The Problem of Economic Calculation - Coursework Example

THE CALCULATION PROBLEM Name Course Tutor School City and State Date The Calculation Problem The performance of any economy and its sectors is dependent on the nature of governance applied by the regime in power. Politics and economics are inseparable at the high levels of government because the two aspects control resources among citizens. Economic interests are always at the heart of an administration in streamlining every sector so that they can work in tandem with their manifesto and constitution. However, in handling economic issues of the state in a micro environment, a lot of independence has to be given so that the natural forces of supply and demand play their role in driving the economy. The problem of economic calculation of such a micro economy in highly regulated sectors like health has been constantly present, affecting the performance of an entire economy. A critical economic synthesis of the role of government in reforming major sectors reveals that it is the bureaucracy and politics are what coordinates resources and not the price, as it should be. There are three major forms of administration adopted by governments, capitalism, socialism and communism. Each of these political systems has a different and unique way of planning and calculating for its economy. However, a debate has ensued questioning whether it is theoretically possible for a country under socialism to plan for its economy. Natural economics dictate that resources are scarce and human beings are always in competition to acquire these resources (Steele, 2013, p. 243). Therefore, any form of government ought to plan and distribute the resources equally and appropriately among its major economic sectors. The planning should involve public participation. However, this is not often the case because politics gives advantage to private participants who end up renting and leasing equipment and resources to the public and the government. This translates to the economy being controlled by few individuals. The economic calculation debate revolves around resource allocation and distribution. In a socialist society, the economic calculation is difficult because of the government ownership of the means of production. According to Samuelson, the government controls the means of production, plans the economy and distributes income among its population (Mises, 2015, p. 184). The control by the government is to ensure that the economic system is controlled and regulated so that there is welfare and equality in accessing and utilizing resources. When allocating resources to sectors like health, the government should identify what can be produced and be made available to the public. Dominance of rent-seekers in the health sector will only cripple the government efforts in putting in place production procedures of health products. Health goods and products lack homogeneity because of the numerous health cases that require different equipment, resources and methods of treatment. Production and creation of resources should be controlled by the government to neutralize monopolies created by private individuals seeking to earn wealth. Private monopolies in the health sector act as a rent-seekers, who try to earn wealth without creating it. The economic control of rent-seekers has the aim of using the little available resources to obtain economic growth without giving back any benefits to the society (Gilens, 2014, p. 350). These private entities are mostly monopolies and use economic power to influence government action, whether in communism, socialism or capitalism, for their own gains. In the health sector, rent-seeking lobbies the government to get grants, tax exemptions, tariff protections or loan subsidies to carry out health business. Such activities have no benefit to the micro society and instead redistribute wealth and financial resources from the tax payers to themselves. According to Adam Smith, rent-seekers fall in the category of individuals who earn income from profit, rent and wages. Any income generating activity usually requires capital risks with hopes of return of profit on the initial capital (Gilens, 2014, p. 119). However, rent-seekers in the health sector manage to manipulate politicians to protect them from any form of competition and creating barriers. As a labour intensive sector, the health sector requires hard work, which will only pay if the resources and profits are distributed equally through a uniform calculation system, without considering private monopolies and economic giants that act as rent-seekers. Politicians and state governments understand that rent is the least risky and easiest type of income. The situation comes from the fact that it only requires ownership of health resources as well as potential to use the resource for purposes of generating income by lending them to health users. Moreover, most health equipment, which are taken as resources are expensive to acquire, creating a shortage of supply with an increased, which ultimately makes health costs go high. For these reasons, those who control resources manage to acquire the equipment and lease them to the government. Healthcare is a necessity and the citizens have no otherwise but to pay for the leased equipment for treatment purposes. Rent income by rent-seekers who enjoy political protection necessitates less work and risk than any other form of income. Therefore, rent-seekers would want to earn this income with the little chance they get. However, rent-seeking in the health sector of any country when such private entities engage in rent seeking to increase the economic share of resources without increasing resources. What emanates from such competition is a rise of demand over scarce resources on a micro-economic level (Steele, 2013, p. 268). When demand is higher than the supply, prices are likely to be increased and it is the end users of the health equipment who will have to shoulder the cost. Rent has been used before to give explanation on why some assets accumulate value over time with no labor-cost input. Some economies rule out accumulation of capital arising from rent