What If There Were No Prices?

What if there were no prices? How would you use available resources?

To appreciate why market prices are essential to human well-being, consider what a fix we would be in without them. Suppose you were the commissar of railroads in the old Soviet Union. Markets and prices have been banished. You and your comrades. Passionate communists all. Now, directly plan how to use available resources.

You want a railroad from city A to city B, but between the cities is a mountain range. Suppose somehow you know that the railroad once built. Will serve the nation equally well. Whether it goes through the mountains or around. If you build through the mountains, you'll use much less steel for the tracks.

Because that route is shorter. But you'll use a great deal of engineering to design the trestles and tunnels needed to cross the rough terrain. That matters because engineering is also needed to design irrigation systems, mines, harbor installations and other structures. And you don't want to tie up engineering on your railroad if it would be more valuable designing those other structures instead.

You can save engineering for other projects. If you build around the mountains on level ground. But that way you'll use much more steel rail to go the longer distance and steel is also needed for other purposes. For vehicles, girders, ships, pots and pans and thousands of other things.

Which route should you choose for the good of the nation? To answer, you would need to determine which bundle of resources is less urgently needed for other purposes. The large amount of engineering and small amount of steel for the route through the mountains, where the small amount of engineering and large amount of steel for the roundabout route.

But how could you find out the urgency of need for engineering and steel in other uses? Find out more as Professor Howard Baetjer Jr. from Towson University explains market prices through the railroad thought experiment.

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[Sam-zwkp]

People in the comments are complaining that they forgot to take the railroad length in consideration. It doesn't matter they forgot it because if they would have included it, the concept was the same. If the railroad through the mountain is faster, the capitalist would estimate how big the difference is and would calculate how much gas he would safe and how much more people would be able to be transferred and then he would be able to make an informed decision based on that. Nobody is saying that not a single capitalist would make bad investments, ofc there would be bad ones. But it's about them being able to make informed decisions in the first place.

[mytech]

Just FYI for anyone wanting to look deeper, this video is mixing the calculation problem of socialism detailed by Mises [circa 1920] with the knowledge problem of socialism detailed by Hayek. They have some similarity but really are different things.

[DoritoWorldOrder]

This is the best educational video that's ever been produced covering this subject matter, and should be included in every economics 101 curriculum in the country!

[BigMathis]

One of the best video on economics I've seen in a long time

[r-]

This video has over six hundred comments. Whatever else this might mean, to me it means one thing undeniably: The topic is relevant.

I've tried to read through this mountain of interaction, if only because I am curious to know what the common pulse of sentiment is in response to such a simple message. A lot of things have been said, but some things seem to get repeated often, and I find the patterns interesting.

One thing that gets mentioned rather commonly in response to the video is that market prices aren't perfect. While this is true, I'm afraid it's beside the point. Detractors to the video's message will need to do more than merely cast doubt on the idea of infallible market prices, because the video isn't suggesting that market prices are infallible. For the video to be taken seriously, it isn't necessary for market prices to be infallible. All that is necessary is for market prices to be MORE efficient at allocating scarce resources which are generally perceived to be of value than if those resources were directed by a central planning board. That's the argument behind the video, and so a focus on assessing the validity of that argument should become the sole focus of all would-be counter-arguments. Going on tangents about greed (common to both approaches), corruption (common to both approaches), pollution (common to both approaches) does NOT tell us which of these two approaches will leave us with more unconsumed resources (savings) after projects are completed than the other one will. That is the central question addressed by the video, and I don't see any opponents actively explaining how central planning leaves more resources available for other projects than market prices do. This is what detractors must argue if they want to directly challenge the video.

Another thing I see often is one-liner swipes using crude expletives—or the “propaganda” catch-all—to denote disapproval, as if this is expected to discredit the central message of the video in one master stroke. What this communicates to me is that a counter-argument isn't at the ready; these frustrated souls may feel a strong need to respond, yet are clearly not prepared for the debate.

I am quite happy to see that this video has led to such a lively ongoing discussion. I want to express my sincere thanks to its creators, and especially to Howard Baetjer, for his commitment to addressing the concerns of as many respondents as he has found the time to engage. I was particularly impressed by his grasp of the socialist calculation problem on a deep philosophical level, and I would be proud to know anyone who cares so much about understanding these ideas so deeply and clearly.

I believe the fallacies will persist, especially in this new digital age, where so much is taken for granted about the power of computers. The need to confront confusion and misunderstanding may have never been greater. The counter-claim is always the same in every new age: “The laws of economics are obsolete, and no longer apply. We can safely ignore them now, as they are only shackles that hamper our supreme vision for future society. We finally have the tools to make anything possible.” This claim is not new, but it will be more difficult to counter in an age of super-computing. The challenge will be to clearly express the knowledge problem on philosophical—not on technical—grounds, where the power to calculate more figures faster can finally be seen as irrelevant to the point at issue.

Ideas have power. Better ideas have more power. In the end, the better ideas—meaning the clearer and more efficacious ones—will win out.

[chubbyninja]

I'm consistently astounded by the vast number of commenters who don't know the first thing about economics who seem to believe they're a subject matter expert.

[gingerfeest]

I had never thought of prices like this: Prices serve to set priority. In an "ideal" society, If the price didn't exist for a finite good, it would be distributed in order of importance to serve the greatest good. So now the people that receive the goods effectively have a price associated with them. Everybody would have different prices for any given good distribution scenario making everything way more complicated than it would be in a universe with prices, but the price function basically is the optimization of this good distribution system. If your job is to determine who gets what in this ideal world, the number that would turn this arduous endeavor into a cake-walk would be the price of the good.

[milafart]

Video notes:
- without market prices, it is harder to determine the value of specific items and make decisions on how to properly allocate resources
- price signals show the value of an item, the future demand/supply, and the amount of resources you should consume/make

[Randsurfer]

Trick question. All of the engineers have fled the Soviet Union. There are only mindless laborers left. Go with the long route using maximum resources.

[supersonicdickhead]

I read somewhere the Soviets even tried just copying prices directly from the Sears catalog which is funny because those prices were derived from the supply/ demand and available resources of a completely different society.

[Fjolvarr]

I really wish that understanding of how resource allocation worked was more common.. Maybe videos like this will help!

[WellWisdom.]

I'm speechless. This info is awesome!

[sevendust]

I've read half a dozen to a dozen books and articles about economic calculation (e.g. Hayek's Collectivist Economic Planning, Hoff's Economic Calculation in the Socialist Society, Steele's From Marx to Mises, Lavoie's NEP), and yet this is the most lucid explanation I have ever seen. Absolutely phenomenal.

[svenhougdahl]

Excellent video! Thank you for the educational resource!!

[mikelly]

This is really fancy way to say “you face the economic calculation issue, comrade”

[Andrew_Sword]

Well in the captalist side you also have to look at what will be more profitable in the long run. What will cost less to operate and which way are people willing to pay more for.

[RoelandCreve]

Best video on this channel in ages! really usefull to share!

[pogchamp-wzud]

"But muh linear programming"

[ROFLMAOtheNARWHAL]

Solution; transform humans into a robotic hivemind.
The Cybermen did nothing wrong.

[thomasjbraun]

amazing how a video about capitalism and the free market gets lost on so many making stupid comments.