Recently, Bryan posed a challenge and a follow-up to state a basic economic claim that is difficult to explain simply and intuitively. Of all of Greg Mankiw’s Ten Principles of Economics, the one that I think is hardest to explain using simple intuition is this one:

Markets Are Usually a Good Way to Organize Economic Activity.
Households and firms that interact in market economies act as if they are guided by an “invisible hand” that leads the market to allocate resources efficiently. The opposite of this is economic activity that is organized by a central planner within the government.

Why would markets be better than a central planner? One reason, emphasized by Austrians, is subjective valuation. In “Man and Superman,” George Bernard Shaw wrote, “Do not do undo others as you would that they do unto you. They may have different tastes.” The late Bernie Saffran used to keep that quote on his door. The central planner does not have access to individual tastes.

The other advantage of markets is that they adapt more easily and learn better through trial and error. This is a difficult point to get across simply and intuitively. If it were obvious to more people, then my ideas on health care policy would be mainstream and the reforms currently under discussion would be out on the fringe, instead of the other way around.

The simplest intuition I can think of is this. “Market economies consist of individuals who are constantly making mistakes for which they must suffer. Central planning consists of individuals who are constantly making mistakes for which others must suffer.”