Economic Calculation Problems - Essay Example

Economic Calculation Problems Name Institution Course Date Economic Calculation Problems Introduction The socialist economic calculation talks about how a socialist economy can potentially perform economic calculation owing to the lack of the law of value and financial prices given to capital goods as well as private possession of the modes of production (Levy and Sandra, 2008). Socialist economic calculation debate in the 1920s was founded upon the implementation of economic planning in the provision of the methods of products as an alternative for capital market. The debate most importantly was focused on the role of the law of value within a socialist economy. The early debate on economy calculation was viewed as an argument between supporters of capitalisms and other supporters of socialism (Levy and Sandra, 2008). However, in reality, arguments on economy calculation were between socialists with different views when it came to utilization of money with a socialist system and the extent to which the law of value strive to operate in the socialist economy (Levy and Sandra, 2008). The recent contribution to the arguments on economy contribution is based on the use of information systems and technology as a source of decentralized economic planning (Levy and Sandra, 2008). One socialist who took part in the economic calculation debate was Oskar Lange who argued that economic calculation was not enough to solve business problems since it was like throwing calculating power at a challenge. This paper will discuss an abstract from an economic calculation debate: “Lange believed economic calculation was just a matter of throwing enough computing power at the problem. Today's regulators believe the same thing – extensive risk models purport to give regulators enough information to manage the private sector. The global financial crisis demonstrated that those models are elaborate fictions. Yet the response from regulators has been to double down and insist on greater powers and more complex models. The calculation problem is endemic in highly regulated sectors like health, where it is not the price system that coordinates resources, but bureaucrats and politicians. Every government proposes to reform health but the sector will remain unreformable until this basic problem is recognised. In the meantime health will continue to be dominated by rent-seekers and rife with inefficiency.” Concept of Economic Calculation According to Levy and Sandra (2008), in such economic calculations, there are a number of inevitable mistakes which arise partially as a result of the difficulties subsequent upon an allocation of general expenses. In addition, other mistakes come from the need for calculating which doesn’t originate from various perspectives of ascertainable data (Hahnel, 2007). Therefore, such mistakes could be restricted to narrow limits in order for them to not disturb the net results of the calculations. For every calculation of a specific branch relies wholly on the fact that it is accurate in terms of market dealings. In the absence of a free market, a pricing mechanism wouldn’t exist. And also in the absence of a pricing mechanism, there is no economic calculation (Levy and Sandra, 2008). In a situation where specific exchange between business branches is allowed, the mechanism of exchange prices are obtained and hence develop a base for economic calculation (Caplan, 2004). Among the framework of an undeviating economy prior to the private ownership knowledge of the methods of production, single labour group are rendered independent. On a first impression calculation with regard to labour considers the non-human condition of production. Therefore, the law of diminishing returns is permitted for in the aspect of socially essential labour time to the degree that its processes are as a result of various natural conditions of production (Boettke and Leeson, 2004). When the demand of a product goes up and worse natural assets must be misused, then the socially essential labour time needed for the manufacture of a single unit rises too. Lange Model From the abstract, Lange argues against economic calculation saying that it is like throwing computing power to a challenge. In response to Mises’ contention, Lange argued that socialism as well as social possession of the method of production meant that economic calculation was difficult and almost impossible by establishing a model of socialism founded upon neoclassical economics (Boettke and Leeson, 2004). According to Lange, a calculation was needed to be carried out in value terms and not utilizing purely natural measures. Lange argued that these values could potentially be achieved in absence of capital markets as well as the private proprietorship of the modes of production. Lange stated that such view proved to be socialist since the means of production might be publicly owned with revenues to the public corporations accumulating in a social divided (Boettke and Leeson, 2004). According to Lange model, the Central Planning Board would take the role of setting prices by means of trial-and –error method in order to determine equilibrium prices (Boettke and Leeson, 2004). Managers in the public-sector corporations would be required to establish prices to equal marginal costs in order for economic equilibrium to be achieved. Nevertheless, critics of the model argue that it degrades the meaning of socialism to meaning “capitalism without capital markets”. Critics establish that when the role of the capital market has been undermined, the integrity of the capitalist system is threatened (Boettke and Leeson, 2004). The problem with Economic Calculations Lange mentioned that in order for the health sector to be successfully transformed, the problem with economic calculation should be identified (Bockman, 2011). Regulators have focussed their attention to the actions to be carried out in the immediate future and have lost track of the larger problem of economic calculation affecting business organisations especially the private sector. One of the major issues affecting any economy was