A comment on the concept of desire satisfaction and the Mises-Hayek dehomogenization debate

One of the cornerstones of the science of economics in its post-marginalist-revolution period is the realization that the necessity of “economizing” — i.e., maximizing individual desire satisfaction whilst minimizing the exploitation of productive resources — stems from the fact that the said resources are not sufficient to satisfy all of the desires entertained by the totality of purposive agents.

In this essay I suggest that in order to paint an accurate picture of human psychology, the desires in question should be thought of as unsatisfiable rather than unlimited. Furthermore, I propose that this observation provides yet another avenue for making a cogent analytical distinction between Hayek’s “knowledge problem” and Mises’ “calculation problem”, i.e., it allows for further elucidating the nuanced differences between these two authors’ views on the efficiency (or lack thereof) of centrally planned economies, thus making a contribution to what has become known as the “dehomogenization debate” within the Austrian School.

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Buchanan as a Proto-Dehomogenizer?

"What, then, does Barry mean (and others who make similar statements), when the order generated by market interaction is made comparable to that order which might emerge from an omniscient, designing single mind? If pushed on this question, economists would say that if the designer could somehow know the utility functions of all participants, along with the constraints, such a mind could, by fiat, duplicate precisely the results that would emerge from the process of market adjustment. By implication, individuals are presumed to carry around with them fully determined utility functions, and, in the market, they act always to maximize utilities subject to the constraints they confront. As I have noted elsewhere, however, in this presumed setting, there is no genuine choice behavior on the part of anyone. In this model of market process, the relative efficiency of institutional arrangements allowing for spontaneous adjustment stems solely from the informational aspects.

This emphasis is misleading. Individuals do not act so as to maximize utilities described in independently existing functions. They confront genuine choices, and the sequence of decisions taken may be conceptualized, ex post (after the choices), in terms of "as if" functions that are maximized. But these "as if" functions are, themselves, generated in the choosing process, not separately from such process. If viewed in this perspective, there is no means by which even the most idealized omniscient designer could duplicate the results of voluntary interchange. The potential participants do not know until they enter the process what their own choices will be. From this it follows that it is logically impossible for an omniscient designer to know, unless, of course, we are to preclude individual freedom of will." - J. M. Buchanan, A note stimulated by reading Norman Barry, "The Tradition of Spontaneous Order," Literature of Liberty, V (Summer 1982), 7-58.

In the above fragment the late James Buchanan appears to hint at the notion that the informational deficiencies of a hypothetical central planner (the focus of what has come to be known as the Hayekian "knowledge problem") are distinct from and in an important sense less fundamental than the central planner's inability to evaluate his decisions against the benchmark of consumer sovereignty expressed in freely demonstrated preferences, i.e. the benchmark provided by the free market price system (the focus of what has come to be known as the Misesian "calculation problem").

In other words, even if the central planner can be hypothetically assumed to know everything that is logically knowable to him (i.e., everything about the available supply of consumer goods, producer goods of various orders, and the existing technological possibilities), he is still bound to lack any intersubjective yardstick for assessing the extent to which his decisions satisfy the desires of the consuming public, since these desires can be acted upon and meaningfully reflected only within the institutional arrangements whose existence is logically incompatible with any top-down economic design (notice Buchanan's very Misesian emphasis on the logical impossibility, rather than the practical unworkability, of rational central economic planning).

In sum, the fragment quoted above seems to suggest that, similarly to Coase, Buchanan understood, even if not as explicitly as the proponents of the Mises-Hayek dehomogenization thesis, that these two authors' arguments against the unfeasibility of central planning are perfectly compatible, complementary, and stronger in tandem, but nonetheless essentially different.

Are Human Desires Unlimited or Unsatisfiable?

It is often asserted that "human desires are unlimited", and that this alone makes any concept of persistent economic equilibrium purely hypothetical and imaginary. But is this an accurate picture of human psychology? It would seem to suggest that at any given moment each of us entertains a set of clearly specifiable desires, such as the desire for apples or the desire for iPads, which, upon being satisfied, give way to a new set of this kind, and so on ad infinitum.

It seems to me that it would be more accurate to say that each of us permanently entertains a limited and largely unchanging number of vaguely specifiable desires associated with particular, oftentimes overlapping sensations and values of material, intellectual, moral, aesthetic, or interpersonal nature (power, love, belonging, gratitude, knowledge, the comfort of living space, culinary pleasure, visual pleasure, etc.), the point being that none of them can ever be really satisfied. Thus, as I see it, it is not the case that as the civilization progresses, more and more of our desires are being satisfied, only to give way to new ones, but that our essentially unchanging desires are being satisfied more and more effectively.

This observation, incidentally, appears to me to provide yet another avenue for making a cogent analytical distinction between Hayek's "knowledge problem" and Mises' "calculation problem".

If the "knowledge problem" is to be applicable to genuine concerns of economic theory, it needs to be restricted to what is logically (even if not practically) knowable. Hence, as I see it, it is applicable to the putative central planner's knowledge concerning the supply of consumer goods, producer goods of various orders, and the available technological possibilities (since this kind of knowledge constitutes a finite set of data), but not to his knowledge concerning consumer desires (since, as I argued above, these can be satisfied in a literally infinite number of ways, thus being infinitely translatable into desires for specific consumer goods, and the infinite is necessarily unknowable to any finite mind).

This, in turn, implies that if in a given economy only one will acts with respect to the disposal of producer goods, then, even if the finite mind behind it knows everything that is logically knowable to it, it is still bound to lack any intersubjective benchmark for assessing the extent to which its decisions satisfy the desires of the consuming public as compared with the extent to which they could be satisfied by the decisions of all those who would be eager to acquire the available factors of production and use them in an entrepreneurial manner were it not for the central planner's prohibition.

In other words, the calculation of profits and losses in the free enterprise system allows us to determine how closely we approach a literally infinite horizon. In view of the above, and given that any sufficiently advanced ability is indistinguishable from magic, I guess the reports of the magic of the market have not been greatly exaggerated.

Price Signals - Signalling What and Why?

I must confess that I fail to grasp the import of Hayek's oft-repeated point about "prices communicating information". Hayek says that thanks to the existence of "price signals", a consumer or an entrepreneur need not enquire as to whether the demand for a given good increased or its supply decreased - he simply knows that a rise in its price means that it has to be economized. But why should prices be particularly effective in communicating this kind of information?

Imagine that instead of prices, market participants were to rely on short bits of verbal communication such as: "supply down, demand the same" or "supply the same, demand up". Would such a system work as effectively as the one we are familiar with? No, but not because the relevant information regarding "the specific circumstances of time and place" would not be communicated sufficiently smoothly, but because the form in which it would be communicated would not allow for performing cost-benefit calculations. The usefulness of prices does not stem from the fact that they communicate information (since everything communicates information), but from the fact that they embody consumer choices and entrepreneurial anticipations expressed in the form of intersubjective, numerical exchange ratios.

Sometimes Hayek is more precise and talks about prices communicating "decentralized information". But from the above example it clearly follows that the benefits of decentralization could be utilized in a system without prices as well, even though in their absence those "knowledge benefits" would not translate into economic efficiency. There is no question that quick and reliable transmission of information that results from decentralization is one of the great strengths of the free market economy, but it is logically independent of its other great strength - its reliance on the price system.

Still, it has to be noted that one is of no use without the other - from the catallactic point of view, decentralized information not expressible in terms of prices is as worthless as "prices" issued by a centralized, monopolistic agency.

Many of the points touched upon above were of course made in the dehomogenization debate, but I am not sure whether it specifically addressed the concept of "price signals".