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Ludwig von Mises’ Century of Validation

by Pater Tenebrarum, Acting Man:

Seeing the Light

It has been said that “the definition of insanity is doing the same thing over and over again and expecting different results.” No one quite knows who first uttered this remark; it has been attributed to Albert Einstein, Mark Twain, Benjamin Franklin, and has even been said to be an Ancient Chinese Proverb. What is known is that this cliché has been repeated over and over again so often that its mere mention substantiates its own definition.

Several of the ladies and gentlemen above wanted to let us know that they’re merely eccentric, and if they want to do things all over again and again and again, we should let them…

Nonetheless, we repeat it again because it’s particularly fitting to today’s deliberations. Here we begin with a look back to the past in search of edification. For the miscalculations of the past continue to dictate the insanity of the present.

Many years ago, a bright minded and well intentioned Italian pursued a devious undertaking. His efforts aimed to conceive a pure theory of a socialist economy. His objective was to take the sordid teachings of Marx and pencil out the mechanics of how a centrally planned economy could bring a life of security and abundance for all. What follows is an approximation of how the dirty deed went down.

In 1908, Italian economist Enrico Barone suffered an abstraction. One late night he skipped a bite of his meatballs and marinara, and gazed into the outer frontiers of deep space. Looking around, he couldn’t believe his eyes. For in this far corner of absolute darkness, he saw something truly amazing. Out in the distant reaches of nothingness, peering into a black hole, he saw not the dark. Rather, he thought he saw the light.

Barone’s light was a socialist utopia achieved through “scientific management” of the economy, lorded over by the Ministry of Production. Through this endeavor, he imagined, an economy could attain something called “maximum collective welfare.”

Enrico Barone in the only photo of him we could find. Both Vilfredo Pareto (in 1897) and Barone (in 1908, in the monograph “The Ministry of Production” discussed above) used a system of simultaneous equations based on Walrasian general equilibrium theory in order to investigate whether there was some sort of theoretical/ mathematical solution available to central planners facing the problem of what to produce, how much of it to produce, how, when, and where to produce it, etc., what resources in what quantities to allocate to capital goods production, how much consumption to permit, etc., etc. – all the stuff socialist planners ultimately turned out to be really bad at. Anyway, we have to defend Barone and Pareto a bit, as neither of them seemed to really believe that the approach was actually viable in the real world. After presenting all his nifty equations, Barone pointed out that the planners would ultimately still need all the things they thought they could abolish (prices, rent, profits, interest, savings, etc., which he averred would “probably return under different names”). He also noted that because no a priori determination of the “economically most viable technical coefficients” for the production system was conceivable (always assuming the goal of the planners was to maximize welfare), they would have to “experiment on a grand scale” – which would be far more wasteful than the so-called “anarchy of production” they wanted to replace. In the final pages of his monograph Barone proceeded to lambast “collectivist writers…[who] simply show that they have no clear idea of what production really is”, and inter alia remarked that “to promise increased welfare and to propose to ” organize” production and to preach about free love in the new regime is simply ridiculous nonsense.” Pareto meanwhile noted along similar lines that it would simply be impossible to perform all the calculations needed for running a complex economy in time and recommended to “rather observe the practical solution given by the market”. The problem was that the Marxists were simply too dense to understand what they were trying to tell them – instead it ended up giving them ideas (further elaboration regarding the issue in the caption under the Mises picture). [PT]

Swiss Cheese

The proposal was simple enough. If a bounty of academics were put to the task of determining the best prices for all goods and services, supply and demand could be optimized to produce an economy without poverty, without unemployment… and without possibility.

Of course, with all these number crunchers hammering out technical memorandums and white papers, projecting data into the future with the intention of fixing the optimal price of toothpaste and pizza, how could they account for a change beyond their control or imagination? What if a springtime heat wave resulted in a meager wheat harvest?

How would this affect their pre-determined price for a 16 inch pizza? Would government mandated thin crust be the solution? More than likely, before the data fabricators could re-optimize the price to the change in conditions, the pizzerias would be out of pizza dough because the price wasn’t allowed to naturally adjust upward by free market interactions. Government-induced shortages and artificial scarcity would result.

With just a little common sense, Barone’s ideas are quickly exposed as absurd. From an academic standpoint, in his 1920 monograph, Economic Calculation in the Socialist Commonwealth, Austrian economist Ludwig von Mises, poked so many holes through the rationale it was transformed to Swiss cheese.

Read More @ Acting-Man.com

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