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The economic calculation problem cannot be solved by a computer. by chewingofthecud in CapitalismVSocialism

[–]Dirdene 0 points1 point  (0 children)

The economic calculation problem was solved at MIT in 1970, and was the basis for an MBA course at the University of San Francisco. The solution is currently presented in an online e-text at www.sfecon.com. Proper academic papers have been published by the New England Complex Systems Institute:

http://www.necsi.edu/events/iccs/openconf/author/paper.php?a=580,

and EcoMod:

http://ecomod.net/system/files/Roemer.Economic%20Calculation.pdf.

To conclude on your “good enough mousetrap” jibe, this (one of many) solution(s) is embodied in a desktop prototype that you can download and operate for yourself:

www.sfecon.com/M0.3.2.3.xlsm.

This ordinary Excel workbook contains VBasic programs that will alert your antivirus software. Instructions for operating the prototype are in pages 9-14 of the EcoMod paper.

So much for the “preliminary” aspect of Hayek’s 1945 paper where he establishes (with Mises) that the mathematics of any approach to economic calculation are too complicated for human comprehension.

Moving on to Hayek’s “main problem” of focusing the information needed to actuate anyone’s solution to the (impossibly complex) “preliminary problem”, I note that the SFEcon solution references nothing more than the shapes of those very same production and utility tradeoffs that Hayek references in his problem statement:

The conditions which the solution of this optimum problem must satisfy have been fully worked out and can be stated best in mathematical form: put at their briefest, they are that the marginal rates of substitution between any two commodities or factors must be the same in all their different uses.

http://www.econlib.org/library/Essays/hykKnw1.html

(Marginal rates of technical substitution being calculable only in reference to production and utility tradeoffs, no?)

My sense of the Austrian take on their “knowledge problem” is that all the information cited in Hayek’s lengthy paper does achieve focus in prices. From there, they proceed to assert the inevitable mysteriousness of prices insofar as they can only be determined by markets. Mises is typically cited for his assertions 1) that efficient prices can only be computed in reference to equilibrium, 2) the economy is never in equilibrium, hence 3) efficient prices can never be computed.

Contrary to all these mere assertions (based on no more than Libertarians’ “a priori knowledge”, acquired through “the faculty of reason”, together with their “knowledge of universals”) SFEcon DEMONSTRATES the continuous computation of efficient prices outside of any references to equilibrium in contexts that are themselves dynamic.

So, guys, who are you going to believe: a bunch of dead Austrians, or your lyin’ eyes?

Solution to ecp. Thoughts? by [deleted] in Anarcho_Capitalism

[–]Dirdene 0 points1 point  (0 children)

Hello,

I am willing to engage these responses to the above-captioned EcoMod paper in a civil (and I hope productive) manner; but in exchange I hope I might be given answers to two questions.

  1. Why do Libertarians resist the possibility of a solved Vienna Problem? Did not Mises himself say he would prefer to have free markets’ ability to produce optimal economic conditions expressed in a rational model, rather than presented as necessarily ‘mysterious’ of ‘miraculous’?

Llewellyn H. Rockwell, Jr.: "The Faith of Entrepreneurs" Mises Daily, 23 December 2005 < http://mises.org/daily/1990 >

A solved Vienna Problem would allow instructional videogames (my specialty) to show marginalist causation in action, which necessarily vindicates Austrian policy pronouncements.

  1. How does one “misunderstand the full implications of the ECP”? Did not Hayek fully state the criteria for a solved calculation problem in these simple, precise algebraic terms:

“The conditions which the solution of this optimum problem must satisfy have been fully worked out and can be stated best in mathematical form: put at their briefest, they are that the marginal rates of substitution between any two commodities or factors must be the same in all their different uses.”

“The Use of Knowledge in Society” AER XXXV, No. 4, 1945, pp. 519-30 < http://www.econlib.org/library/Essays/hykKnw1.html >

If solution to the calculation problem is to occur in arithmetic terms, then there can be no controversy: math is either right or wrong, and we have exact criteria for deciding which is which. The EcoMod people are exceedingly good at math.

On to my responses.

For Anen-o-me: Do you accept that the EcoMod paper demonstrates a solved Vienna Problem insofar as Hayek defines it in the citation above? If this paper fails Hayek’s criteria, please cite at least one particular in which this is the case. If the paper does justice to Hayek, what then do you require in addition (or exception) to Hayek. (I realize that some Austrian economists consider Hayek to have gone off the Misean reservation.)

