Monday, October 28, 2013

Imperfect information

This chapter has made me realize how much information can be imperfect. In the past I thought Hayek's Book Road to serfdom, and George Orwell's book 1984 Were written largely in response to Lennon's  government during the Soviet union. However I see that now they were really written in response to Britain's postwar government strategies. This realization pressed home to me the fact that information is something that is constantly being acquired and is often imperfect.
Because of imperfect information we see why a free-market system works as efficiently as it does. In a free-market system there is no central intelligence that collects information and uses that information to decide what goods can be produced and at what prices. This means that the prices will reflect what the incentives of the people and not be based on imperfect information. This also means that the supply will be incentivized to meet the demand based on that price and as such will supply goods in the quantity demanded. The system does not require the collection of information and as such is a much more agile system.
In contrast a command economy or an economy was centralized planning would have to collect information about what people need and what they're capable of producing then make a determination as to what the price of good should be with the quantity of good should be and how those good should be distributed. I mentioned at the start of my post information is often imperfect, this means that in a centralized planning system there's a lot of room for error simply from the information acquired.
Ultimately even with the best of intentions the lack of perfect knowledge could very well lead to very poor economic choices simply because the centralized planning "committee" is misinformed. This is not to say that a centralized planning system could not function at all; however it seems readily apparent that the centralized planning would not be as efficient and would easily be overwhelmed.

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