEMAN October through the market. When the government does this, then the economy produces what the gov ernment wants in the-manner the government considers best, rather than what society wants in the manner society deems most ef ficient. In the United States today, the government influences prices in in numerable ways. Wage and price controls, minimum wage laws, laws discouraging the hiring of nonunion workers, rent controls, interest rate regulations, tariffs, and zoning laws are just a few of the ways the government contra venes free market pricing and thus distorts and disrupts economic cal culation. Such laws, from the point of view of society, can only result in misallocations of scarce re sources.

The farther an economy moves from free enterprise, the more wasteful it becomes. In a com pletely socialized economy, con sumers have no influence over "prices" of consumers' goods. The government widget manufacturer can arbitrarily set his "price" be cause the government is the only manufacturer of widgets. Custom ers have nowhere else to turn. In a completely socialized econ omy, consumers also have-no in fluence over the "prices" of labor, natural resources, and capital goods. These factors of production are controlled' by the government, and the government decides their "prices." How does a completely social ized government decide these "prices"? Well, it can guess. This is apparently a common procedure in communist countries. Another procedure communists often use is to charge whatever the going rate is in the relatively free markets of the West. Of course, free mar ket prices vary from place to place, so the communists are at best approximating the prices that would prevail in their countries were their markets free. Should we ever completely lose our West ern markets, no one anywhere in the world will know what to charge for anything.

Lacking a means of economic calculation, socialism is bound to fail. I IDEAS ON LIBERTY The Market Process THE EFFICIENCY of the price system ... depends on the degree of success with which market forces can be relied upon to generate spontaneous corre'ctions in the allocation patterns prevailing at times of disequilibrium. ISRAEL KIRZNER, Competition and Entrepreneurshil DAVE OSTERFELD KARL MARX and Frederick Engels defined socialism as that stage of economic development when pro duction according to a consciously "settled plan" replaces the produc tion of commodities. "Commod ity production" exists when pro ducts are produced for sale on the market, Le., when production is separa ted from use by an inter vening exchange. 1 Since a commo dity necessarily presupposes a market, the substitution of a plan ned economy for commodity pro duction therefore entails the de struction of the market. And this is precisely what is demanded.