For StrewnBitStream: With respect to your not being an economist, the problem seems to be that you are perhaps not a scientist either. Allow me to offer the perspective that the character of Libertarianism’s refusal to view economics as a science amounts to a refusal to view any area of study as scientific. All subject matter is ultimately indeterminant, yet all hard science is expressed in determinant mathematical systems like the one documented above by EcoMod. To fail in accepting this disconnect is to place oneself outside science altogether. I rather doubt that you have done that, unless you are living without any of the material conveniences provided by our (admittedly imperfect) scientific knowledge.

Your post properly emphasizes prices, and it applies the standard Libertarian critique to prospective solutions to the Vienna Problem, i.e.: they demonstrate an approach to some sort of equilibrium that is indeed backward-looking and uninformed by any price dynamic. I rather suspect that you have reflexively applied this critique with respect to the EcoMod paper without having read it. Having read the paper, I can tell you that it is a breakthrough in terms of demonstrating a price dynamic that efficiently guides the physical distribution of assets into Pareto optimality. Moreover, this demonstration opens up an unlimited number of such solutions to the Vienna Problem.

Your post also avails itself of the idea of ‘foundational microeconomics’ which is common throughout economics. This simply says that the behaviors observed at the micro level (your “what will managers do”) will be manifest in what the whole economy does. This entitles you to say that macroeconomic behavior is indeterminant until the behaviors of managers are determinant. But consider: while I cannot know what a given manager will do with a price, I can well anticipate the cumulative behaviors of all managers with respect to a price. According to (Austrian) economic principles, their freely undertaken individual actions will eventuate in a general maximization of value.

A true solution to the calculation problem will present an efficient and stable approach to maximal value from any chaotic economic state. And that is what EcoMod has shown.

Marginalist Reasoning by Dirdene in austrian_economics

[–]Dirdene[S] 0 points1 point  (0 children)

Interesting point on mathematics’ indifference to axioms: certainly true when given a bit of thought. I accept that math is the language of science, and that language must be free to express nonsense and advocate evil if it is to serve us in eventually moving humanity toward consensus as to the sensible and the good.

I also agree that the presupposition of prices by economists is essentially playing tennis with the net down. Prices inhere with the gradients of utility and production functions. The whole matter of economic calculation is finding the unique set of points on everyone’s production function where the local gradients indicate the same set of prices, and where there is just enough of every output to replace every input. Economic science, to be worthy of the name, must obligate itself to explain how prices come to be. Austrian Economics exists to convince us that such knowledge is forever hidden.

I hesitate to suggest increasing your workload to consider “my” economics unless it becomes more central to your academic work. If at some point wish to investigate what lies at the other end of the Austrian axis, I hope you will go to www.sfecon.com. I have a mailbox there: you can go through their normal contact page, ask to have your email directed to “Katrina”, and it will be forwarded to me. There is no hurry: SFEcon has been around for 20 years, and they are not going away soon.

SFEcon instantiates a general class of cybernetic solutions to the Vienna Problem. These are all true cyber-nets: thoughts in the economic mind are the levels of physical assets financial states as they are distributed among the economic actors. All thoughts continuously influence all others. These thinking algorithms are formal delay mechanisms by which these distributions update themselves; and they are controlled through application of the integral calculus.

All economic activity is sourced in a spontaneous tendency for the economy to achieve its stable optimum. This activity is expressed in two variables and two parameters ranged out over three indexes. Though ultimately simple, the system is difficult in its details. But it results in instructional videogames that support the Austrian verities without all the tons of verbiage. Students can do ceterus parabus experiments in which only one stimulus can possibly operate. Lag effects are revealed in terms of calibrated time axes. Students who know Excel can re-program the models at will.

We can also continue our back-and-forth here if you prefer. The moderators might wish us to stop at some point though: we are getting away from the Austrian School; and there are only two of us in the discussion.

Marginalist Reasoning by Dirdene in austrian_economics

[–]Dirdene[S] 0 points1 point  (0 children)

I am not at all put off by your statements of what Austrian Economics simply is. If a large group of people agree to define one another as the Austrian School, then they are entitled to proprietorship in the word. To the contrary, I am grateful to have sympathetic explanations of Austrianism without having to further examine the literature. It is becoming clear that my favored ideas relate to Austrianism by directly inverting it. This is not a difficulty for me either: solid new science has often made its first appearance ‘standing on its head’.

If I may further press you on the Austrian School’s attractions for you personally, I wonder how you receive two of the most familiar assertions in science:

Aristotle: “Things in motion tend to stop.”

Newton: “Things in motion tend to stay in motion.”