and still is the provision of capital goods whose role was to manufacture other commodities for final consumption (Bockman, 2011). This influences the decision on what to produce. Socialism by combining the possession of capital goods can destroy the market where these products are traded. This tends to make the economic calculation impossible. This means that lack of market for the factors of production can mean that there would be no prices attached to the factors of production (Salter, 2012). And with no prices attached these factors, it would be very difficult to determine which lines of products are profitable. In addition, with the absent of information concerning profitability, it would be impossible to decide what products to manufacture. Owing to these difficulties, it would be unmanageable for socialism to develop material wealth in the identical extent as the free-exchange system. Application of Economic Calculation to Private Sector Socialist governments controlling the economies could relate to the economic rationality by designing their internal prices yields using foreign prices of nations with strong markets as a reference (Salter, 2012). Doing this could enable them operate despite the lack of market prices for line products since they were not secluded socialist systems. They could opt for economic calculation when the prices are established abroad. Lack of such assistance would have made their actions aimless (Salter, 2012). Economic calculation argument can be applied to the private sector raising the question, “what is the role of the economic calculation and implicit earnings in a highly regulated sector?” An organisation can accurately approximate the amount of revenues it generates in its operations by establishing the implicit price of their lines of products (Salter, 2012). This can be done only if the external market price of the lines of products is established elsewhere. In the presence of external market, it would be very difficult to know which stage of production was profitable. This would make it hard to allocate factors to different stages. Therefore, it would be hard to estimate any implicit price for the capital good (Cottrell, Paul and Michaelson, 2009). Estimations made would not have a meaningful relation with the economic conditions. In other words, if there lacks a market for any line of products and their exchanges are considered internal, therefore, no company can be able to determine a price for these products. This means that a firm can only determine an implicit price in an event where there is an external market (Cottrell, Paul and Mishaelson, 2009). The inability to calculate a price makes it impossible to allocate factors of production and resources. From the abstract, Lange argues that regulators expect the extensive risk models to offer them enough information that can be used in managing the private sector (Cottrell, Paul and Michaelson, 2009). Nevertheless, the occurrence of the financial crisis has shown that such models are obsolete. Some regulators argue that the traditional economic calculation challenges can be solved by making use of the power of computing as well as modern data collection. Even though central planners are faced with challenges of gathering information about issues concerning production plans, preferences and modern technology, the challenges can easily be resolved by use of computers that have the ability to collect and transmit information (Salter, 2012). As a result, important knowledge can then be available to planners in figuring out what people want and use the scarce resources in producing them. Nevertheless, despite its optimistic look, such a suggestion is termed by Lange as impossible. Lange mentioned in the abstract that the fundamental problem facing regulators in managing private sector is the challenges of economic calculation. Under socialism, business people do not possess the factors of production which makes it impossible for them to exchange them (Cottrell, Paul and Michaelson, 2009). As a result, they cannot appraise the value of these factors of productions in monetary terms and thus create a system of market prices. It is argued that without a price system, allocating resources is impossible. Lange shows that viability of central planning does not necessarily bank on the quantity of information and data available to planners. Even when the planners have all the relevant information about consumers, they still cannot design price system in real-world market (Salter, 2012). Even if we assume economic calculation problems, socialism still will need to overcome other problems as well. In addition, today, it is still controversial whether computers and modern data collection would have the ability to plan the economy. For a century now, it can be seen that, no matter how lenient we construe socialism, it can never emulate entrepreneurial economy (Cottrell, Paul and Michaelson, 2009). Financial crisis that has destroyed the lives of many people is the consequence of substituting a diplomatic market exchange with economic central plan. Economic Calculation Problem in the Healthcare Industry The healthcare industry all over the world are greatly affected by the problem of pricing since it is very difficult. For both the governments as well as the service providers and payers, it has been deemed challenging to comprehend ways to value healthcare in terms of price centred on input and the value of outcome of a person to name a few (Kling, 2010). From the abstract above, the concept of economic calculation problem affects the healthcare industry. When it comes to pricing a healthcare service, two problems come into mind; the quantifiable unit of output and the cost of that service (Kling, 2010). Some scholars argue that the insurance industry have imitated healthcare procedures for outlining the quantifiable unit of output. In addition, the economic calculation problem strongly affects the medical services. In this case, the insurance companies appear as economic planners since they have an idea of how much the consumer value given for a certain medical services at a margin. Also, they