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Prices as signals in capitalist systems

Prices act as signals that indicate to each company and to the capitalist economy as a whole how to orient its production (towards profit maximization).
Prices are used as signals in business.

Prices and target.

In the company, the weightings determine the objective with which it must be allocated, the benefit.

Prices and exchanges.

The contrast between values and exchange rates tells the company how to make the exchanges .

Prices and allocation.

Accounting, with its values, informs the company how to establish the inputs .

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Three aspects of prices �in capitalist systems

In capitalist systems, there are three types of prices. They may differ, but there are forces that cause them to tend toward proportionality. However, they are distinct concepts; they will not always coincide, and it is important to differentiate between them.

Exchange rates .

These are the prices that arise in exchanges.
They are established by the participants in the exchanges. They are external to the company; they are determined by the market.
In our simulation game, these are the quantities of wheat that you exchange for quantities of iron.

Weights or allocation coefficients.

These are the prices that a company uses to determine its profit target.
They are established by the estimation of the person who decides the allocation to maximize profit, the entrepreneur. They are internal to the company and are decided within it.
In our simulation game, these are the prices at which you estimate the products will be sold in the next class.

Lagrange values or multipliers.

They are what increases the objective that is maximized by introducing a small amount of matter.
They are not decided by anyone, but are the result of calculation. They are internal to the company, but determined by calculation.
In our simulation game we have calculated it for wheat in slide 11 of ppt 5.3.

Values or

Lagrange multipliers

Exchange rates

Weights or �allocation coefficients

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Three aspects of pricing �in other societies

In capitalist systems these three types of prices may diverge, but they tend to be proportional.
In non-capitalist economies, these three types of prices are not necessarily proportional, and some may not even exist. However:

Values will exist in all optimal economies.

Values exist where a goal is maximized, subject to the possibility of allocation.

There will be weightings where the objective to maximize is precisely the benefit.

Weightings exist in profit-maximizing economies, such as capitalist systems; but not in socialist systems or Robinson's Island, where a different objective is maximized.

Exchange rates will exist in all market economies.

These exchange rates exist in capitalism or anarchism; but not in a centrally planned economy (if that were possible), nor on Robinson's island, where there are no exchanges.

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Three aspects of pricing �in other societies

On Robinson's island (or in a planned socialism) there would be neither exchange rates nor weights, because there would be no exchanges and no maximization of profit, but there would be values (for the economy as a whole in a planned socialism), because Robinson also allocates by maximizing an objective function (we could say his "subjective utility") subject to the possibility of allocation.

For Robinson, the value of something is what that thing contributes to fulfilling his needs. On Robinson's island, the neoclassical view makes sense, even when there are no exchanges; it makes sense to talk about values, means of production, and consumer goods.

In a market socialism there would be exchange rates for the economy as a whole and internal values in each unit of production, because in each unit an objective function would be maximized, but there would be no weightings because the objective would not be to maximize profit but another objective.

The neoclassical view of value also makes sense here. In fact, Robinson lives in a one-man socialism.

In a "planned capitalism", in an allocation that would be established in a planned way in order to maximize profit, we would have weights and values, both for the economy as a whole, but not exchange rates because there would be no exchanges.

The neoclassical view makes no sense here, because the value of something would be how that thing contributes to increasing profit, not how it contributes to meeting needs.

In an economy where allocation was established without maximizing an objective, for example randomly, there would be no values or weights (benefits would not be maximized), although there might be exchange rates if exchanges took place.

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Economic mechanisms as �real algorithms

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Optional. Mathematical algorithms

An algorithm tells us what steps we should follow to solve a problem.

For example, a cooking recipe tells us that we have to use certain ingredients, that we have to cut this or that, that we have to cook that or that, that we have to add something else, and so on. A cooking recipe is an algorithm for solving the problem of cooking a dish.
A mathematical algorithm is like a recipe for solving a mathematical problem.

To solve constrained maximization problems we use mathematical algorithms.

(Simplex algorithm, gradient, divide and rule.)

These algorithms frequently involve maximum conditions and Lagrange multipliers.

For the constrained maximization problem to have a solution, the maximum conditions must be met, which involve Lagrange multipliers.
One way to try to solve the problem is by checking if these maximum conditions are met for certain magnitudes of the unknowns and Lagrange multipliers, and if they are not, by trying to modify them so that they are violated less often.

These algorithms also use divide-and-rule strategies: a large problem is divided into smaller subproblems, each subproblem is solved separately, and then these solutions are coordinated to approximate the solution to the large problem.

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Optional. Economic mechanisms as �real algorithms

Economic mechanisms attempt to overcome the economic problem in a society by imitating the way some mathematical algorithms operate.
If mathematical algorithms use maximum conditions and Lagrange multipliers to find the solution to the problem, economic mechanisms use accounting and values for the same purpose.

