Abstract
Economists recognize competition as fundamental to economic science. General equilibrium is not competition; Austrians, like other economists, have sometimes confused the two. The socialist calculation debate and the elimination of competition by socialists in the Soviet Union offer insight into danger of using an equilibrium framework to study competition. Current policy models are based on a general equilibrium framework, but heterogeneous interactive agent-based models are rising to challenge them. Austrian economists should embrace this new direction and guide the creation of agent-based models of the economy.
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Notes
Bukharin summed it up, saying “the end of the capitalist commodity society will be the end of political economy” (cited in Cohen 1980).
As described by the Marxist writer Daniel DeLeon (1906), “At first, its wastefulness is amply compensated by the good it works—the steady improvement of the means of production. In the measure, however, that its wastefulness increases, competition cures itself. Its wastefulness points the way to concentration. Individual capitalist concerns, in the same industry, draw closer and closer together. ‘Agreements’, combines and trusts spring up.” DeLeon goes on to explain that, in the “second phase” of competition, the now concentrated industries compete with each other, and this leads to a “war” between them, exposing the rulers of the capitalist system, the capitalist class.
Economic competition was considered very crass and unsocialist, but “socialist competition” or “socialist emulation” was introduced, in which workers and firms tried to compete, without economic indicators such as profit and loss, by working for the common good to increase output.
At least this was the Soviet ideal. In the reality, often stores could not obtain goods easily and were encouraged through “socialist competition” and Stakhanovite campaigns to make the effort to obtain the goods that customers desired (Randall 2000). In short, different stores might end up with a different assortment, but not through innovation and competition, but rather through the luck of the delivery system or the connections of the store manager.
Prices were not always set at cost—some were set below cost and some above cost, but firms could generally not retain any excess profit (see footnote 6) and, if prices were too low, the losses were subsidized—however, cost-plus was the general rule. See, e.g., Nove (1986).
There are minimal exceptions to this, including some funds firms may retain, but they had to be used in accordance with the planned production of the firm, with permission of the state bank. See Berliner (1957).
Lange argued that, in his system, planners could ensure that production was directed toward socially optimal end and that taxation could be used afterward to provide a social safety net and redistribute for greater equality (Lange 1937b). These were the same ends of the Soviet government. The Soviet government also allowed the consumer to freely spend his wages in the shops, without direct distribution (rationing) for most of Soviet period. There were also largely free labor markets for most of the period, with areas involving heavier planning. Of course, the primary difference is that Lange promised that retail would be free; the extent to which this would have been possible in his system as described is debatable.
In a sense, there was profit, but it accrued to the true owner, the state (see Ioffe and Maggs (1987) for a discussion of de facto and de jure ownership structure of the ownership in the Soviet Union), through the mechanism of fixed wage, investment and operating cost funds, and turnover taxes (Berliner 1957). However, the use of this signal for coordinating supply and demand was severely reduced by the centralized pricing mechanism (see, e.g., Nove (1986: 61), Krylov (1979: 33), Wilczynski (1977: 212)).
Readers of this journal are the unlikely to require a reference on this point. It will suffice to remember that just a few years after von Mises (1990 [1920]) had argued that, without market prices, “There is only groping in the dark,” socialist-sympathizing economist Barbara Wootton described the war communism period, saying that the “Supreme Economic Council had to make guesses in the dark” about what to produce (Wootton 1935: 58).
Furthermore, shortages and surpluses at factories could not help planners to see which factories were able to produce more or less, in part because “a material control would produce a mixture of surplus and shortage items, but would give no picture of the total performance of the enterprise. This is because discrepancies in performance are unavoidable and their causes are partly beyond the responsibility of the enterprise, lying in the realm of delivered and intermediate products” (Hirsch 1961, p. 50).
Little by little, planners realized the importance of the holistic target. Profit was introduced as one indicator (Berliner 1957), but, because planners still set prices centrally, it was of little use. “While theoretically appealing, the meaning of profit guidance is often unclear in a system where prices bear little or no relation to relative scarcities,” (Gregory and Stuart 1990: 437). Planners continued to reform targets, hoping to better guide firm managers to properly fulfill customer needs, without allowing them to serve their customers in a decentralized manner, e.g., guided by profit (Nove 1986; Berliner 1957).
The Soviet economy was not only inefficient in that it did not produce the goods that the consumer desired; it also had industrial labor productivity of about 55% of that in the USA until its fall and as low as 5% of the USA in agriculture (Rutland (1985: 110 and footnote 20)). There were incredible shortages of capital goods and inefficiencies of transport (Krylov 1979: 133–134) and supply, which together induced “armies” of middlemen called tolkachi to hang around hotels for months, in hopes of bribing enterprises to allocate intermediate goods to their own factory, ahead of other enterprises (Berliner (1957: 210–214)).
Yeager (1999) enumerates many supposed advantages of general equilibrium modeling, mostly as compared with partial equilibrium.
The classic response to this is that they can adopt the technology of the other firm at no cost (through imitation). This is not what occurs in the real world, though. In certain circumstances, large inventions that reduce cost can be adopted cheaply by other firms; but, in everyday competition, competing firms must find their own way to cut costs and reduce their price to the level of their competitors. They cannot imitate a technology that is protected by trade secret or which is particular to the firm in question. All businesses do not lower their costs in the same way or use the same technology: each has its own method. Competition is about innovation not imitation. The simplification might be useful if it did not mask the very nature of what it attempts to model.
Again, in rare circumstances, a firm may simply mimic the competitor’s innovation. This is what many Chinese knockoff firms do. However, most markets do not look like Chinese knockoff markets. When Coca-Cola comes out with a new flavor of soda, Pepsi Cola cannot simply adopt the identical formula; it must invest in its own new flavor, which may or may not target the same group.
