SA must abandon policies that assume bureaucrats know better than the market. The minimum wage, price controls, state-owned enterprises and restrictive labour laws all stem from the flawed belief that officials can manage the economy better than millions of freethinking individuals in a free market.
The government should adopt policies that allow spontaneous order; where individual voluntary transactions generate economic outcomes. Only by acknowledging the knowledge problem and trusting the market can SA escape stagnation and create prosperity.
One of the most fundamental reasons socialism and government intervention fail is what Austrian economist Friedrich Hayek called “the knowledge problem”. No central planner, no matter how intelligent or well intentioned, can allocate resources as efficiently as a free market.
In The Use of Knowledge in Society, Hayek dismantled the socialist belief that experts, armed with data and models, could direct an economy more effectively than the market. He argued that knowledge in society is not centralised; it is democratised; dispersed among millions of individuals, each possessing unique, local knowledge that no single planner can even begin to grasp.
Every business owner, worker and consumer has knowledge of his or her specific circumstances; insights that are constantly changing and impossible to articulate into raw data. Market prices act as signals, co-ordinating this distributed knowledge efficiently. Rising demand increases prices and rewards production. Falling demand lowers prices and punishes waste. This dynamic process ensures that resources are allocated where they are most valuable; without the need for central direction.
Governments believe they can replace this intricate system with bureaucratic mandates. Yet they invariably fail because:
Lack of real-time information. No government agency can collect and process the vast and ever-changing knowledge that all individual humans possess. Market-driven price signals are constantly adjusting while bureaucratic controls do not.
Distorted incentives. Unlike private businesses, which respond to profit and loss signals, government planners operate outside the discipline of the market. Their decisions are driven by political incentives, leading to waste, corruption and misallocation of resources.
The impossibility of accurate pricing. Socialist economies, lacking a correctly functioning pricing mechanism, cannot determine real value. State planners arbitrarily assign prices, leading to either shortages or surpluses. For example, the Soviet Union suffered from chronic misallocation; factories churned out mountains of unusable goods while consumers queued for days for goods that were essential for their survival.
Suppression of entrepreneurial discovery. In free markets competition drives innovation as entrepreneurs seek better ways to meet consumer needs. Central planning suppresses this process, replacing competition with rigid controls. Without unencumbered competition, inefficiency and stagnation follow.
Not even AI can overcome the knowledge problem. Some argue that AI will solve the knowledge problem simply by processing vast amounts of economic data. This is a fantasy. AI, like human central planners, operates on limited information. It cannot capture the ever-changing, subjective nature of individual knowledge and preferences. A human market economy is an organic process of trial and error, adaptation and innovation that cannot be centrally programmed. No AI, however powerful, can possibly replace the decentralised, arbitrary, decision-making of millions of individual people responding to their real-life incentives.
The only way to handle the knowledge problem is to let the market work. Free individuals, responding to price signals and incentives, make decisions that collectively create an efficient, adaptive and resilient economy. Governments should focus on securing property rights, enforcing contracts and ensuring a legal environment that allows voluntary exchange to thrive.
When governments attempt to replace market mechanisms with bureaucratic control they cripple the very system that allows an economy to function. SA, like many nations burdened by excessive state intervention, suffers from stagnation because it rejects market principles in favour of central planning.
• Davie, a director and board member of the Free Market Foundation, is author of “Unchain the child”.
