No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Ten: It’s all About the Institutions! 236 View the following video for a modern version of this story. Fortunately, the market process provides the right feedback to guide all participants to behave in socially desirable ways. That feedback is, once again, through relative price signals; if the price of one input is undervalued, for example, its price will be bid up as more of that asset is used. This type of relative price adjustment will help coordinate the plans of everyone involved. Entrepreneurs that respond correctly to market feedback via price signals will earn profits, and those that don’t will suffer loss. Of course there are many people who are enamored enough by central planning that they don’t care about true consumer preferences, precisely because they do not approve of those preferences. So they may think it is still possible to have central planning to produce in keeping with what consumer preferences “ought” to be, according to their view of “allowable” preferences. But even if this is accepted, it ignores the supply (or production) side of the equation. There are millions of potential suppliers that have knowledge that the central planner cannot know—what the economist F.A. Hayek calls the knowledge of time and place. The man on the street sees a specific opportunity to profit that may be fleeting, or it is small enough not to matter in the aggregate. It is this potential entrepreneur who can direct the most efficient use of resources. The very process of gathering and reporting millions of individual facts to a central planner will necessarily obscure the specific knowledge that must be conveyed to allow central planning. So that knowledge is effectively lost and the knowledge of time and place cannot be aggregated. SOME KNOWLEDGE CAN’T BE ADDED UP! Hayek states 2 : “The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place and that the central planner will have to find some way or other in which the decisions depending on them can be left to the ‘man on the spot.’” I, Smartphone

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