There are two primary economic models in the world today - free markets and centrally (government) planned economies, though of course neither exists in the real world in pure form. Nonetheless, history has produced overwhelming evidence that the free market works better, indeed far better, than the centrally planned economy. It’s not hard to understand why this should be so.
Markets are a means of allocating scarce capital and labor among competing desires. If there were a real surplus of capital and labor, there would be no need for a market – everyone could have all they want of everything they might desire. But in the real world, scarcity prevails.
Now the free market is a feedback system, with price as the feedback signal. When there is high demand for a good or service that is in short supply, the price (and the profit for producers) rises. That encourages (a) more producers to enter the market and invest more capital and labor in creating more supply, and (b) encourages users to be more careful with the available supply. (If gas costs $8 a gallon, I’ll become more careful with my driving, combining trips where possible and perhaps forgoing an expensive driving vacation).
When there is a surplus of a good or service, the price (and hence the profit) will fall, encouraging producers to reinvest their capital and labor somewhere else, in some good or service that is currently in short supply relative to the demand.
Hence the free market works continuously and automatically to adjust the allocation of capital and labor toward goods or services in demand. Of course it is not perfect. There are time lags and unexpected surges in demand and the like, but all in all it works pretty well, factoring in the daily price signals from tens of millions of customers each day as they decide what they need and how much they are willing to pay.
Now the centrally-planned economy tries to replace all those millions of daily price signals with the expertise of a few government bureaucrats. In practice these are frequently political appointees with no special expertise in the economy, making decisions based on political priorities or ideological mythologies. But even if we were to find the world’s smartest economists for these positions, they simply can’t get all the day-to-day information that is provided by the price signals from tens of millions of customers.
So that, in a nutshell, is why the free market works better than a centrally-planned economy. No central planning authority can possibly get as accurate and as timely information about day-to-day fluctuations in demand and supply as simple market price signals from tens of millions of consumers every day.
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