… is from page 23 of Harold Demsetz’s penetrating 1982 tract, Economic, Legal, and Political Dimensions of Competition:
[In laissez-faire markets] [n]ew products and activities succeed only when they result in a net gain in the total value of what is produced.
Two characteristics of the laissez-faire setting are relevant to the workability of this filtering mechanism. First, because the filtering is done according to willingness to pay, not according to some theoretical index of global utility maximization, laissez-faire offers an easily measured money unit guide to resource movement. Secondly, because ownership is private, persons are motivated by their own wealth considerations to respond to this guide.
Decisions in markets aren’t perfect. But they are generally more likely to be better for society at large than are decisions made when market forces are suppressed. And erroneous and harmful market decisions are more likely than are non-market decisions to be quickly corrected in directions that improve matters rather than double-down on the harm.
For example, a privately run school that cannot now cover its expenses will either improve its operations (by reducing its costs or enhancing the quality of its offerings in order to persuade customers to pay higher prices) or it will go bankrupt, releasing those misused resources to be better used elsewhere. A poorly run government school, in contrast, is likely to get rewarded for its incompetence with an increase in its budgeted allotment of other-people’s (that is, taxpayers’) money.
