Monday, March 12, 2012

An Introduction to Austrian Economics - Calculations in Kind 1

An Introduction to Austrian Economics

Social Cooperation and Resource Allocation

Calculations in Kind in a Primitive Economy

The task of economizing is as applicable to an isolated, self-sufficient person like Robinson Crusoe as it is to someone who lives in a society characterized by extensive division of labor and complex exchange transactions. Robinson Crusoe's task was to employ the means available to him in ways that he hoped would generate the greatest satisfaction. A process of deciding and choosing was essential to his welfare. Similarly, in modern society vast numbers of interacting individuals try to make the best use of all available means for want satisfaction. This economic problem exists whether the choices and decisions are largely left up to a centralized planning board, as envisioned in the theory of socialism, or whether such choices are made more or less freely on the part of individuals acting in a market economy.
Robinson Crusoe could effectively manage only a limited amount of resources and had to make comparatively few plans about directing their use. Because of the relative simplicity of his range of choices, he could make effective decisions without making any quantitative calculations about the possible results of different courses of action. His ability to assess or anticipate results would likely depend on the observation and intuitive grasp of the productive alternatives before him. Calculations in terms of physical output would suffice because his resources would not be highly diversified, and each resource type would lack, for him, a significant degree of versatility.
He would have access to some of the original factors of all production--land, including natural resources, and labor. However, because of his limited ability to produce goods in his isolated situation, these original factors could not be converted into a wide range of intermediate products such as machines and tools. He would be compelled to use the most rudimentary tools since he could neither acquire nor, given his situation, would he need the more intricate and sophisticated machines characteristic of a modern economy. Consequently, his decisions about how he should use the available resources to obtain consumption goods would not be so complicated as to necessitate some sort of objective profit and loss computation, even assuming the availability of something like money that could be used for computational purposes. The uses to which resources could be effectively put would be more or less determinable. The most versatile factor would be his own labor and ingenuity, which he would utilize in combination with natural resources to produce those products that he preferred and whose production was feasible.
His time and energy would be spent making basic tools, hunting for food, building a shelter, and producing clothing as well as resting. Given his particular situation and wants, he would not have to compile and compute data about the past or expected success of these uses of his time and energy and other factors of production. The limited nature of both his time and energy would prevent his exploiting the complete potential of his island's natural resources. His decisions would be based on a subjective calculus of profitability for each considered action; his alternatives would be so limited that he would be able to observe or anticipate the results of his undertakings in real terms in reaching such valuations. And since he would be producing for his own satisfaction, there would be no problem of his being unable to know which good among those producible should be chosen. His own scale of values would be the sole determinant.
A self-sufficient household could also manage its economic resources effectively without involved calculations of any sort, particularly if it had gradually developed a tradition of resource utilization. Whatever calculations of outcomes were necessary in these relatively primitive situations could be captured in terms of the various outputs, sometimes referred to as calculations in kind. Because of the absence of exchange relations there would be no medium of exchange and thus no common denominator for calculation purposes.

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