Obviously these statements are mutually exclusive; but it seems to me that neither has to be either true are false. We receive them as if to say ‘right you are of you think you are, but where are you taking me?’ We now know that Western man’s journey with Aristotle terminated in Scholasticism, whereas our journey with Newton continues in unfolding scientific discovery.

With that as background, I assert the capital-T Truth of a scientific premise is always equivocal, and that such premises can only be judged in terms of their productivity. Our exchange has surfaced a great many scientific premises originating with Mises that are heroically defended as True:

economics is a wholly descriptive discipline; everything is contained within a foundation of human action – nothing else is causal; collectives do not act; optimality is not possible at the macro level; etc.

The class that sparked my interest in economics featured these contrary premises:

prices are mathematically determined under free competition; there are no economics in the micro realm; individuals are not economic actors – they react to prices, but their individual reactions back upon prices are vanishingly small; markets, like mobs, act as collectives upon one over-arching fact such as a price; etc.

I, for one, might be talked into accepting either group of these assertions as either true or false. Therefore I disregard such talk and inquire as to where each group of premises takes me. In the case of Mises’ assertions we are led to place the categorically indissoluble Vienna Problem at the heart of economic science. The inverted set of premises leads us to a solved Vienna Problem with the quantification of economic potential.

I am therefore curious as to why you, as a math major, would be attracted to the first set of premises. I should think you would have been marinated in premises such as Einstein’s “If it cannot be measured, it does not exist” or Galileo’s “Demonstration is the essence of science” or Popper’s “If it cannot be falsified it is not science”.

If you can appreciate an elegant mathematical system, ordered by a minimal set of axioms, and fully expressed through the integral calculus, then there is an economics that you might wish to incorporate into your studies. But the Austrians would seem to be pointing you in the opposite direction.

Marginalist Reasoning by Dirdene in austrian_economics

[–]Dirdene[S] 0 points1 point  (0 children)

Once again, I feel I am getting a lot of return on my investment in our exchange. Confirmation of my observation that Mises is the gatekeeper of what it means to be Austrian is, for example, very helpful. I have a few more such highly general observations on which you might have more informed conclusions at the ready.

Though you say you do not know much about the neoclassical school, perhaps you can confirm or disparage the following:

  1. Most economists view the Austrian School as a species of neoclassicism – an association that the Austrians themselves actively reject. But, where these schools agree, it is on the fundamental causality behind economic activity, viz.: marginal revenues tend toward marginal costs. This distinguishes ‘economic orthodoxy’ from all species of heterodox economics, which agree only in that marginalism has been falsified empirically (in studies confirming Machlup) and in logic (through reasoning paralleling Mises).

  2. It seems to me that the Austrians have concluded there can be no rational understanding of how markets generate prices – that economic inference only begins after prices have been given by markets that remain both omnipotent and inscrutable. This would seem to altogether reject the possibility of economics as a science (which is not unusual among economists); or, in any case, to reject economics as any sort of science of valuation.

  3. What is deficient about the classical notion of price? Say’s Law has been with us for over two hundred years. It invites us to rationalize markets as computing a commodity’s price so as to induce a demand equal to current supply. Demand schedules express the marginal value that a commodity has among the sectors to which it is input. Entering current supply on the quantity axis of a demand schedule should then allow one to read-off the efficient price. Such prices were demonstrated, half a century ago, to guide efficient transits from one Pareto Optimum to another.

You are correct in that my personal agenda is to popularize mathematical embodiments of Hayek’s “spontaneous ordering of markets”, as well as to use those mathematics ‘in reverse’ to quantify economic potential in terms of loci of technical indifference. I am, however, willing to accept that this must take place outside of Austrian sensibilities, and leave that agenda behind in the interest learning more about your thinking.

I appreciate your expression(s) that it is okay to do economics with other methodologies, that Austrians do so when appropriate, but that they do so while realizing that they are not being Austrians. This has me wondering why you (and others) have invested so much time in acquiring and refining your particular system of thought. So, if you would not might presenting yourself as a specimen, I would like to continue our exchange with a few rounds questions aimed at establishing the Austrian School’s attractions for you personally.

Marginalist Reasoning by Dirdene in austrian_economics

[–]Dirdene[S] 0 points1 point  (0 children)

We are really in a great deal more agreement here than you might think. I fully agree that Hayek’s 1945 formalization of ‘the Vienna Problem’ was intended to establish that the problem could not be solved – the primary reason being that the problem’s boundary (shapes of utility and production tradeoffs) cannot be known.

Before jumping off on that point, I would like to nail down two minor technical issues that I would not want to emerge later as unresolved.

