Robust Political Economy The nirvana fallacy is the informal fallacy of comparing actual things with unrealistic, idealized alternatives. We are always going to come up short when we compare to expectations of the ‘perfect world.’ Economist Harold Demstez, creator of the idea of the nirvana fallacy, states, “The view that now pervades much public policy economics implicitly presents the relevant choice as between an ideal norm and an existing 'imperfect' institutional arrangement.” This nirvana approach differs considerably from a comparative institution approach in which the relevant choice is between alternative real institutional arrangements. Comparative institutional analysis focuses on the rules people operate by and is defined as the assessment of feasible organizational or policy alternatives. Comparative institutional analysis goes conjointly with robustness, which is the normal standard we apply. Robustness asks questions such as, ‘what set of rules produces better outcomes in bad circumstances?’ and ‘how well does it keep the really bad things from happening?’ Mark Pennington on Robust Political Economy, draws on two problems: the knowledge problem and the incentive problem. This goes hand in hand with the economic calculation problem proposed by Ludwig von Mises and later expanded by Friedrich Hayek as well as the comparison between private versus public property in economics. All economic and political systems must challenge both knowledge problems and incentive problems. When there is a knowledge problem, one has the proper resources but does not know how to use them in order to climb up the ladder of success. If we possess all the relevant information, if we can start out from a given system of preferences, and if we command complete knowledge of available means, the problem, which remains, is purely one of logic. In the world of economics and business, the incentive problem has no cooperation and uses resources in ways that cause conflict rather than productiveness due to the fact that people are mostly concerned with remunerative incentives rather than moral incentives. A supply and demand chart can be used as an example of an incentive structure. If everyone in a market has a remunerative incentive, an economic theory predicts that the market will tend to move towards the equilibrium price. Karl Marx, a revolutionary socialist, thought socialism would cause people to change and that eventually people would do things without incentives. The economic calculation problem uses economic planning to determine the proper way to allocate resources and factors of production in economics. One example that can be used to explain the economic calculation is a train-building project. If one wants to build a train and there is a mountain in the way, one can either build the train around the mountain (which would mean more time on a train to get to the destination) or one can build through the mountain (which would be much faster to get to the destination but would require much more work.) Without monetary calculation, one can not determine which way is cheaper leading back to the economic problem which is getting what you want without giving up more things to get what you want.
The economic calculation problem sparks a socialist economic debate. As economists begin to research and test out these theories, market socialists have stated that Mises is right and that Hayek has only caused confusion to the arguments. Mises states that “If there is no private property in land and other production factors, then there can also be no market prices for them.” He believed that socialism’s problem is the lack of private property and economic planning. Market socialism is rooted in Adam Smith’s classical school of thought, which believes in no government regulation. Early neoclassical examples of socialism were based on setting prices to equal marginal cost.
Market success is based on four components: private property, competition, price, and profits. Private property is a crucial foundation of the market process leading to competition. As long as one uses their own products, they are free to enter the market and sell what they desire at their own price because overtime someone else will have more profits and more control. Market success can be easily disturbed if not planned correctly. When dealing with politics in economics, there are three key factors: public property, restrict entity, and authority. Public property belongs to anyone and is supposed to be for the benefit of everyone but must restrict entity and is controlled by authority figures. Public ownership of the means of production is achieved through public ownership of equity and social control of investment. In regards to human nature and robustness, it does not matter what rules one is under; if people are motivated they will do what they want. Under conditions of total benevolence and omniscience, any political economic organization is workable; but, in a world of gods, the notion of economy, the science of economics disappears. It is assumed that only self-interested parties populate the market world taking over the control of political positions of authority. Political self-interest is used to generate social cooperation. Mises and Hayek believed that the system collapses even when better than real-world conditions are assumed. Socialism cannot be expected to robustly deal with real-world economical conditions and is fragile under both best-case motivation and information conditions concluding that liberalism out performs socialism.

Sources http://en.wikipedia.org/wiki/ American Economic Review. XXXV, No. 4. pp. 519-30. American Economic Association

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