Shortly after the fall of the Berlin Wall, a group of Soviet officials were sent on a mission to London’s fresh-produce market to observe the workings of a free market. The Soviet officials were amazed at the efficiency of the operations: goods came in, money exchanged hands, and after thanking each other, both the customers and the sellers left with smiles on their faces. Flabbergasted that all of this worked without a central authority directing the movement of all the goods, one of the Soviet officials exclaimed, “But where are the surpluses”?
In the Tyranny of Experts, William Easterly says, “The knowledge needed to generate prosperity is not contained in a single mind, it is dispersed among many minds. The free society creates the incentives for each individual to utilize his or own particular bits of knowledge”. This important insight provides part of the answer to the Soviet official’s question. The reason why there were no surpluses in the London fresh-produce market is simple: the resources were not allocated by a central planning commission and they did not need the permission of planners to reduce their prices at the end of the day if this was necessary to sell the last of their produce. Rather, the resources and the knowledge required to bring the goods to market in the correct quantities and at the right time, and to adapt rapidly to changing circumstances, were dispersed between countless individuals and brought together by the secret weapon of prices.
Prices make the activities of supply and demand work without any need for anyone or any group of individuals having to oversee the entire economy and steer it in the ‘right’ direction. As prices adjust, they steer resources and knowledge from one sphere of the economy to the other and there by redirect scarce resources from unproductive to productive sectors.
This ‘planning paradigm’ was ‘hard wired’ into the minds of the Soviet officials and many people around the world still believe that development is, in a fundamental sense, up to government rather than individuals. They argue that the state should know what the people need and ought to make the decisions that affect their everyday lives. Many South Africans continue to struggle under this misconception and espouse that, in order for everyone to benefit, we should all live in a ‘planned economy’.
But William Easterly’s insight has to be taken notice of. No single individual or government can possibly have all the necessary information to make such plans on behalf of a whole nation. Nobody can see or comprehend the machinations of the whole economy. To survive and prosper, individuals need to be free to watch what happens in their little section of the economy and to make decisions that are relevant to their particular situation, be it as an entrepreneur, employer or worker, and do whatever they can to fit their endeavours in with the rest of the market.
Governments simply do not have the time, manpower or computing capacity to collect enough information to allow them to plan an entire economy. Attempts to centrally plan an economy all deliver results that are entirely predictable and equally as tragic as was borne out by the Soviet experiment that condemned millions to a miserable life and often an early death (especially if you failed to follow the orders of the central political committee, known as the Politburo).
What many people fail to recognise and find hard to believe is that a market economy does not operate entirely unplanned. An amazing amount of planning does go into a market economy, but it is planning conducted incessantly, not by one, but by millions of individuals seeking to maximise their own interests to get what they want and to deliver all of the goods and services that people demand.
As competition increases, firms often need to cut costs or profits or both in order to stay competitive and continue to provide the best goods at the best price. Unfortunately, changing consumer preferences may reduce the demand for a particular product and, as a result, some firms may go out of business. Think of the millions of businesses that have had to buckle under the wave of ‘modernism’ and consumer choice: for example, horse drawn carts made way for cars, typewriters made way for personal computers, old fashioned TVs have been replaced by flat screens, photo developers have had to make way for digital photography, bookstores are giving way to e-books etc.
As this evolutionary (and entirely unpredictable to a central planning body) process unfolds, job losses are bound to occur in the various sectors of the economy. But, thanks to the creative drive of entrepreneurs and the redirection of resources, there will always be a market opening up requiring the establishment of new companies and a consequent demand for labour. Provided people are prepared to face new challenges, learn new skills or even completely change their working direction, if business is left to steer itself according to the demands and desires of the masses, there will be work to be done and money to earn.
The lesson we all need to learn is that no company is too big to fail and no industry is worth protecting just because it provides jobs to hundreds of people. If businesses were never allowed to fail, we would still be travelling around in horse-drawn carriages, bashing out letters and reports on typewriters, and many of the thousands of visible and invisible advancements that we enjoy today would simply not have occurred.
The market is an intricate balance between supply and demand and prices are constantly adjusting according to new information. The market is, without any shadow of doubt, far superior to a planned economy that simply cannot adjust to new information, which leads to mismatches between supply and demand that inevitably result in surpluses and deficits. For the benefit of each and every one of us in this country, the market must be free to operate.
Author: Jasson Urbach is an Economist and director of the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the FMF.