Knowledge and the discovery process

(This policy bulletin is an extract from Unchain the Child by Eustace Davie Publ. The Free Market Foundation 2005)

Schooling constitutes a very substantial part of economic activity in most countries and it is incongruous that citizens as voters and parents should be content to allow this important activity to function outside the competitive market. No economic activity can function effectively unless, within that activity, ‘the ultimate source of the determination of prices is the value judgements of the consumers’ (Mises, 1949). Government planners, as we will discover, do not have the necessary information, and are not able to obtain the information they would require to emulate the functioning of a competitive market. They suffer the same consequences as planners in other socialist arrangements in which economic calculation is impossible.

Impossibility of economic calculation under socialism

Economic calculation occurs in the myriad decisions producers make in attempting to satisfy the demands of consumers and the decisions consumers make in deciding on their purchases. Producers start their calculations with what they believe their customers will pay for the product or services they wish to produce, and in what quantities and at what times they believe the customers will purchase them. They then calculate the cost of all the factors involved in the production and delivery of the goods or services to the point Knowledge and the discovery process 45 of sale. If they find that the price they believe customers will pay exceeds the cost by a sufficient margin to make production worthwhile, they will go ahead with production. In doing their calculations, they are guided by current market prices of all the factors of production, including labour.

Market prices change as consumer demand for products and services rise and fall, making calculation difficult and entrepreneurship risky. If producers are incorrect in their estimates of their own production costs, what consumers will pay, or the quantities they will buy, they face losses. If they are correct, they make profits. Consumers constantly make economic calculations in deciding what to purchase and what not to purchase in assessing how to utilise their available resources to best advantage. These consumer choices determine the prices that guide all production, except when non-economic forces such as political dictates intervene.

All production is aimed at satisfying the wants of consumers. The economic environment that satisfies those wants most satisfactorily is one in which economic calculation guides production to utilise resources efficiently. Freely formed prices are the key attribute of such an environment. They guide the co-ordination of production and supply in a way that both utilises resources most efficiently and makes the greatest number of consumers happy.

Source: This policy bulletin may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.



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