| Now, one of the main things that Hayek pointed out is that the price system is, in fact, the best "calculator" that we have for the efficient allocation of resources. Out of innumerable individual negotiations and transactions, the price system works up a rough estimate of consumer preferences and how they match with current resources. It signals which things might be in short supply, and represent opportunities for profit- seekers, and which things might be in a glut, and worth disinvesting in. Similarly, capital instruments, such as shares and bonds, contain important information in their prices. Anyway, distortions in the pricing system lead to ever greater inefficiency in the economy, and thus the waste of resources. Even granting that the government makes legitimate spending decisions, for example, in providing for defense, the more it uses instruments like subsidy, the tax code, and regulation to control elements of the economy, the more it distorts the pricing system and leads to inefficiency, such as recession and inflation. |
