In the market economy, the common measure of costs and revenues is monetary prices. Prices reflect the value of alternative uses because multiple private firms independently value each productive asset based on how it contributes to their own businesses. A competitive bidding process between firms drives prices to reflect the highest and best use of each asset.
Because prices are all in units of money, each alternative can be reduced to a single net amount of money. A net positive amount is a profit, and a negative is a loss. Profits are earned by the firms that are able to find the opportunities to do more with less. In a market economy, entrepreneurs estimate future market prices in order to plan what they will produce.
Mises called this comparative process “economic calculation.” Socialism is an economic system without privately owned capital goods. Productive resources are centrally owned by the state. Without independent private owners bidding against each other, there is no competition and are therefore no market prices, no profits, and no losses. The choice among alternative uses for productive assets becomes a purely administrative process.
According to Mises, this problem cannot be solved administratively, leaving no solution at all. The single owner of all capital goods would have no rational basis for choosing one alternative over another. He would have no way to know whether the one set of final goods met consumer needs better than another.
Nor would there be any means to ensure that the intermediate steps in the supply chain would provide the proper quantities of parts and raw materials, in the right time and place, for production to proceed. If too many parts were produced, then resources would have been wasted. If too few, then subsequent stages could not proceed because of lack of parts, labor, or some other crucial resource.
Computers can do mathematical calculations. That has always been true. A computer, or perhaps several big ones, could solve a very large number of equations in a reasonable time. The economic calculation debate began in 1920 and continued until around 1950. Modern computers did not exist at the start of that time frame, but they began to appear near the end. Although they were not widely used in 1950, their capabilities were evident.
“The economic problem of society is thus not merely a problem of how to allocate ‘given’ resources—if ‘given’ is taken to mean given to a single mind which deliberately solves the problem set by these ‘data.’ It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.”
The purpose of an economic system is production. Socialism is more properly described as a centrally owned system, not a centrally planned system. The question at hand was not whether quantities of inputs could be computed. The question was whether a centrally owned system is capable of producing goods and services without consuming more valuable assets in the process. And that requires prices and calculation.
By focusing on the problem of equilibrium prices, the socialist debate team had narrowed the problem considerably from production to computation. The entire debate is remembered as a debate about planning. Planning was limited in scope to determining the quantities of inputs to be transformed into outputs, assuming known production methods.
Production, like all things that take time, requires planning. The end result, production, requires both planning and execution. The fixation on computing the quantities of inputs to be used in the socialist system ignores the execution step. And the two aren’t entirely separate; the boundary between planning and execution is permeable. Some steps fall purely into one or the other, but a lot of what goes on in a business falls somewhere in between. Producers refine their plans as they are executed and revise them as circumstances change. A plan gives the business enough confidence to start, but it takes more than a plan to finish.
“Once the material is collected, it would still be necessary to work out the concrete decisions which it implies,” he said.
Many other decisions that affect costs and product quality are made on a daily basis. Many decisions cannot be planned in advance and are left to be addressed during execution. The comparison of alternatives using market prices is ongoing from planning through execution. As production advances, many decisions—big or small—must take into account the competitive price system in the same way as did the earlier versions of the plan.
A construction project knows approximately the amount of materials required to build a house, but the supervisor must organize the crew and direct their labor each day to ensure that the building is built properly. Unusual weather, shortages of drywall, or unexpected soil conditions must be taken into account. If a work crew is short-handed, what is the best way to economize the limited supply of labor available on that day? Should the smaller crew proceed with tasks that do not require a large number, or should temporary workers be hired? If the desired construction material is in short supply, should construction halt or a lesser quality substitute be used?
As production proceeds, the remaining cost-to-complete will tend to decrease because some costs are paid along the way, and fewer costs remain. But, If market conditions have moved far enough away from the original assumptions, then abandoning work in progress will result in lesser losses than completing the project. Walking away can be the best thing. In large cities, you may see partially finished office buildings. The initial plan was not completed. Why? The real estate developer may have run out of funds because of underestimating costs. Or maybe because of a decline in office building prices, it no longer made economic sense to complete construction.
