“The free market is like a perfectly tailored suit that will last a lifetime. 
Government control is like a cheap suit that despite endless alterations
never fits right and eventually winds up in tatters.” – Dr. Society

What makes the free market so intelligent and superior to centrally planned economies? 

You do.  Every one of us has a supercomputer brain.
The free market system utilizes millions of on-site supercomputer brains who know every aspect of their small share of the total market to accurately determine pricing for goods, services and wages and where best to allocate and produce them.  In computer-speak it is called distributed processing and negotiated networking,   It is what makes the Internet work and is ingrained in Nature itself.  

Nature establishes and maintains the essential conditions for life and the innate intelligence of the insects, the plants and the animals brings order out of chaos.  An ecosystem arises spontaneously based on the participants adaptation to stimuli and signals.   No one would even imagine trying to centrally control nature.  Even slight interference by mankind can collapse an ecosystem.  And yet we operate under the delusion that a government can centrally control an economy.  

A government is incapable of ever planning or controlling the economy.  The Soviet Union proved this, as did the Story of Thanksgiving, where a communal system produced nothing and a system of private property and reward led to a bountiful harvest.  

Nature provides the solution to ordering any complex system.  For an economic ecosystem, like nature, the role of a government is to establish and maintain the essential conditions – e.g. physical security and protection of trade through property and contract rights and a legal system to resolve disputes.  Other than the essential conditions, the government is absent.  The participants adapt organically to stimuli and signals and bring order out of chaos and complexity with accurate prices and win-win trades in goods and services. 

The government is not able to determine subjective value and can not determine the value of any trade. 

Every trade is based on both parties acquiring something more valuable to them than what they trade.  Many of us pay five dollars for a Coffee at Starbucks that we could make ourselves for a fraction of the price.  We buy hot dogs at the baseball game even though they cost twice as much and we are both happy.  I pay more for the convenience or maybe I like the taste or whatever.   You might think that I was ripped off and pass a law to “protect” me from “Price Gouging”.   After all I’m stuck at the Ball game and I will get hungry.  So you set a fair price of 2 dollars. The result would be that no hot dogs would be sold at the game anymore.  It works the other way too.  If you think a worker is not getting paid enough and you set a minimum wage, then the jobs dry up.  To accurately set a proper price for a trade you have to read everyone’s mind and know all the details of their circumstance, desires, business and life.   No one ever trades unless there is some advantage.  A free trade is always a win-win. 

When the government is involved someone is forced to get a deal they do not want.   Often it is lose-lose.     

Price is the bottom line that allows us to make deals without having to lug accountants, lawyers and analysts with us,
just as currency allows us to trade without having to lug our goods around with us.
The best deal can easily be ascertained.
Goods and services are allocated exactly where they are needed or desired.
Wages properly reflect the cost of living based on a survey of accurate prices.
Capital flows where it is needed most and where it will make the most profit.

Profit is a measurement of the success of your enterprise in producing a product or service
and meeting market demands better than someone else’s enterprise.
Competition insures that only the best survive.

Each brain is motivated by self interest to accomplish it’s trading, hiring, occupational safety and customer service in the most efficient and socially desirable manner (or you won’t work or buy from there) so as to maximize it’s profit.   

Since the brains are only handling a small set of information (your business) there is processing power left over to generate new ideas.  If a few of the brains are faulty or make a mistake it is a drop in the bucket and the system is not affected. 

The government planned system on the other hand has only a handful of supercomputer brains without access to all the data needed to compute the appropriate solution at the appropriate time. Data often flows through advisers and so data the central planners receive is likely to be tailored to what the planners want to hear and therefore inaccurate.  Such is the reason for bad laws and bad policy.   Even if the data and plan was perfect, which it never could be,  the central planners can’t do everything themselves.  They have to delegate tasks, and instructions from the top have to filter down to millions of people.  The instructions will get garbled or not be appropriate, the people are going to screw up and have no motivation or incentive to do well other than fear of punishment.  Feedback will not happen, the cogs are not allowed to make decisions and the machine will stall.  Central Planners have no direct sense of the market and no motivation to succeed (make a profit).  Government is a service not a producer.   

Garbage in garbage out.

Every subsidy, wage or price control, tax and regulation warps the free market and causes economic disaster.
President Nixon caused the oil shortage in 1973 by putting price controls on gasoline.
What businessperson will sell gasoline at a forced price of 60 cents that costs them 60 cents or more? 

The government (Specifically Chris Dodd and Barney Frank) forced sub prime lending on banks,
causing the housing bubble and eventual crash that killed our economy.

