… is from page 13 of my late GMU Econ colleague Don Lavoie’s important Spring 1986 Comparative Economic Studies paper, “The Market as a Procedure for Discovery and Conveyance of Inarticulate Knowledge”:
The number of technologically feasible ways to produce any desired good in a modern economy is virtually infinite, but the subset of these which represent production methods that are also relatively economical is much smaller. Without the benefit of a price system, decision-makers who are faced with the bewildering variety of technologically possible methods of production would hit upon a set of economically feasible methods only by the most bizarre accident. The likely outcome of production that is carried on in the absence of price-guidance is that so little would be produced that society would revert to the simple methods of primitive societies.
Thus the aid provided by prices is a reduction in the overwhelmingly numerous possibilities of production methods to a handful that appear profitable ex ante. Of course, only some of these will, as prices continuously change, actually prove profitable ex post and thus survive through time as regularly employed habits of producers. But by reducing to a manageable size the mind-boggling variety of conceivable methods of production, the price system performs an indispensable service.
DBx: Precisely so.
This reality is missed by advocates of industrial policy. By proposing to allocate large quantities of resources by diktat and, hence, in opposition to the manner in which those resources would be allocated by the price system, industrial-policy advocates imagine that, by some miracle, industrial-policy mandarins will somehow know how to allocate those resources in ways that result in better economic outcomes than are achieved by the price system. Industrial-policy advocates never tell us just how industrial-policy mandarins will obtain all the necessary detailed information and knowledge they must obtain in order that these mandarins might have some reasonable prospect of improving the living standards of ordinary people over time.