Wednesday, April 27, 2011

Why Central Planners Fail: The Knowledge Problem and Why Markets Win

By one of my favorite bloggers, the "knowledge problem" is the recognition that no one can be an expert at everything while markets are able to facilitate cooperation and communicate through pricing signals (Washington Examiner):

Economist Friedrich Hayek explained in 1945 why centrally controlled "command economies" were doomed to waste, inefficiency, and collapse: Insufficient knowledge. He won a Nobel Prize. But it turns out he was righter than he knew.

In his "The Use of Knowledge In Society," Hayek explained that information about supply and demand, scarcity and abundance, wants and needs exists in no single place in any economy. The economy is simply too large and complicated for such information to be gathered together.

Any economic planner who attempts to do so will wind up hopelessly uninformed and behind the times, reacting to economic changes in a clumsy, too-late fashion and then being forced to react again to fix the problems that the previous mistakes created, leading to new problems, and so on.

Market mechanisms, like pricing, do a better job than planners because they incorporate what everyone knows indirectly through signals like price, without central planning.
Read the whole thing. Sadly, there isn't any shortage of "experts" who believe they can allocate resources and price better than markets leading the Cato Institute to observe that "inside every leftist, is an authoritarian dying to get out."

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