Markets are often rightly characterized as extraordinary problem solvers. Under the right rules of the game (including private property, free exchange, and the rule of law) people following their own self-interests can coordinate their plans with one another more or less successfully, generating an overall order without being aware, or needing to be aware, of how it all gets done. That’s why economists sometimes say that markets are a lot “smarter” than any single person.
But I think markets are more important for the problems they “create” than for the problems they solve.
As marvelous as the market economy is at problem solving, in a sense the real genius of the market process is in how it brings problems to people’s attention in the first place. Before you can solve a problem, you have to be aware that there is a problem. This, I believe, is the great insight that Israel M. Kirzner, beginning in the 1970s, contributed to our understanding of the market—in particular, that it is a process of entrepreneurial discovery of error.
An economy without inefficiencies is either one where knowledge is so perfect that no one ever makes a mistake, or it’s one in which government policy has effectively foreclosed the very possibility of inefficiency. In a world of surprise and discovery, of experiment and innovation, the former is impossible; the latter sort of economy, as Mises showed almost 100 years ago, is impossible as well as intolerable.
So a living economy needs to “create” inefficiencies, and lots of them, to set the stage for greater efficiency and ongoing innovation. And that’s just what the market process does all the time—thank goodness!