Strictly speaking, you would also have to assume that the firms have the knowledge of the other firms’ products and technology, filling out the other equilibrium assumptions.
This better satisfaction of human needs is not the same as a movement “toward equilibrium.” There is no movement toward anything in this vision, and it is admitted that the improvement of needs creates further “disruptions” in the price signals.
For example, “In order to grasp the function of entrepreneurship and the meaning of profit and loss, we construct a system from which they are absent. This image is merely a tool for our thinking. It is not the description of a possible and realizable state of affairs. It is even out of the question to carry the imaginary construction of an evenly rotating system to its ultimate logical consequences. For it is impossible to eliminate the entrepreneur from the picture of a market economy. The various complementary factors of production cannot come together spontaneously. They need to be combined by the purposive efforts of men aiming at certain ends and motivated by the urge to improve their state of [p. 249] satisfaction. In eliminating the entrepreneur one eliminates the driving force of the whole market system.” (von Mises 1966 [1949]: 248)
Even those with a very sophisticated, subjective and Austrian understanding of equilibrium tend to summarize the problem with the notion of general equilibrium in these terms. For example, Selgin (1988) concludes that “To ask whether general equilibrium can ever be achieved” is to “wonder whether innovation and unexpected change will disappear.” This still begs the question of how the general equilibrium was achieved from which no innovation or change allows it to remain in equilibrium. The innovation is still pictured as outside the process of equilibration and equilibrium.
In ecological systems, there is said to be an equilibrium when a predator population is in balance with its prey. The balance means that no predator starves, and no food goes to waste. Although a certain predator and prey population may find equilibrium and many different sets of predator and prey may find equilibrium, this does not establish that there is a movement toward overall general equilibrium among all animals of the Earth. In an isolated system such as a park, the observed single predator–prey population equilibrium is often found. In a jungle, there are many more predator and prey populations interacting and hence “disturbing” the equilibrating process.
The models currently in use by the US government are simpler than the cutting-edge models. See, for example, Joint Committee on Taxation (2006).
For, a good overview of some of the earlier advances and of advantages of using DSGE, see Diebold (1998)
MacKenzie (2008) makes the case that von Mises and von Hayek were equilibrium theorists. Describing the Austrian equilibrium theory, MacKenzie makes the case that, like lily pad jumping frogs, “In each plain state of rest we acquire knowledge that partially aligns our own expectations with those of everyone else. The knowledge we acquire in each plain state of rest impels us [to] undertake actions that move us toward the next plain state of rest.” If this were the case and each plain state of rest could be discerned and defined through market clearing, then DSGE models may be defensible. However, the actual market process cannot be well described by a series of definable equilibrium states.
Buiter, W. Financial Times web log. http://blogs.ft.com/maverecon/2009/03/the-unfortunate-uselessness-of-most-state-of-the-art-academic-monetary-economics/ (Last accessed, March 29, 2009).
Sandye Gloria-Palermo makes this same argument. “Simultaneous equation systems, differential equations, mathematical functions and derivatives are appropriate tools for the neoclassical approach, but of little use for a causal-genetic approach that is interested in the emergence of certain phenomena. The division in question is of an ontological nature and recalls the debate between formalist and constructivist mathematicians in the 1930s. The equilibrium logic requires formalist tools, while the causal-genetic approach requires constructivist tools. Today, what is on the agenda for Austrian authors is to try and imitate evolutionists, that is, to import into the domain of economic analysis the tools that have been developed, above all, in the cognitive sciences. Their integration into the new institutionalist paradigm may well provide the impetus to do precisely this. As far back as 1979, Littlechild made a similar suggestion, namely to reformulate Kirzner’s theory of entrepreneurship using evolutionary game theory in order to see to which extent this tool could be adapted to Austrian reasoning. More recently, Lavoie et al. (1990) have expressed their enthusiasm about combining Hayekian economic analysis with computer sciences, and Vaughn (1999) has pointed to the compatibilities between the theory of complexity and von Hayek’s analysis of spontaneous order. It should be noted, however, that, inevitably, only very few of these contributions have gone beyond a purely methodological investigation and a discussion of the feasibility of entering into an alternative agenda of formalizing Austrian ideas. Doubts regarding this promising new avenue of formalization along evolutionary lines also arise from a—at present largely unjustified—resistance to the introduction of mathematical tools. This risks leaving modern Austrians with the image of a rather outdated community of authors.” “Modern Austrian Economics: Archaeology of a Revival,” Found here: www.unibs.it/on-line/dse/Home/Novita/documento5496.html (Last Accessed April 1, 2009)
More information on Brookings agent-based models can be found here: http://www.brookings.edu/topics/agent-based-models.aspx
More information about the agent-based models of Argonne National Laboratory of the US Department of Energy can be found here: http://www.anl.gov/Media_Center/News/2008/DIS081114.html.
I wrote an agent-based model for a programming magazine that was 360 lines of code, which included buyers and sellers and a simple learning algorithm; the little model illustrated that imperfect information in the market allows firms to keep their prices higher. A simple model like that could be used for demonstration purposes or could be made more complex to explore whether this result has positive or negative implications.
For example, SWARM or MASON. Some resources can be found here: http://www.econ.iastate.edu/tesfatsi/acecode.htm (Last accessed April 1, 2009).
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Nell, G.L. Competition as market progress: An Austrian rationale for agent-based modeling. Rev Austrian Econ 23, 127–145 (2010). https://doi.org/10.1007/s11138-009-0088-2
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DOI: https://doi.org/10.1007/s11138-009-0088-2