as a non-productive factor of income. Additionally, any productive factor in an inelastic supply system should receive a return on capital, which partakes in some form of rent (Mises, 2015, p. 164). Medical and health equipment have inelastic supply in the short-term. When it earns return, the return is categorized as quasi-rent because it is similar to rent of any leased land. Private health players and rent-seekers take the advantage of price inelasticity to make the most out of the health equipment. Just like in classical economic theory, short-term returns are an accumulation of resources, which are bound to be earned, whether production goes on or stops. In the short-term, rent-seekers will have contributed little or no labor costs but will be sure to earn at the end of the trading session because the equipment continue to acquire utility (Gilens, 2014, p. 303). Therefore, productivity of an equipment remains a determining factor in the amount rent-seekers will earn at the end of their lease. Unless the government controls the behavior and aggression of rent-seekers in infiltrating the health sector, price will never coordinate resources for equality purposes. The difference created by rent-seekers in leasing their medical equipment to the public results to a marginal private cost. On the other hand, the government, through public utility of its resources, some of which it acquires through lease, results to marginal social cost. A wide gap between the marginal private costs and marginal social costs leads to exploitation of the public, with the rent-seekers benefiting heavily. In the process of leasing, the government will go for the lowest bidder so that it cuts off some marginal costs that may be incurred in the long-ter. Therefore, there should be some form of equality between marginal social costs and marginal private costs. The practice of bringing together marginal private costs and marginal social costs is a common method adopted by Pigovian welfare economies to coarse the health sector. The allocative method is meant to influence economic choice and give a wide variety of health products to the public. When the variety is increased, supply will increase and consumers will have choices, which will ultimately reduce healthcare costs (Gilens, 2014, p. 241). However, objectivity should be of paramount concern because it is only under objective measurability that corrective devices can be brought in to the health sector. Governments and political entities should operate in a market economy, where each player has a fair ground of producing and advertising third products without the interference of rent-seekers. Market economies operate under the concept that capital is heterogeneous. Therefore, the government should protect public interests and not interests of private players who sum up as rent-seeker. Rent-seekers take the heterogeneity characteristic of money to benefit themselves without any labor costs (Mises, 2015, p. 266). Rent-seekers understand that if medical equipment are purchased by the government, the sum invested in the purchase can only be recovered at a considerable loss. This is because the equipment will not find any other use in a different production process other than the health sector. Most equipment leased to government agencies to handle healthcare are always bulky, heavy and once installed become difficult to transfer. Therefore, calculation of the price of transfer from one place to another drives government into utilizing the equipment by leasing rather than buying. Moreover, although the equipment might be of use in a different location within the same state territory, the cost of transferring the equipment will be high. Therefore, it will be impossible to make a full recovery of the purchase investment capital. Essentially, health and medical equipment acquired by rent-seekers cannot be cheaply or easily transferred from one function to another. The aspect of choice comes into play if governments and political entities would want to reform the health sector. Choices come as a result of decisions. The things that happen after specific choices have been made drive specific economic components. Choices matter because they have the ability to solve calculation problems in highly regulated sectors like the health sectors. In such sectors, price system ought to be regulated by price system so that resources are effectively coordinated and not politicians and bureaucracies (Steele, 2013, p. 243). In socialism, the government has total control in making these choices. In communism, the people have the ability to create control. In capitalism, it will require the participation of both the government and oversight authorities to make choices that will regulate intentions of rent-seekers often protected by politicians and bureaucracies. Existence of a free market under the right form of administration will ensure that resources are secured and their best use is known to all the members of the society. The mode of acquiring the resources is determined by the amount of information that is made available to the public. Therefore, at this point, information is considered as a resource of economic importance and those who possess it are reluctant to share because they want to control strategic resources. Although a free market economy might be a consideration by governments to ensure equality in resource allocation, buyers and seller may lack perfect knowledge about the market. In solving the calculation problem so that resource coordination is done by price, the problem of adverse selection arises instead. Rent-seekers, who have more economic muscle and have superior information will make detrimental offers to the interests of their trading partners. Additionally, all the actions that are necessary for verification of information are often not easily observable, which limits the potential of such governments to fully implement cost-equality interventions (Mises, 2015, p. 185). Therefore, a potential moral hazard is created, which is likely to spur unhealthy competition for the scarce health resources. The other problem is the renegotiating activity that takes place after