The Implications of Marginalism

Reading around the internet lately, I've found a lot of people debating:

A.) Whether or not government can effectively make economic calculations

B.) How government should do so (when both parties agree that government can, in fact, do so).

So, I decided somebody needed to tell these people about marginal utility. As usual, its up to me to save the day.

In this world, we have material goods, and also services (usually based around providing some sort of material good or gain). Different people value things differently. I love hamburgers, Steve loves pizza. Steve likes pizza more than hamburgers, I like hamburgers more than pizza.

Everybody on Earth does not agree with me that hamburgers are better than pizza. There are people on Earth like Steve, who like Pizza more.

Now, let's say I have one slice of pizza, and Steve has one hamburger. We can trade, each getting what the other wants. This system is called barter. The direct exchange of goods.

But say I have pizza, and Steve has a salad. I don't want salad, I dislike it.

So, having pizza, I have to seek out someone who A.) Has a hamburger, and B.) Wants to trade a hamburger for my pizza.

This can, for obvious reasons, become inconvenient.

Thats where money comes in.

So what is money? Money is a good that everybody in society is reasonably convinced, everybody else in society will be willing to accept in trade.

Maybe I don't like salad. But I know that the large majority of the society does, and I'm convinced that I will be able to trade my salad. So I give the pizza to Steve, getting the salad in return. Then, I take my salad to man who makes hamburgers. Maybe he doesn't like salad either. But he is willing to exchange some amount of hamburgers for some amount of salad, because he knows that he can trade salad.

This is the basic function of money. It is the medium(s) in society, which have become sufficiently trade-able that they become a standard of trade. People will measure the value of some good or service in that standard. Maybe one hamburgers is priced at two salads. If this is the case, it is the case because a sufficient number of people value a hamburger more than a salad to charge two salads for one hamburger.

This is the mechanism of price. Price is the way that people express how much they value things.

I like pizza. I will exchange two salads for one pizza. But I like hamburgers more than pizza, so I'll exchange three salads for one hamburger.

The price I am willing to pay for hamburgers, that is to say, how many salads I believe one hamburger is worth, is entirely reliant on how much I, personally, value hamburgers.

I cannot say to Steve that one hamburger is worth three salads and one pizza is worth two salads. Because how many salads is a pizza is worth to Steve depends on who much Steve values pizza, relative to how much Steve values salad.

This is why any sort of central economic planning always fails, period. No individual planner can possibly know how many salads any given member(s) of society would be willing to exchange for one hamburger. Since they don't know, they cannot calculate.

Advocates of central planning often talk about calculating value through group mechanisms. But note that they are never actually doing calculations. They can't calculate because they don't have any data.

What if a man from the government came to town, and said that one hamburger would now cost no more than two salads. Any higher price (such as the price of three salads for one hamburger, which had previously prevailed) is inherently unjust and it is immoral for us to allow hamburger producers to charge the exorbitant price of three salads for one hamburger.

Okay. We have the conclusion: The price of three salads for one hamburger is unjust. The price of two salads for one hamburger is just. But how did the man from the government arrive at this conclusion? How does he know that two salads is the level at which society values hamburgers?

He doesn't. In fact, we do know what level of value is placed on hamburgers by society. Three salads. If it was any less than three salads, nobody would be buying hamburgers. They would not need to have any advanced understanding of economics, as critics of marginalism sometimes contend, nor would they need to be "New capitalist man" as those critics also sometimes contend. All any of them would need to know, would be that they, individually wanted three salads more than one hamburger.

The hamburger producer would be forced to either lower the cost of his hamburgers to the point where they sold in sufficient numbers to create a profit, or cease producing hamburgers.

Similarly, the hamburger manufacturer obviously wants to charge as high amount for his hamburgers as he can. So if society was willing to pay more than three salads for one hamburger, he would raise the price of hamburgers, until he found that his hamburgers were no longer selling.

In this way, Markest Clear

This is a rational and genuine form of calculation. Any one man knows whether or not one hamburger is worth three salads to him. He can calculate, for himself, that 1 Hamburger > 3 salads, or 1 Hamburger <>himself what the "just" price of a hamburger is. I value hamburgers more than Steve, Steve values pizza more than hamburgers. So how can there ever be an objective price for both of us? We assign value to things as individuals, and so price is always a subjective concept, and never objective. It merely is the expression of how much value any given individual assigns to any given good or service.

For this reason, government programs are always a bad idea. The architecture in the Washington, D.C. Mall is very beautiful. Does the beauty of the mall's architecture surpass the price that was paid for it?

We'll never know, because the mall was built with tax dollars. Since the exchange was made coercively rather than voluntarily we have no way of knowing whether or not the taxpayers would have rather had the beauty of the mall or any of the other myriad goods and services their money could have gone to, had they not used it to pay taxes.

Mises famously said that Socialism can't calculate.It isn't simply socialism. It is any government program ever conceived of. The reason is because of marginal utility. Value is subjective.

One another site, a friend of mine said that in his particular field (stability and non-proliferation studies) they cared more about ends than about means. This is both true and important. Government cares about benefit totally regardless of cost.

As any rational economic actor could tell you, considering benefit without any consideration of cost is irrational. Government is an irrational actor.