# What does my lecturer mean by “economic calculation”?

We got this essay question

"It is argued that economic calculation should exclusively be based on individual utility maximization but include an altruistic concern for the common good and for other human individuals. In the perspective of such an ethical correction of economics we think of the economic actor as an individual, who makes an economic calculation which is extended to include the responsibility for other human beings and society integrating economic calculation in well-founded moral norms and ethical customs of society"...Rendtorff (2010)

Discuss the economics of the creation of a separate aesthetic medical industry, borne out of the technological advances in the health sector. Is the economic calculation based on 'well-founded moral norms and ethical customs' of our society? Support your answer with economic reasoning and ethical considerations for various stakeholders.

I'm not so sure what she meant by economic calculation. Is some kind of economic reasoning such as with indifference curves.

The classic definition of an economic problem is one where limited means may be put towards alternative ends.

• Making the fastest car possible with a given set of inputs is an engineering problem.
• Making the best possible car, where there are tradeoffs between speed and safety is an economic problem.
• Whether to use parts to build a fast car or a delivery truck is an economic problem.

I would call anytime you solve an economic problem as "economic calculation," but I don't know for sure exactly how your instructor is using/defining it.

# Classic, economy wide economy wide calculation question:

To give some structure, I will follow some definitions in Mas-Colell, Whinston, and Green:

• Let $\mathbf{x}_i$ as the consumption vector of individual $i$.
• Let $\mathbf{y}_j$ be the production vector of firm $j$.

Define an allocation in an economy as a specification of the consumption vector for each individual and the production vector for each firm.

$$\left(\mathbf{x}, \mathbf{y} \right) = \left(\mathbf{x}_1, \mathbf{x}_2, \ldots, \mathbf{x}_n, \mathbf{y}_1 \ldots \mathbf{y}_m \right)$$

An allocation is feasible if the consumption bundle can be produced from the production technology and the initial endowment $\mathbf{e}$. $$\sum_i \mathbf{x}_i = \mathbf{e} + \sum_j \mathbf{y}_j \quad \quad \mathbf{y}_j \in Y_j$$

Where $\mathbf{y}_j \in Y_j$ means that the production decision $y_j$ is in the set of production possibilities $Y_j$. If you don't follow the math, that's fine. The basic idea is that an allocation is a complete description of what each individual consumes and what each firm produces.

The economic calculation problem in this context is how does an economic system choose an allocation from the feasible set? How does one figure out what each individual should consume and each firm should produce?

The historical economic calculation debate, between Mises and Hayek on the one side and people like Oskar Lange on the other, was about the extent to which accurate trade-offs can be made in a world without meaningful prices, like the world the naive socialists seemed to envision. For example, if I am looking to buy a car I observe the prices and characteristics of various models, I evaluate the utility I will expect to receive from the various packages of automotive characteristics on offer, compare that utility with the utility I'd expect to get from other uses of the money that I would spend on the car, and make my choice accordingly.

I assume that the question above is asking about the nature of my utility calculation. It is usually, not literally correctly but not too incorrectly either, assumed that the in the above car buying scenario I am considering my utility exclusively, ignoring the way the utility of others might be affected by my choice in obvious (pollution) and not so obvious (how I would alternatively arrange my life based on my choice of car).

What "separate aesthetic medical industry" is supposed to mean is outside of my expertise.

• Thank you Hayek is definitely something i've been reading about. – Ivan Sep 16 '16 at 10:43