Loose Change

People talking
And they're saying that you're leaving
So unhappy
With the way that you've been living
--John Waite

Let's briefly review why central planners cannot outperform free markets in setting prices and allocating resources.

Viewed through a static lens, planners have to start out by correctly determining proper price and allocation quantities. But all of the PhD brainpower in the world has yet to effectively model economies and markets. Moreover, globalization, derivatives, and other innovations have increased complexity, further restricting cognitive grasp of what is going on. Counting on 'experts' to correctly 'answer' the price and allocation questions ignores the cognitive limits of man.

Free markets, however, rely on the cumulative decisions of many economic actors. Much like the concept of the central limit theorem in statistics, the large number of individual decisions, while most would prove 'incorrect' by themselves, sum to provide an estimate much closer to the 'correct' price and allocation quantities.

The more significant issue is that economic systems constantly change, meaning that the 'correct' answer for the price and allocation questions is a moving target. Central planners have very low capacity to revise decisions on a frequent basis. Instead bureaucratic behavior is famously rigid and maladaptive to dynamic conditions. They can't adjust quickly enough.

The real beauty of markets lies not in their capacity for getting things right at any point in time (although they are likely to crush planners in this regard). No, the power of markets is their ability to adapt.

Markets are vastly superior to bureaucrats in adaptive capacity--a requirement when coping with economic systems that are constantly evolving.