The economic problem

The economic problem on Robinson's Island

• Robinson establishes what his restrictions are.
• Determine what the possible assignments are, gathering the necessary information about possible processes and available materials, using your experience or through experiments.
• Robinson states what his objective is.
• She knows what she wants
• Robinson calculates the allocation that best suits him.
• He uses his intelligence (perhaps with the help of paper, pen, and arithmetic) to determine the allocation that best suits him from among all the possible ones.
• Robinson achieves the practical implementation of the calculated allocation
• He forces himself to work and to change reality

​

​

Very important. The enormous difficulty of the real economic problem in a complex economy.

• In a complex, high-tech economy, such as current capitalist systems, it is not possible to establish allocation directly as Robinson does.
• It is not possible to establish the restrictions , or to gather the necessary information about the processes and materials available.
• A huge statistical apparatus would be needed for that.
• It is not possible (or it is very difficult) to determine the objective to be achieved
• If we were to establish something similar to socialism, we would have to determine what people's needs are.
• It is not possible to perform the calculation
• Even assuming a mischievous imp gave us the information about the constraints and the objective, and even assuming we used scientific methods to formulate the problem, such as solving systems of equations, we would only be able to solve this problem for relatively small systems.
• The calculated allocation cannot be practically implemented .
• Even imagining that a little devil directly informed us which assignment was best for us, we would still need some procedure to ensure that the corresponding jobs were carried out.

​

Optional. A glimpse into complexity: Input-output tables

Wassily Leontief , 1906-1999

The Structure of American Economy, 1919-1929 (1st ed. 1941),

https://babel.hathitrust.org/cgi/pt?id=mdp.39015023177895 �The Structure of American Economy, 1919-1939 (2nd ed. 1951),

https://archive.org/details/structureofameri0000leon 

capitalist systems solve the economic problem ?

Very important. 1st, division of the allocation problem in capitalist systems

• The problem is solved locally in each allocation unit (company), without needing to take into consideration the other allocation units.
• The information is collected locally
• The processes and materials available at the local level are determined, without the need for a huge global statistical apparatus.
• The objective is set locally
• For example, in companies the objective is profit (we will detail this later).
• The calculation is performed locally
• For the small number of variables that affect the allocation unit, not for the set of variables of the entire economy, and often without needing to resort to solving systems of equations.
• The allocation is carried out locally in practice.
• Controlling production (and workers) locally, without the need for a global apparatus for this.

Very important. 2nd, coordination of the allocation problem in capitalist systems

• The allocation units (companies) are coordinated through the price mechanism.
• overdemanded goods increases, and the price of relatively oversupplied goods decreases.
• The production of relatively profitable goods increases, and the production of relatively unprofitable goods decreases.
• For example, if a commodity is in excess demand, its price increases, thereby increasing the profitability of its production, and consequently, its production. Conversely, if a commodity is overproduced , its price decreases, reducing the profitability of its production and thus decreasing its production. This is how production adjusts to the needs of the system.

​

Important. Market competition and profit maximization

• By allocating resources to firms and coordinating them through the market, the firms that survive in the market are those that maximize profit.
• Companies that use other allocation criteria cannot compete with those that maximize profit. Business owners are not free; they are compelled to maximize profit if they want their company to survive. A "humanitarian" company will go bankrupt.
• The pressure from competition is so great that even by maximizing profit it is very difficult for a company to survive.
• https://www.larazon.es/historico/3858-el-80-por-ciento-de-las-empresas-nuevas-quiebran-el-primer-ano-ULLA_RAZON_398424/
• https://elpais.com/economia/negocios/2023-01-28/emprender-y-no-morir-en-el-intento-por-que-el-90-de-las-empresas-que-se-crean-en-espana-no-llegan-a-los-tres-anos.html
• In a system of cooperatives, controlled by the workers but linked by market exchanges—in an anarchist system—competition among cooperatives would also lead to profit maximization, to a capitalism without capitalists. To build socialism, a system that operates to meet people's needs, it is not enough for workers to simply control resource allocation.
• Countries that maximize profit will also tend to displace those that use other criteria; the force of competition also operates between countries.
• All other things being equal when it comes to production, countries with a welfare state will have profitability problems compared to those without one, because the welfare state represents a significant added cost.
• Welfare states can only be maintained over time either because the countries that maintain them are much more productive (which is what has happened so far in advanced capitalist countries) or because they become generalized to all countries.

Adam Smith: the invisible hand ; self- �interest and benefit to society

“Insofar as every individual endeavors to invest his capital in national activity and to direct that activity so as to produce the maximum value, every individual necessarily works to make the annual income of society as high as possible. It is true that as a rule he neither intends to promote the general interest nor knows to what extent he is promoting it. By preferring to engage in national rather than foreign activity, he is only pursuing his own security; and by directing that activity so as to produce maximum value, he is only seeking his own gain. But in this case, as in others, an invisible hand leads him to promote an objective which was not part of his intention. That this is so is not necessarily bad for society. By pursuing his own interest, he frequently promotes that of society much more effectually than if he actually intended to promote it. I have never seen many good things done by those who pretend to act for the good of the people.”