have an idea of the opportunity costs of medical services (Kling, 2010). The key is to permit extensive experimentation. If that is carried out, some of the pricing and service models are bound to fail whereas might succeed. Therefore, allowing extensive experimentation within the healthcare sector, specifically on the business side, inclines at managing resource allocations (Kling, 2010). Socialists have agreed that the healthcare sector is unsustainable and thus require some sort of transformation in order to enhance better coordination, performance, cost effectiveness and responsibility (Medicare Payment Advisory Commission, 2008). Nevertheless, it is seemed that there is need for a robust central planning regulator in order to make this achievable. As mentioned earlier, economic calculation is impossible not just in terms of higher cost, inefficient or reduced innovation (Kling, 2010). In practice, healthcare authority is required to evaluate the quality, difficulty of the production process, the amount of revenue and the healthcare products, services and expertise across time. With this regard, the healthcare is expected to put into account almost infinite number of calculations for the larger sum of money to be allocated effectively (Medicare Payment Advisory Commission, 2008). As argued by regulators and the government, computerized electronic medical record can be used to resolve the available economic calculation problem in the healthcare sector. Nevertheless, even if healthcare authority utilizes the most advanced computer systems and healthcare services, there would be an increase in information and data that would be hard for the sector to absorb meaningfully (Medicare Payment Advisory Commission, 2008). This means that computer use in the healthcare system tend to make economic calculation more difficult. In addition to experiencing economic calculation difficulties, the healthcare regulators are faced with misunderstood pricing theory (Sunderman, 2012). Misunderstood pricing theory cannot be resolved by use of super-advanced computers. It is therefore difficult to forecast the price for healthcare services. The reason as to why health regulators find it hard to arrive at meaningful prices is that costs of production cannot establish prices of products. Another reason why it proves to be difficult to price services is because prices in the economy are developed, destroyed and re-developed by subjective valuations of consumers. Healthcare regulators often set their prices by copying the free-market pricing arrangement (Sunderman, 2012). However, as the proportion of the healthcare expenditure increase, the private-sector pricing structure is distorted due to the reduced in the free market pricing signals that is copied. As a result, the healthcare sector continues to be faced with chaos and challenges which make it hard for actors to rationally allocate capital (Medicare Payment Advisory Commission, 2008). The healthcare regulators understand the need for the final healthcare products and services to meet the need of the consumers. In addition, these regulators also understand the need to ensure that the products and services of the healthcare are produced using a rational production process (Medicare Payment Advisory Commission, 2008). However, without the demeanour of the economic calculation, all hospitals, healthcare services and expertise would be left in the dark. Unless the economic calculation challenge is identified, transformation of the healthcare system would be possible. Conclusion To sum up, Lange in the abstract mentioned the concept of economic calculation problem. He criticizes the use of economic planning as a supernumerary for market-based provision of factors of production. Economic calculation has been seen as a problem especially in highly regulated sectors such as healthcare. The socialist economic calculation talks about how a socialist economy can potentially perform economic calculation owing to the lack of the law of value and financial prices given to capital goods as well as private possession of the methods of production. In the context of the health care sector, pricing is the major issue. It is very hard to comprehend the value of health sector in regard to price centred on input. Healthcare sector is considered unsustainable and therefore require effective transformation. Some regulators argue that in order for this to happen, a central planning should be established. However, this is impossible since utilizing economic panning by using computer systems will just make economic calculation difficult. Therefore, in order to effectively transform the healthcare system, regulators and the government should recognize the basic problem of economic calculation. References Bockman, J 2011, Markets in the name of Socialism: The Left-Wing origins of Neoliberalism, Stanford University Press, p. 20. Boettke, J., & P. T. Leeson 2004, Socialism: still impossible after all these years, Ludwig von Mises Institute. Caplan, B 2004, Is socialism really "impossible"?, Critical Review, vol. 16, pp. 33-52. Cottrell, A., Paul, C & Michaelson, G 2009, Is Economic Planning Hypercomputational? The Argument from Cantor Diagonalisation, International Journal of Unconventional Computing, vol. 5, no. ¾, p. 223. Hahnel, R 2007, The Case Against Markets, Journal of Economic Issues, Vol. XLI, No. 4. Kling, A 2010, Health Care and Socialist Calculation, retrieved from http://econlog.econlib.org/archives/2010/11/health_care_and_7.html Levy, D. M. and Sandra J 2008, "socialist calculation debate." The New Palgrave Dictionary of Economics. Second Edition. Eds. Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan Medicare Payment Advisory Commission 2008, "Report to Congress Reforming the Delivery System," p. xi. Salter, A 2012, Economics and the Calculation Problem, Philosophy Article, Retrieved from http://fee.org/articles/economics-and-the-calculation-problem/ Sunderman, P 2012, Medicare Whac-A-Mole: Why Health Care Price Controls always Fail, digital edn., Retrieved from https://reason.com/archives/2011/12/13/medicare-whac-a-mole/2 Read More