Saturday, March 09, 2013

The Economic Calculation Argument (ECA) refuted

The ECA is basically that “The need for the price system arises from the need to choose how to allocate resources, where one use competes with other uses”.

'The need to choose how to allocate resources' is a feature of all human societies, as all of them have to engage in production in order for their members to survive. Production is the use by humans of resources, including their own mental and physical energies, that originally came from nature, to transform parts of the rest of nature in to things that are useful to human social life (wealth). Production by its nature involves the allocation of resources.

One difficulty for the ECA is that for most of the time that humans have been in existence, engaging in production and choosing how to allocate resources, they have done this without the price system; in fact until comparatively recently the price system only applied to a limited range of products.

Contrary to what the ECA says, the need for the price system does not arise from uses for resources being in competition (from resources being 'scarce'). It arises from resources being under the exclusive control of private individuals and groups of individuals (from resources being 'private property').

The price system is in fact the system that governs the ratios at which articles of private property exchange. If resources are not private property but the common heritage of the producers the price system is not required, and in practice does not come into being even if uses are in competition with each other. This explains why humans existed for so many years without the price system, which for the ECA is a glaring, inexplicable anomaly.

In a society where productive resources were the common heritage of all, there would still be a need to allocate resources but not for a price system. Resources could be allocated directly and calculations done in units of physical resources. A resource-based economy would calculate in resources not money.

But what does 'where one use competes with other uses' mean? The ECA seems to mean a situation where resources are not available in sufficient quantities to meet all the uses to which humans wish to put them and that, therefore, the various uses are in competition with each other.

It is not clear whether it means just some resource or all resources. Since conventional economics concedes that if some resource is available in abundant supply, as is the air we breathe, then it does not need to enter into the price system, we can assume that what is meant is most resources and not all resources.

So we now arrive at: 'The price system is needed where most resources are available in insufficient supply to meet all the uses to which humans want to put them.'

If you accept that needs are not infinite (a perfectly reasonable assumption) - in other words, that it is possible to conceive of a situation where the number of uses to which humans want to put resources would be limited - then you must also accept, at least as a possibility, that resources could be available in sufficient quantities to meet all actually wanted uses.

Such a situation would mean that, at least for most resources, one use would not be in competition with other uses. All uses could be met; one use could be met without this having to mean that some other use would have to be forgone.

So, by 'where one use competes with other uses' the ECA must be understood as meaning 'where most resources are available in insufficient supply to meet all the uses to which humans want in actual practice to put them'.

We are now able to work out the situation in which even the ECA admits that the price system would not be needed.

Are resources at the present time, or could they become so in the new future, available in sufficient supply to meet the uses to which humans will in practice want to put them to satisfy their needs? It can be argued that we have indeed reached this stage. (And even if we haven't, it is at least theoretically conceivable that at some stage we will). In which case the ECA falls.

But this is only to refute the ECA on its own terms. In fact, prices arise only where goods exchange and goods only exchange when they are privately owned.

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