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Economic Calculation


If we understand capitalism as truly free markets (not as managed socialist markets) the information that this system provides in terms of prices allows planners (e.g. companies) to maximize the efficiency of resource allocation hence generating the maximum amount of goods and services possible at a minimum price within the native error that prices carry. And this is the best that it can possibly be expected.


We actively attempt to avoid moral or ethical discussions because they are, by definition, subjective. However, this time we will make an exception. Communist propaganda (and religious propaganda too) has depicted capitalism as something immoral or unethical because they present it as "money-philosophy". They portrait the idea that economic calculation is somehow evil because it does not take into consideration some foggy notion of "society". They say that "materialism" does not consider the needs of people or art or beauty and so on.

This is, of course, utter nonsense. As we have seen, thanks to the existence of prices, economic calculations are possible thus allowing for the most efficient resource allocation for the maximum satisfaction of people's needs. Thanks to prices it is possible to satisfy the largest number of people with the minimum expenditure of wealth.

Thanks to this increased productive capacity geared at satisfying our needs, we actually end up with more time and wealth to spend on non-market items such as art or beauty or honour or glory or whatever else you may want to spend your time on.

The fact remains that a free market does not impede anybody from behaving in any way this person so desires. If this person wishes to steal, corrupt, murder and so on, a free market has nothing to do with this personal decision. On the other hand, if a person wishes to live a life of servitude to society and die for a noble cause, the market also has no opinion or input about it. These kinds of decisions are purely personal and completely unrelated to free markets.

However, we must point out that economic calculations in managed or captive markets (such as socialism or communism) do impact personal decisions. This is so because in those conditions economic calculations in free markets are always compared to dictatorial decisions made by planning state bodies which attempt to bring some sort of theoretical and impossible worker's paradise. They are comparing the reality and efficiency of economic calculations in free markets against the hypothetical (and never realized) efficiency of state-determined, "for the greater societal good" productive systems. It is plain ridiculous. Communism and Socialism compare the achievements of capitalism against their own failures and somehow this is supposed to be good. Preposterous! This is done through a trick. It goes like this. State-determined productive systems carry with them state-determined political philosophies with state-determined definitions of good and evil. Thus, going against those state-determined definitions is, by definition, evil. Thus, capitalism is evil! The fact that capitalism works and communism and socialism are a dismal failure seem to be of no importance to those philosophies. How strange, considering that they are supposed to be all about "societal welfare".

Thanks to the existence of economic calculations it is possible to evaluate plans before capital is spent (in terms of costs and revenues) and the success or failure of such plans (in terms of profits or losses) determined. Thanks to economic calculations it is possible to engage in productive activities with a very long profit horizon, such as Internet Service Provision to people. This is possible because it is possible to estimate the amount of time it will take to recover costs and to begin making a profit. It is possible to know years or even decades ahead of time if people's satisfaction will be fulfilled at a cost they can afford. Because of this it is possible to know if resources should be spent on this project or it will become prohibitively expensive (i.e. undesirable by people) and hence we should spend scarce resources on something else entirely different which is more satisfactory to people. Profit tells us this and profit can only be estimated through economic calculation and this is only possible with free market-determined prices.

The term Capitalism has been systematically smeared through propaganda campaigns by those presenting and proposing economic systems that have shown time and time again to be a total, complete and utter failure. In reality capitalism is nothing more and nothing less than the use of economic calculation to determine how best capital can be spent to satisfy people's needs. People doing this are capitalists or people who desire to accumulate capital to satisfy their needs through satisfying other people's needs. One is tied to the other. The more effective capitalists are, the more we all benefit.


We conclude with this though. Capitalism is actually the most moral or ethical of all political philosophies precisely because it delivers the maximum amount of satisfaction with the minimum amount of wasted resources. It is the most effective and efficient system we know of, in real life, that actually accomplishes this. Is it perfect? No. But until a new process is discovered capable of so doing, capitalism will reign supreme because it is nature's way.

And then we have all those who don't believe us, which, sadly enough are the majority. That's OK. It's not their fault. They have been brainwashed through generations of public "schooling". However, they are not brain dead. What is unforgivable from them is the fact that they refuse to understand that in ultimate analysis the USSR -the biggest communist experiment ever- collapsed under its own incompetent weight. Communism (and socialism) do not work. Period.

Note: please see the Glossary if you are unfamiliar with certain words.

2 Comments | Add yours
  • Thanks for another well written explanation of of the free market. I especially like your discussions of Austrian Economics.
    You say: "The term Capitalism has been systematically smeared through propaganda campaigns" I can't understand why believers in non-intervention persist in using that word rather that the term "free market"

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  • Thank you kindly for your encouraging words.

    As to your question, there are many answers, the simplest is that capitalism is not exactly the same as free markets. Formaly speaking there are differences and these differences are worth retaining.

    A definition of a free market would be:
    The market is simply free people freely exchanging their properties with the goal of satisfying their needs as much as possible, in a place where rights of property are respected.

    Capitalism, on the other hand is an economic theory based on the use of capital for production purposes. It contains three basic components:

    > A free market which generates prices
    > Manufacturing freedom for producers which can use those prices to perform economic calculations thus maximizing the productive capacity of savings
    > Private ownership of the means of production

    These and other differences will become clear as soon as we publish the "Market" chapter of our Austrian Economics For Dummies series. Albeit, this won't happen right away since it is not due to be published until some time in early May. We may be able to accelerate its publication for your convenience, but I am not entirely sure it is doable.

    Tx again, and never stop thinking!

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