Two questions asked of Block and Salerno

This student asked two questions, one of me, and one of my colleague, Prof. Joseph Salerno. He wrote as follows:

Hi Professor Block, I am sending you this email with some questions that I have about economics and I didn’t find any reference in any book I know, if you could help me I would be glad. My main question is if any changes in the economy data would not create a whole new changes in the data itself, for example, when we have a change in the demand from one good, this would change the income of the individuals, changing other demands, and this fractional changes of data would keep the market adapting itself, but this change to adapt would create more changes, my question is if this is right or I am missing something? The other question is about the economic calculation problem.

Hi professor Salerno, thanks for agreeing to answer my question:

Watching one of your lectures at the last Mises University about
economic calculation, you say (trying to in my opinion refute the problem
of knowledge raised by Hayek as a deeper analysis of what Mises call
“Intellectual division of labor”) that even if the central planner knows
everything relevant to economic calculation (The resources that he has at
his disposal, both in number and quality, all the technical possibilities
and alternative uses, and the relative importance of each good), he would
still not being able to do the economic calculation because of the lack of
prices, however I don’t see why, because if he knows everything he would
not need prices because inside the economic sphere, the central planner
would be “omniscient”, and as Mises pointed out at Human Action, we are not
dealing with an omniscient being. Again, I do not know if I am missing
something, like if you are talking about he having at his disposal all the
data but not having it in his mind, so I would like to understand better.

Joseph Salerno <[email protected]:

Mises's assumption in his book Human Action (pp. 694-97) is that the central planner
knows all the quantitative and technical information about production,
including both the latest technology and the available quantities, kinds,
and locations of the different resources, including labor. He gets this
information from scientists, engineers, and managerial personnel. He also
knows his own value scales and is not concerned with consumer value
scales. Even given this knowledge, without a price system he would not be
able to know the opportunity costs of using a certain combination of
resources to produce one thing rather than the thousands of other things
the resources in this combination could produce. So if some beneficent
dictator were put in charge of the entire U.S. economy as it is right now
and knew all the technical info about the economy and his own value scale,
he could order production of literally an infinitude of different bundles
of goods, including capital goods and consumer goods. Since he could not
create a price system in his own head or along with a committee of experts,
he would not be able to calculate the best use of the resources* from
his own point of view . *He would not have the meaningful cardinal
numbers, that is the prices, to calculate costs, revenues, profits and
losses.

I hope this helps

Sincerely,

Dr. Joe Salerno

I sent Prof. Salerno’s answer to this question to someone else, who wrote as follows:

As you can probably tell it's an answer, but not a satisfying answer, since he retracts his main assumption.

Here is my answer to this second person:

Prof. Salerno’s answer is very satisfying to me. Hayek says this non omniscient information is sufficient, but can't be obtained. Mises says that even if the central planner has this non omniscient information, it still won't suffice. In my view, Hayek makes a good point. Mises makes an excellent point, one that puts Hayek's entirely into the shade.

Here is my response to the first question of this student: Yes, any and all changes have
reverberations all throughout the economy. I think you are correct in saying so. However, I think your inference about this is problematic; namely, that these changes would never end. In reality, of course, the economy is continually in a flux. That is because exogenous changes (tastes, the weather, innovations, inventions) continually occur. But, take any one of these changes in our mind's eye. Assume that no other changes occur. Eventually, at least theoretically in our imagination, the reverberations from this one change will come to an end, and we shall
once again be at a new (imaginary, in our mind's eye) equilibrium.

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