Tuesday 25 March 2008

Planned v. market economies

On the blog of the Adam Smith Institute Madsen Pirie considers the idea that A sensibly planned economy is more efficient than random chaos. No one would of course suggest that 'random chaos' is anyway to run an economy and a market economy isn't random chaos. It is, as Pirie points out, a "spontaneous and unplanned order". The real issue isn't about a planned economy versus chaos, its about a planned economy versus a market economy. Pirie goes on to say,
The free economy is more rational than the planned society. First of all, it contains far more information than can be held by one human mind. Secondly, that information is continually being updated by individuals. Thirdly, it is constantly changing and adapting to new circumstances, and modifying itself, learning from errors and improving itself. The planned society has none of these improving characteristics. It makes one giant forecast and attempts to fulfill it, where the spontaneous society makes millions of small-scale forecasts and constantly modifies them.
He adds
The spontaneous society responds constantly to the needs and desires of its citizens. Its overall order is at once more efficient and more moral. It converges on consumer satisfaction and directs resources to those who are successful at achieving it. At the same time, it allows individuals to nominate their priorities and freely to pursue them, instead of making them live as the planners decide is appropriate.
A free market economy is more organized than the term 'random chaos' would ever suggest and makes better use of knowledge to better allocate resources and meet the needs of its citizens than any centrally-planned economy can. Central planning isn't necessary to avoid the problems of a chaotic economic system since a market economy produces not chaos but order, as Adam Smith famously pointed out more than 200 years ago. Eamonn Butler has summarised Smith's insight as:
[Smith] ... realised that social harmony would emerge naturally as human beings struggled to find ways to live and work with each other. Freedom and self-interest need not lead to chaos, but - as if guided by an 'invisible hand' - would produce order and concord. They would also bring about the most efficient possible use of resources. As free people struck bargains with others - solely in order to better their own condition - the nation's land, capital, skills, knowledge, time, enterprise and inventiveness would be drawn automatically and inevitably to the ends and purposes that people valued most highly. Thus the maintenance of a prospering social order did not require the continued supervision of kings and ministers. It would grow organically as a product of human nature. (E. Butler, 'Adam Smith: A Primer', London: Institute of Economic Affairs, 2007: 27-8).
Exactly!

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