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The Socialist Calculation Controversy Redux?

One of the most telling debates of the twentieth century was the socialist calculation controversy. The question, broadly speaking, was whether the government could figure out how to set prices for goods without the market. Frederich von Hayek told socialists that such a feat was impossible, because the market provided information that no centralized authority could replicate. The fall of the Soviet Union provided a real world confirmation of Hayek’s academic insight.

Nevertheless, today much of our debate about growth and inequality still depends on our confidence in government calculations.  In a very interesting article in the Wall Street Journal, Hal Varian, the chief economist of Google, claimed that productivity and economic growth were severely understated, because  government statistics are not capturing many of gains in the information economy. One problem is that government only measures something as part of GNP when people pay for it. But much of what Silicon Valley produces is free or nearly so. Google’s search engine puts the information of the world at our fingertips. Yet this value is not fully captured.

Government measurements of productivity and growth were designed for the industrial age, not the information age, where the dematerialization of the world created by information technology helps create more and more free goods. Another problem is that measurements have trouble dealing with an accelerating rate of change—also a product of the information age’s relentless increase in computational power. A computer itself may cost the same but yet be many times as powerful as last year’s model. How is the government to measure that change in value? It has methods of “hedonic adjustment” but they suffer from the same kind of top-down attribution that bedeviled socialist calculation of prices.

And the problem of measuring growth and productivity is also a problem when it comes to measuring inequality—the phenomenon that many pundits of the left have proclaimed as the central political problem of our age. If there are a variety of free goods that government statistics miss, everyone’s position is more relatively the same, because those of wealth and those of more modest means benefit equally from such goods.  Indeed, one might argue free goods benefits those earning more modest wages than high earners. who have higher opportunity costs in spending the time to enjoy such goods.   Because income statistics miss out on the improvement in health care as well, that miscalculation too misses out on an important force for equality. Everyone has but one life and thus these improvements in health likely have more equalizing effects.

Thus, when people complain about growth or inequality today, they may be misled again by the kind of confidence in centralized calculation that proved such a disastrous mistake in the last century.

Reader Discussion

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on October 26, 2015 at 16:04:39 pm

Thus, when people complain about growth or inequality today, they may be misled again by the kind of confidence in centralized calculation that proved such a disastrous mistake in the last century.

Yes, we should take measurements of growth and inequality with a grain of salt. Indeed, perhaps we should regard growth estimates as systemically biased low, and inequality systemically biased high. And perhaps we have systemic reasons to regard the magnitude of these biases as growing.

That said, what alternative to these measures does McGinnis offer? Hayek, in criticizing government data, suggested that we rely on market signals instead. Does McGinnis imply that the market gives measurements of growth and inequality that are more reliable than government statistics?

Because income statistics miss out on the improvement in health care as well, that miscalculation too misses out on an important force for equality. Everyone has but one life and thus these improvements in health likely have more equalizing effects.

I share McGinnis's suspicion that the growth of free stuff tends to moderate inequality of consumption. This seems pretty self-evident under any model of utility. And if you subscribe to the view that there is a diminishing marginal return on consumption, you would find this dynamic compounded.

That said, we continue to observe disparities in life expectancy among social classes -- and certainly disparities among worklife expectancy. True, that's not a perfect a proxy for who gets the better benefit of health care. (Perhaps there are systemic reasons that the poor face more health challenges than the rich, and thus may consume more health care per capita yet still die earlier.) But this data challenge the assumption that the poor derive a disproportionate benefit from advances in health care.

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nobody.really
on October 26, 2015 at 16:51:26 pm

" But this data challenge the assumption that the poor derive a disproportionate benefit from advances in health care"

Did McGinnis actually make such an assertion?

McGinnis' comments: " Because income statistics miss out on the improvement in health care as well, that miscalculation too misses out on an important force for equality. Everyone has but one life and thus these improvements in health likely have more equalizing effects." - do not appear to be so assertive as you make out.

Other than that, I think your comments are directly on-point and you are correct, McGinnis is not offering a viable alternative measurement. With respect to "inequality", here are some interesting comments:

Measuring poverty
Angus Deaton
Research Program in Development Studies
Princeton University
January 2003
Revised July 2004

Heck, I cannot set up a link for this .pdf file- dang it!

Deaton does a fine job of a) illustrating the difficulty of statistical data on inequality and also covers the issue of what constitutes wealth (material and or political / psychological / health).

Sorry but in addition to being somewhat slow-witted I am also computer illiterate - but it is a nice piece if you are interested.

As for life / work expectancy, there are a host of other factors that come into play. Clearly, government cannot manage these. Or to put it into terms that our fellow commenter R. Richard might use, "what are the motivations of the players and how does this affect (or effect) their encounters with the mechanisms of the society. Individual choice (or perhaps, choices made by the parents of the players) are significant indicators / causes of the outcomes.

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gabe
on October 26, 2015 at 16:57:42 pm

Well, here is the poor man's equivalent for Deaton and the difficulty of statistics on inequality / poverty:
http://www.washingtonexaminer.com/study-census-severely-overstates-u.s.-poverty/article/2574915

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gabe

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