the initial costs have been incurred. In an environment where free market does not exist, pricing mechanism does not equally exist. Therefore, without a pricing mechanism, economic calculation cannot be computed. According to Ludwig Mises, in a socialist economy, there is no private of ownership (Mises, 2015, p. 402). Every important resource like the health sector is under the control of the government. Additionally, Mises was of the idea that the theory of economic calculation would be impossible in a socialist community. All these owed to the fact that individuals could not control strategic items that would benefit the entire state. Contrary to socialism, capitalism gave these strategic resources to superior individuals and rent-seekers, who ended up accumulating wealth without any production or labor costs. With the integration of technology and economic systems, it has become possible and easier to carry out calculations to determine the prices of resources. Socialist communities realized the importance of an adequate system of economic accounting that would consolidate important resources to make calculations easier. The calculation problem from this point became a problem of choice, which could be a selection of capitalism, communism or socialism. Capitalist and communist societies had no difficulties in carrying out calculations and determining prices of strategic and important resources in major sectors like the health sector. The basic problem of calculation and resource coordination of prices can be tackled through three variables. However, this is only possible if the rent-seekers, who are often bureaucratic and political puppets get out of the way. Its interference in major government processes and functions will only curtail resource allocation despite the regulatory measures a regime can adopt. The variables include knowledge of preferences, knowledge of resource stocks and knowledge of opportunity costs or the prices. According to Lange, knowledge of preferences and knowledge of resource stocks are always available in a socialist economy in the same way that they exist in a capitalist economy (Steele, 2013, p. 339). Estimation of prices of health equipment in a capitalist economy can be done through trial and error. Therefore, the health sector in a socialist society can as well estimate the prices of equipment through trial and error methods. Price calculation problem works to come up with a method that would eventually lead to an equilibrium where rent-seekers will no longer control strategic health resources. However, the method developed should be able to secure a more rapid and complete adjustment to cater for daily changes and fluctuations in the different sectors, including health departments. Although various methods will be developed in coming up with solutions to the calculation problem, the methods have to bring forth a considerable economic difference. One method should deduce prices determined by free market parties while the other method should indicate the level at which prices of health equipment are decreed from above. Planning the economy becomes an important factor to help streamline the calculation process so that all economic components are incorporated into the macro-economic model of a state. To take away the superiority from rent-seekers, socialist and other forms of governments need to take control of information and sit at the center of the planning process. As a central planner, all information should be made available despite the fact that there of no mechanism applicable in centralizing information (Mises, 2015, p. 271). If information is distributed, the planning process becomes inclusive and calculations to determine prices and coordination of prices become simpler. When information is made available to the entire public about the procurement, purchase and leasing practices the judgment in acquiring health equipment is more informed and effective. Lobbying, licensing, reduction of competition and creation of barriers to entry are likely to stop because everyone will be informed about health economic process. Possessing relevant information can allow people to start out their own system from a specific system of preferences (Gilens, 2014, p. 209). Additionally, commanding complete knowledge on the availability of means of production and control of superior resources will create a simple way of solving the calculation problem. However, the calculation problem may not be solved soon because of the inefficiency of data from which the economic calculation starts. Societies have developed an economic calculus to solve the problem of economic inequality in the society. Initial steps include redistribution of resources towards greater equality to reduce the influence of rent-seekers. Additionally, socialist societies are eliminating monopoly pricing, which is often enjoyed by rent-seekers because they determine the market prices. Elimination of monopolies will see heightened competition and removal of entry barriers, which will ultimately create a healthy competitive business environment for governments and business individuals (Steele, 2013, p. 331). Over capitalism, socialism advocates for greater technological progress. The fact that the government control strategic resources, the entire society is likely to move faster in one direction. In conclusion, critical economic synthesis of the role of government in reforming major sectors reveals that it is the bureaucracy and politics are what coordinates resources and not the price, as it should be. Economic performance especially on a micro-level is often determined by the natural forces of demand and supply. However, when resources and costs get controlled, then the market becomes driven by few individuals. The calculation problem in determining prices and coordination of resources still exists and several debates have consulted different economic schools to break these questions. Large regulated sectors like the health sector are often affected when resources are controlled by monopolists and leased out by rent-seekers, who end up accumulating wealth without engaging in production. References Read More