Therefore, economic mechanisms can be understood as real algorithms that operate to solve the economic problem, and mathematical algorithms as logical mechanisms for solving the mathematical problem.
That is why in real economic mechanisms, such as the capitalist mechanism, accounting and values play such an important role, because it is with their help that an optimal allocation is attempted.
And that is why in economic mechanisms it is important to divide the problem of economic calculation into allocation units, and to coordinate it with some method (such as the price mechanism in capitalism).

Economic calculation (real)

In real economic mechanisms , an attempt is made to find an optimal allocation by checking the accounts against the values .

Mathematical (logical) calculation

Mathematical algorithms attempt to find the solution to a constrained maximization problem by checking the maximum conditions with Lagrange multipliers .

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Optional. Economic �mechanisms as real algorithms

Economic problem

�

�Economic mechanisms, ��accounting, �values ��, division and coordination

�Mathematical problem

��Mathematical algorithms ��Maximum conditions �Lagrange multipliers ��Divide and rule

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Capitalism as an algorithm

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Optional. Capitalist mechanism and �division and coordination

(To gain perspective on capitalism, it is helpful to imagine hypothetical socialist systems where people's needs are met, which would not resemble the "real socialist" systems that pursued other goals. It is also useful to study capitalism in its "pure" form, as allocations that maximize profit, without dwelling for the moment on the highly complex "realist capitalist" systems, where allocation follows complicated patterns.)
In divide and rule algorithms, the original problem is divided into a series of subproblems, each subproblem is solved separately, and an attempt is made to find the solution to the original problem by coordinating the solutions to the subproblems.

These algorithms can only be applied where the objective and the constraints can be further broken down.

The similarity between the way this algorithm operates and capitalist systems is evident. In these systems, the general allocation problem is divided into subproblems (firms), each subproblem is solved separately, and an attempt is made to coordinate the solutions of the subproblems (markets).

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Economic mechanisms and other societies

With algorithms we solve a constrained maximization problem using maximum conditions and Lagrange multipliers, which depend on the objective we are maximizing, to get closer to the solution.

If we use the conditions that correspond to a specific goal, our algorithms will solve the problem for that particular goal; with another goal, we use its corresponding conditions.

mechanisms are real algorithms for solving the economic problem.

If we use profit-maximizing accounting in an economic system, our system will tend to produce capitalist allocation. If we use socialist accounting, it will tend to produce socialism.
Therefore, the actual algorithms that we call economic mechanisms will produce an allocation that will depend on the accounting and values we use.

Therefore, in other societies the economic mechanism must use the corresponding values and accounting , and not the capitalists.

For example, in socialism we can use a variant of the simplex model we've seen. But instead of including in the processes those that are most profitable in terms of earnings, we would have to include those that maximize attention to people's needs, and we would have to use that criterion to discard processes as well, not their lack of profitability.
The divide and rule strategy could be attempted in other societies by dividing the allocation into units and coordinating them in some way.

If an unmodified market is used to coordinate allocation units, market competition will cause these units to maximize profit.

The gradient algorithm could also be applied to other societies, simply by taking into consideration the corresponding values and accounts.

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Optional. Leontief on profit and social justice

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A note for reflection: �Socialism and the path of capitalism

A socialist system with a complex economy and advanced technology cannot avoid the economic problem; it cannot allocate resources through a single decision-making center. Such a system will also have to divide the allocation into relatively small allocation units (cooperatives, communes, etc.) and coordinate them in some way.
In a socialist system, one might try to use a market to coordinate these allocation units; one might try a market-based socialism. But if, in any system, socialist or not, the allocation is divided into units and coordinated through a market, without any additional modifications, it is inevitable that market competition will arise among the allocation units and that they will end up maximizing profit.

For example, suppose the workers stage a revolution, seize power, and organize cooperatives coordinated through market exchanges (establishing anarchism). If the division into allocation units and coordination through the market are maintained, competition will arise among the cooperatives, which will have to maximize profit to survive. The allocation would be similar to that produced by capitalism. And it would also have the other problems inherent in capitalism: cycles, imbalances, inequalities, etc. Such anarchism would soon devolve into capitalism without capitalists.

Therefore, workers having power, control, and ownership of the means of production is not enough for socialism to exist. The essence of capitalism is not the capitalists. Capitalism can exist without capitalists. The essence of capitalism is that the division of resources into units and their coordination through exchanges leads to profit maximization. That is the path of capitalism.
A socialist economic mechanism, in order to function differently from a capitalist mechanism and produce a different allocation, has to use different values and accounting; it has to move away from profit maximization.
But production in allocation units must be efficient , and this seems to be guaranteed only by maintaining competition between them.
Later in the course, we will see that there are methods for modifying the market mechanism so that the accounting and values used move away from capitalist practices and more closely resemble those of socialism, and that the resulting allocations approach socialism while maintaining competition among the allocation units. For example, the welfare state is one such method.
Therefore, a market socialism is possible, but only if the allocation mechanism is modified , not with pure and simple anarchism.