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by Peter Hume, columnist

Imagine an island with seven people on it producing a total of seven goods, with no contact with the outside world.

The economy consists of all the things these people produce and exchange with each other. So Fred catches a fish. Pete cuts down a coconut. And so on.

Remember factorials in maths? 4 factorial equals 4 x 3 x 2 x 1. To find the total possible number of permutations of exchanges on our island, you have to multiply numbers of combinations of persons, and numbers of combinations of goods *factorial*.

If you do the maths, the total possible permutations of one person exchanging one good, is 2,365. If you include all possible permutations of combinations of people and combinations of goods, the total is 700,776,097.

Now think of an economy the size of Australia: imagine the total number of possible permutations of exchanges for 22 million people and thousands of goods.

Of course, the Australian population is not isolated from the world. For the world economy in which we live the total number of possible permutations is truly astronomical.

And remember, that is for a static model. In reality, the market data are changing ever second.

Now imagine that we are intending to replace that system, with one in which a central planning authority is to decide who is to produce what, using what materials, how.

You can see, can’t you, that no matter how clever the central planning authority, no matter how smart his functionaries and committees, no matter how many fancy diplomas they have, the knowledge set that they would need, to equal the status quo in its ability to economise scarce resources, is astronomically bigger than the knowledge set they have or can ever have?

This means the more central planners are empowered, the more will be the social chaos and waste of natural resources they produce.

This problem is inherent in all attempts to replace social co-ordination based on individual liberty and private property, with bureaucratic command-and-control.

Pink batts, anyone?