Some properties of equilibrium price
consider a stylized economy with 5 sellers and 5 consumers
A central planner may select the wrong producer (they cannot produce the good with the lowest cost), or may allocate the goods to wrong customers (they value the goods less than their current price).
Giving goods to a wrong customers cause deadweight lost.
A simple supposition:
If the world consists of only two people A and B, and there is only one guitar worth 20 bucks. A values the guitar at $15 while B values it $25. If the guitar is giving to B, B will get a consumer surplus of 5 dollars while A,since he doesn't get what he want, will bear a loss of 15 bucks.(Suppose there is only one good, a guitar, in the world) And the loss of a society is 10 bucks.
But now if the guitar is giving to A, he will gain 5 bucks of consumer surplus but B, who is deprived of the good, will stand a 25 bucks loss. And the net loss of a society is now 20 dollars.
The similar story can be applied to suppliers as well.
So price system forces customers and producers to examine what they want and what they need to produce. Other ways will impoverish the poor.Central planners simply don't have all the information to make every single decision right.
If there is underproduction and overproduction, consumer and producer surplus will be affect and deadweight loss will occur.
What's the difference when government do trial and error and market do trial and error?
My thought is that:
(1) The government officials are not producers, who acquire the tacit knowledge about how to cut the cost as much as possible while maintaining the quality. (Knowledge problem)
(2) There are too many commodities to allocate, so the men in the government are not enough. Even though the government sets up, for example, pork allocation bureau, beef allocation bureau, the bureaus need bureaucrats to work, they need fund, which will be hugely costly.
(3) Suppose the government can solve the problem of fund. But another question is that these bureaucrats have a greater opportunity cost to do these kinds of jobs. In other words, they have a comparative disadvantages in doing searches than other people , i.e middlemen and producers.
(4) With the very existence of self-interest, no one can be sure that the allocation can be equal and fair. Officials may take bribe or give goods to their friends. Even some people complain that they don't get what they want, the officials can simply say that it's the very outcome of "trial and error"---there need to be mistakes and sacrificers.
(5)The role of government is to enforce the law to protect the citizens from being hurt by dictators. Another role is to control the budget. Hayek points out that the law should be objective and predictable, and stable, letting people know what punishment they will get when break the law. If the government does trial and error, there can be constant change in law, confusing people and giving chances to speculators to get illegal profit. (Actually this is one of the problems in Chinese government policy)
(6)In Bureaucracy, Mises points out that government actions, though can be valuable, cannot be valued by money. The task of bureaucrats is to obey the rule unlike the enterprises, whose task is to produce and get profit under the profit motive. The profit motive forces free enterprise to care about customers needs and desires (this is another implication that no man is free: we have property rights but we have to produce things based on others' preferences). But bureaucrats don't have that incentives. They are not using their own capitals, so they don't have to take great economic calculations before making decisions. So they may stumble upon some good allocation, but as I said, it may be fluke.
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