Within a firm production is a mix of managed and price-driven. The firm to some extent works on a centralized model, the way that socialists think that socialism should work for the entire system. People are told what to do, resources are sent from the loading dock to the department. Departments of the same firm usually do not bid against each other for the chance to fill an order. But a business plan is only detailed up to a point. Many more decisions must be made along the way. Market prices often are the deciding factor in these choices.
The best or most efficient production method is not purely a technical problem. It cannot be entirely solved by computation. Production methods can only be compared with market prices because the costs of alternatives must be valued differently. In many industries, best practices have been established. Firms in the same industry learn what works based on the history of what has been tried. Along the way, many things did not work and losses were suffered as a result. Production methods that succeed result in lower costs or improved products and so contribute to profits of the initial adopters.
Production methods are not simply given to the management of firms. Improvements came about because an entrepreneur has the freedom to try something different. If socialist factory managers were provided with lists of inputs and required outputs, they would not be in the same position as capitalistic management in a market economy. They would not have prices to guide them in the choice of production methods and the many decisions about how and what to economize along the way.
We have established that production involves planning and execution. Can AI help with either? Yes, surely it can. When processes within a firm can be measured and then data used to train AI, then software can be taught to do some things well and other things just well enough. Over time, human skill in one area may be augmented, or replaced by a computer.
As increased AI capabilities become readily available, they will be offered on the market, for a price. AI, robots, and computers will replace human labor under the rules of economic calculation. Successful choices will become best practices across an entire industry, in the same way that all businesses now use supply chain automation and payment processors. Once widely adopted, these innovations provide a similar benefit to most firms and no longer differentiate one competitor from another.
However, replacing labor with a machine doesn’t necessarily mean reducing costs. A decision to replace people with AI is subject to the same rules of economic calculation as any other choice between alternatives. Whether a machine lowers costs or increases revenues depends on what it does and how much it costs. It is not free to deploy software. Like all technology, AI has a price tag.
Training an LLM is something like statistical averaging over all of the language samples in the input. This is what enables the LLM to produce a coherent response to a prompt. ChatGPT gives a summary of what the average internet writer thinks about a topic. That serves well enough to be useful for many things. If I want to know how to change a setting on my iPhone, then ChatGPT can tell me that because it is widely known.
As X user Bronze Age Pervert wrote: “I think what gets called AI now is good. It’s not really intelligence think of it as a ‘normie simulator’; a contentless mimicry of language and application of rules already describes normie mind.”
Markets are driven by the differential knowledge, skills, viewpoints of the management, and leadership of business firms. The market price formation process is a type of consensus. Through the bidding process, we find what the prices are. The bidding process also determines which firms will have control over specific assets. Each buyer has their own specific use for the asset.
Entrepreneurs bring together in one person the ability to earn profits by directing production. “Using existing assets to produce goods and services” is not a single thing that anyone does, or could do. We have no data on “planning the entire economy” that could train an AI. Firms plan, and individuals plan, but production involves the interplay of all the plans of privately owned firms and all the executions.
Entrepreneurs accept a risk of loss if they fail at any stage—calculation, planning, or execution. The market economy ties production to the personal accrual of profits or losses. Human people start businesses or invest in them in order to provide for themselves, their families, or however they envision their futures.
The meaningful use of time in people’s lives requires continuation of their consciousnesses from the past into the present. Each business has its own time horizon, as required by the time needed to create the product or service, before profits can be captured. The current generation of AI has no consciousness that spans over time. They spin up some computing power when asked a question and tear it down when the conversation is complete. They have no continuous being or purpose that ties past, present, and future into a single timeline.
What AI cannot do is incorporate into a single entity all of the specialized skills that the entrepreneur has: the abilities to calculate, plan, and execute, the personal acceptance of profit or loss, and the continued span of consciousness over time that makes the pursuit of wealth purposeful.