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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.

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