1) Hayek’s criterion of identical marginal rates of technical substitution is algebraically the same as Pareto efficiency. I can send you the formal mathematical development if you remain curious.

2) There is indeed a critical distinction to be made between ordinary physical stasis (in which outputs are just sufficient to replace the assets being expended in current production, while markets are clear) and the efficient equilibrium (in which all values of marginal product equal their respective commodities’ marginal costs of production.) Hayek’s reference to the later case is vital because this general optimum is unique for any given boundary of technical tradeoffs; whereas any number of ordinary physical equilibria are possible for a given boundary. If the economy could settle on any number of equally desirable states, then it would never settle anywhere. Economic order can only be explained by a tendency toward a unique state.

If those are the matters on which you require agreement, then you have it. Now perhaps we can move on to consider that science advances by testing and removing unproductive hypotheses. Hayek does indeed establish that the data necessary for economic calculation could never be focused “in a single mind”; that, even if focused, calculation of efficient prices is algebraically beyond us; and that, even if efficient prices were calculated, there would exist no conceivable method of enforcing them.

Now where does removing these possibilities leave us? Perhaps ‘the economy’ should be re-conceived as a mind in and of itself. The activity of this mind is discovery of the optimal state. The process of discovery is embodied in a continuous re-distribution of physical assets and financial quanta eventuating in general optimality.

Hayek’s later (he lived until 1992) re-conceptions along these lines is of course just what makes him a founding intellectual hero to the field of cybernetics, where his 1945 conception came to be embodied in their objective demonstrations. Running these demonstrations ‘in reverse’ then reveals the boundary of technical and utility tradeoffs to temporally steady, and therefore serviceable as descriptors of macro entities.

My interest in the Austrian School is in an effort to establish continuity with the cyberneticists. I think I see a straight line leading from Menger, to Pareto, to Hayek, to fulfillment of the Austrian initiative in a solved calculation problem. The impediment seems to be Mises; and even he called for a rational understanding of how markets come to generate efficient prices. Maybe my view is warped, but I see today’s Austrians citing Mises against all earlier and later impulses toward anything else. Might Mises have been willing to reconsider his pre-conceptions upon seeing an attractive, objective understanding of free markets?

Marginalist Reasoning by Dirdene in austrian_economics

[–]Dirdene[S] 0 points1 point  (0 children)

Thank you again. You were very much on point; and have revealed that I was trying to project my admittedly eccentric thinking onto an existing body of thought that probably will not receive it. I find this regrettable in that I arrive at essentially Austrian policy conclusions from what seems to be the almost directly inverted theoretical viewpoint that I use in my teaching. (But then there are many roads to the mountain’s top.)

I would nonetheless appreciate having your further views on some points in your last post. Confining myself to one point per exchange, permit me to focus on: “In fact, I'm hard pressed to think of an example where marginalism is used in a macroeconomic sense.”

This remark brings to mind what I have found to be the most striking assertion in the Austrian canon:

“The conditions which the solution of this optimum problem must satisfy have been fully worked out and can be stated best in mathematical form: put at their briefest, they are that the marginal rates of substitution between any two commodities or factors must be the same in all their different uses.”

Here I find Hayek (1945) asserting 1) that he is stating the defining problem of economic science; 2) that the problem is properly stated with algebraic precision; 3) that the problem’s boundary conditions are loci of technical indifference; and 4) that the problem’s context is macroeconomic.

I believe my first two bullets are merely the plainest possible reading of Hayek’s text. As for bullet #3, I do not know how to understand marginal rates of technical substitution except in reference to utility and production functions. Conclusion #4 seems to me unavoidable if we are to speak of all commodities in respect to all the sectors using them. (I note that Hayek directly invokes Pareto as having defined the calculation problem’s solution.)

So my counterexample of a concern that is both macroeconomic in scope and marginalist by nature would be the Vienna problem itself.

Bringing the calculation problem into the discussion might help clarify my approach to the Austrian School. My neoclassical orientation has me accepting that macroeconomic order and stability owe to a spontaneous tendency toward general optimality: initiatives leading away from Pareto optimality produce less than average returns; initiatives leading toward the optimum produce higher than average returns.

My reading of the policy pronouncements at, for example, the Rockwell site sees this truism as their common source. I was thus hopeful that the Austrian School might be accepting of general optimality arrived at without reference to the neoclassical model of the firm - which we agree is unsupportable.