The Wealth of Nations (selection) , Alianza, 1994, page 554, https://archive.org/details/smith-adam.-la-riqueza-de-las-naciones-ocr-1994

Hayek and the impossibility of socialism

• https://www.youtube.com/watch?v=kJ9B3_S4IUM
• “Socialism assumes that a single central authority can utilize all available knowledge. It overlooks the fact that modern society, which I now prefer to call the extended order, which surpasses the capacity of any single mind, is based on the utilization of widely dispersed knowledge. And, once we realize that we can derive great benefit from available resources only by utilizing the knowledge of millions of people, it becomes clear that socialism’s assumption that a central authority can dispose of all such knowledge is simply incorrect.”
• Completely centralized planning was only advocated by authors like Lenin or Bukharin . But many socialist systems do not assume that all allocation is determined from a single center, as is the case with market socialism.
• We have already pointed out that the economic problem in a complex economy with advanced technology cannot be solved by allocating resources to a single center. This is not only because of what Hayek says (he seems to be referring to the impossibility of establishing the constraints, and perhaps the objective), but also because the calculation cannot be performed, nor can the resulting calculations be put into practice.
• Thus, Hayek is correct when he states that a modern economy cannot be established from a single center, but he is incorrect when he claims that all forms of socialism advocate this. Socialism with decentralization is indeed possible.

​

Hayek and profit as a sign

• https://www.youtube.com/watch?v=kJ9B3_S4IUM
• “Socialism, by criticizing production for profit rather than for use, opposes what makes an open society possible. Production for use would only be possible in a society where all knowledge was given. But arriving at a situation where we all work for people we don't know and are sustained by the labor of people who don't know us is possible because we produce for profit. Profit is the signal that tells us what we must do to serve people we don't know. In fact, we can produce enough to sustain the entire current population of the world only thanks to a spontaneous process, a mechanism, that allows us to use infinitely more information than any central authority possesses.”
• The benefit is a sign that tells us what we should do to serve people we don't know.
• In fact, it is only possible to produce enough to sustain the world's current population thanks to a spontaneous process or mechanism that allows the use of infinitely more information than any central authority can process.”
• Hayek is mistaken when he claims that production for the satisfaction of needs, "for use" in Hayek's terms, is only possible with a fully planned socialism. Other forms of socialism are possible, such as market socialism. Capitalisms are also possible where allocation is not solely driven by profit but also partially by the satisfaction of needs, for example, through a welfare state.
• But Hayek, by stating that "production for use would only be possible in a society where all knowledge was given," is acknowledging that in capitalism there is no "production for use" to meet human needs, since a society where all knowledge is given would be a completely planned socialism and not a capitalism.
• It is incorrect to claim that profit directs resource allocation toward serving people. In a “pure” capitalism, governed solely by profit, this would direct the allocation of resources by companies toward production for production's sake, not toward satisfying human needs. Prices would not be a measure of “subjective utility” but of the capacity to generate profits. Human beings would be treated as inputs like any other, receiving resources to sustain themselves only if they are capable of contributing to generating profits, as one might say of a mule. The allocation of resources in a “pure” capitalism is inhumane ; it does not treat human beings differently from other inputs, and if all production were automated, the system would continue to function without human beings present, as Sismondi and Tugan - Baranowsky envisioned .
• We don't live in a pure capitalist system. But even so, if a portion of the world's population can support themselves today, it's because those people have the capacity to generate income. Today, where there are no mechanisms to correct resource allocation, such as the welfare state or aid from international organizations, people who are unable to generate income die of hunger, just like mules. https://www.fao.org/hunger/es/

​

Problems of capitalism

Very important. Main problems of allocation in (pure) capitalisms

• Local allocation does not take global objectives into account .
• _CO2 emissions .
• inefficient systems , even for maximizing profit.
• Business owners are doomed to make mistakes, having to allocate resources without knowing what other companies are doing and having to predict the future.
• unstable systems .
• There are cycles of economic crises.
• inequality is possible .
• If the richest have an advantage, inequality will increase, both within a country's population and between countries.
• Monopolies
• And, above all, maximizing profit is not the same as meeting human needs .
• Maximizing profit is an inhuman objective ; it doesn't consider human beings as distinct from other resources. Under this criterion, human beings are reduced to the category of input, on equal footing with other inputs, and if it proves beneficial to replace human workers with machines or artificial intelligence, they will be replaced. Therefore, a capitalism without human beings is conceivable, as Sismondi and Tugan envisioned. In capitalist systems, humans are neither essential nor indispensable, neither as producers nor as consumers.

Partial solutions to the problems of capitalism

• Faced with these problems and this dehumanization of the allocation process, institutions emerged that managed to partially alleviate them.
• Welfare state, political systems, labor legislation, redistributive mechanisms, etc.
• We do not live in a pure capitalism, as described by the classical thinkers, where human beings were just another commodity, but in one partially humanized by these institutions, and where the rest of the problems have been nuanced.
• If those institutions were to disappear, for example due to competitive pressure from countries where they do not exist, then we can expect a return to pure capitalism.
• And in pure capitalism, human beings are replaceable if there is another input that performs their task more cheaply, such as machines or AI.