Presidents Bush and Obama prolonged the great recession by putting us trillions of dollars in debt
for bailouts and “Stimulus” (e. g. payback for campaign contributions and special interests). 

Government forced employers to take out Health Insurance for their Employees.
Medicare price controls inflated “retail” medical costs and killed price competition.
Government regulation of private Health Insurers inflated private Insurance costs and
allowed for monopolizing most Doctors under HMO or PPO plans.
Prices are now fixed at artificially high levels with no competition allowed.
With prices so high, you must have Insurance to afford Health Care.

Central planing always messes up some part of the economy.   Government has no money of it’s own and to do anything it must first take the money from the ecconomy.  In the end all the government can ever do is transfer money, by force, from one sector of the economy to another.    This breaks the intelligence of the market, skews pricing, supply and demand and  “requires” ever increasing control to patch the system – eventually progressing to greater degrees of tyranny.

Free market self interest works to improve society.

Business people are motivated by self interest to keep themselves in business and make a profit by putting out the best product and service and keeping ahead of the competition.

“every occupation, prospers by the aid which each receives from the other, and from the whole. Common interest regulates their concerns, and forms their laws; and the laws which common usage ordains, have a greater influence than the laws of government. In fine, society performs for itself almost every thing ascribed to government… Government is no farther necessary than to supply the few cases to which society and civilization are not conveniently competent.” – Thomas Paine – “Rights of Man”

Political self interest kills society.

Government politicians are motivated by self interest to keep themselves in business by trading campaign contributions for favors, increasing how much they take from you through taxes and printing money, diverting as much of your money to special interests, campaign contributors and government largess (to buy votes from those dependent on the government).
They spend most of their time campaigning and knocking the competition.

Government legislation, laws and regulations “solve” a problem through  coercion and almost always have unintended bad consequences.   A few non intuitive examples:

TRAFFIC SIGNALS CAUSE MORE ACCIDENTS. – research shows that traffic flows better with less accidents when there are no traffic signals.   Drivers have to be more alert so they make less mistakes. Drivers signal to each other which is faster than waiting for lights.

SEAT BELT LAWS CAUSE DEATHS – The total number of deaths from traffic accidents has increased even though there are less motorist deaths.  Drivers who voluntarily wear seat belts are more cautious in general.   Forcing the reckless driver to wear seat belts causes them to be more reckless than they would be without the belts and they kill more pedestrians and bicyclists.

ZONING INCREASES CRIME – Where business and residential mix, residents, businesses and customers’ mutual interest creates an informal neighborhood self-policing.   Engineered neighborhoods end up the most decrepit and crime ridden unless they pay for doormen, security patrols and private gated security.  Projects for the poor with plazas and long corridors that people don’t usually frequent defeat the neighborhood eyes which stop crime.  

BANK RUNS ARE GOOD AND KEEP BANKS HONEST – Government regulation, bailouts and deposit insurance allow bankers to take unreasonable risks.  They lend out more than they actually have (reserves).   In a competitive free market, bank failure is a necessary mechanism for bankers to be more careful with their funds.   What they should be doing is keeping 100% of their reserves.  If you want withdrawal on demand they charge you a fee for keeping your money safe and for checking.  If you want to earn interest, you must put the money in a time deposit CD.  It is not available to you because it is lent out. 

GOVERNMENT STIMULUS DOES NOT JUMP START THE ECONOMY – It just moves money from one part of the economy to another usually contrary to where it should best be allocated according to the intelligence of the market. 

WARS AND DISASTERS DO NOT JUMP START THE ECONOMY – War kills millions of workers and consumes resources.  Repairing or Replacing resources doesn’t create new wealth.   Without the war we would have had the people and the resources and the new business.  If a hurricane breaks a window replacing it may benefit the glazier but is a wash to the economy as a whole.   The gain for the glazier’s business is offset by business lost elsewhere in the economy now that the capital has been spent on the window.  If the window wasn’t broken I would have enough money to buy a suit.  Repairing the window uses up the money.  Repair gives the glazier business but the tailor loses an equal amount of business.  

Moral –  Government interference is more harmful than helpful.   Together the people are more intelligent than a small number of government pencil pushers.  

Above summarized from “The Politically Incorrect Guide To Capitalism” by Robert P. Murphy Ph.D., Regnery Publishing 2007

Reliance on the government leads people to be less responsible.  Instead of talking to their neighbors they call the Police when they hear a loud argument or a child breaks a window.  Rules and regulations replace common  sense and leads to the spectacle of a school principal calling the police to arrest an 8 year old child with a water pistol.