Economic systems can be considered to fall along a continuum. At one end is the pure market economy, where the government only provides the basic rule of law, enforcement of contracts and property rights, and some public goods. All property and the means of production are private owned. At the other end is the pure command economy, where the government is responsible for all key production and consumption decisions, and owns most property and the means of production, on behalf of citizens.
All modern economies fall somewhere in between these two extremes, and most developed countries are closer to the market economy end of the continuum than the command economy end of the continuum. That shouldn't be a surprise. Market economies have been incredibly successful over the past century and more, while socialist and command economies have mostly fallen away. [*] However, long before it was apparent that the command economy was a slow-motion train wreck, it was heavily critiqued by the Austrian school economist Ludwig von Mises, in his famous paper Economic Calculation in the Socialist Commonwealth (originally published in 1919, then translated to English in 1920). Von Mises essentially argued that money and money prices provided the information that was necessary for the market system to function efficiently. Because a socialist economy lacked money prices, a socialist planner could not properly coordinate the economy in as efficient a manner as would be achieved in the market economy. Von Mises concluded that "rational economic activity is impossible in a socialist commonwealth".
The difficulty of rational economic planning by a central planner was brought home later by economics Nobel Prize winner Leonid Kantorovich. In a story I first read in Tim Harford's book Adapt (which I reviewed here), Kantorovich applied linear programming methods to the production and allocation of Soviet steel for a single year (it is mentioned briefly in this biography of Kantorovich as well). Solving this problem using complex mathematics took several years. And that was for a single (albeit large) industry. For a single year.
However, computing power and computer science methods have progressed significantly since von Mises' and Kantorovich's time. The availability of big data, machine learning algorithms, and artificial intelligence might suggest that command economy planning will become more feasible. Not so, according to this new article by Karras Lambert (George Mason University) and Tate Fegley (Montreat College), published in the Journal of Economic Behavior and Organization (sorry, I don't see an ungated version online).
Lambert and Fegley go back to the original arguments of von Mises and outline how the basic problem of economic calculation is not resolved by big data, increased computation, or artificial intelligence. Specifically, they note that:
Can “big data”, absent the market pricing process, generate a commensurate cardinal unit with which to meaningfully compare costs and proceeds of productive actions? Does it provide a mechanism for translating ordinal preferences into commensurate cardinal numbers? Does it give a central planner the capability to engage in entrepreneurial price appraisal without genuine market prices for goods of all orders? The answers are evidently no on all counts. As a result, “big data” itself, while undoubtedly a useful tool for entrepreneurs operating within a market system, cannot replace the pricing process or render unnecessary private ownership and ex- change of the means of production.
The key point for me is that big data and algorithms, by construction, are based on past data. The most useful data for planning are data that come from the decisions of consumers and producers. If we moved from a market economy to a command economy, the extant data would become progressively outdated over time. Eventually, relevant data necessary to estimate big data models and algorithms would not exist at all.
It seems to me the argument about whether the pure socialist or command economy is feasible needs to be set aside for a while yet. Perhaps we come back to it when we get artificial general intelligence, or where we get so much computing power that we can simulate entire people, with all of their preferences, quirks, and sub-optimal decision-making capacities.
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[*] Some might argue that China is a counter-example. However, when you look at the characteristics of the Chinese economic system, it looks much more like a market economy than a command economy. Indeed, it is not so much a socialist or command economy, but socialism with Chinese characteristics.
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