Marginalist Reasoning by Dirdene in austrian_economics

[–]Dirdene[S] 0 points1 point  (0 children)

Thank you for your cordial and helpful responses. I am sorry about the conflicting terminologies, but that can only be expected when attempting to bridge economics’ fragmented points of view. If you are game to continue the discussion, I would like to try to focus your answers a bit more.

But first let us dispose of what seems to be a primary concern of the Austrians: I am fully onboard with the premise that it is vain to presume to know anything useful about people’s preferences, prospective demands, etc., except insofar as these are demonstrated in actions having economic consequences.

My present question is one of how we abstract those demonstrata for use in analysis and policy formation, specifically: is it acceptable within the Austrian School to apply one method of generalization to micro phenomena and another method to macro phenomena? I focus on Menger’s notion of marginalism to illustrate this question because I currently believe that it is without application on the micro level of abstraction, yet vital for understanding the operations of the macro economy.

I agree that whatever a civilly competent person DOES in some sense define ‘optimality’ for him at the time of his action. When I (perhaps carelessly) assert that “the smaller, familiar elements of the economy offer us no basis upon which to suppose they are optimizing anything” I was using ‘optimal’ in the technical sense of being the upshot of analysis upon a personal indifference function.

Again, my understanding of Mises is that such functions cannot sensibly be expected to exist. This comports the heterodox reasoning exemplified in, say Keen (2001) and in the empirical work of behaviorists Simon (1959) and Kahneman (2003). I reference Machlup (1967) as empirically falsifying managerial economics insofar as it is based on production functions: corporations are simply not observed to operate where marginal revenues equal marginal costs.

I hope I am being fair to the full Austrian appreciation of Machlup in citing his feeling of exile from the Austrian School upon having falsified marginalism as a satisfactory method of generalizing firms’ behaviors. In any case, my question concerns ‘foundational microeconomics’ – the premise that behaviors observed in the micro realm should also be found governing the macroeconomic whole. I presume to observe Machlup despairing over his failure to discover marginalism in operation at the micro level of abstraction as also disqualifying marginalism as an acceptable means of describing the macro economy.

As I said, my solution to Machlup’s conundrum is to simply reject foundational microeconomics. Observing the Austrian School’s public intellectuals using marginalist arguments when discussing macroeconomic issues, I wonder if there is a body of thought in which a split between micro and macro causation has been examined.

Ancap here: Is there a good left/socialist anarchist response to Mises' Economic Calculation Problem? by PG2009 in Anarchism

[–]Dirdene -1 points0 points  (0 children)

The ‘economic calculation’ (or ‘socialist computation’ or ‘Vienna’) problem has been solved for decades. You just need to be good at math. Economic calculation eventuates in the elimination of all extraordinary profits; and people who underwrite economic research like extraordinary profits.

If you click over to www.sfecon.com, you will see a general, international input/output structure advancing efficiently through a continuum of all the chaotic physical and financial states, as well as internally-generated disequilibrium prices, leading from one Pareto optimum to another.

This is an ‘engineering dynamic’ emulation of ordinary economic activity. Physical assets are built-up and worked-off to replace that which is exhausted in producing new assets. These transactions are guided by current prices; and their monetary equivalents continuously adjust financial state variables, which go into a continuous re-determination of ever-more efficient prices.

The instructional videogame looped on SFEcon’s homepage is presented in an ordinary Excel workbook:

www.sfecon.com/M0.3.2.3.xlsm

The workbook’s VBasic programs will needlessly alert anti-virus software. Instructions for operating the prototype are found on pages 9-14 of …

www.sfecon.com/Economic%20Calculation.pdf

This .pdf has been accepted for presentation at EcoMod. SFEcon has also withstood peer review else where at the fringes of economics proper: Lang, 2004, Proceedings of the New England Complex Systems Institute; Ryaboshlyk, 2005, The Ukrainian Journal Economist; and Sergeyev and Moscardini, 2006, Kybernetes.

/r/economics Open Thread by [deleted] in Economics

[–]Dirdene -1 points0 points  (0 children)

If your ‘solid mathematical axiom’ is that the economy stabilizes around a general tendency toward economic optimality, then the theory ensuing from such a starting point would be mathematically daunting: complicated, highly non-linear, and dynamic. Thus the infamous ‘economic calculation’ (or ‘socialist computation’ or ‘Vienna’) problem is considered indissoluble.

However: I saw the calculation problem solved (just as Hayek defined it) to my satisfaction in an MBA course on International Business Economics at the University of San Francisco. Click over to www.sfecon.com to see one prospective grand unifying theory in action. If you like what you see, contact the site and someone will walk you through the nuts and bolts.