Friedrich Hayek (3)

Continuing my thoughts about Friedrich Hayek directly from my previous post here.

There I asserted that markets are not optimal determiners of prices or demand.

Say that there a market of 100 people each with $1. And 90% want product A and the remainder want product B. So, the efficient allocation of investment would be 90% for production of A and 10% for production of B. In reality, nearly all investment would be for the production of A leading to an oversupply of A and a shortage of B.

Now assume that ten (10) people have $10 each, and the rest nothing. Of the ten (10), nine (9) want product B and one (1) wants product B. Of the rest, 81 wants A and nine (9) wants B. This is the same proportion of people who prefer product A or B as in the previous example. Now, the efficient allocation of investment is 90% for production of B, and 10% for A—a reversal of the previous example. In reality, we would get an oversupply of B and a shortage of A. This is contrary to the wishes of the population.

The disparity of wealth in the market leads to distortions in investment allocation.

Even if the market starts with equal distribution of wealth, disparities in wealth develop over time as the people who make more profitable investment decisions accumulate wealth at the expense of others.