“If we could just get the right people in charge, we could fix this.”

It’s tempting, isn’t it? When the economy tanks and people lose their jobs and homes, wouldn’t it be better if smart, well-intentioned experts could just… manage things? Set the right interest rates, guide money to the right places, make sure loans go to people who can actually pay them back, stop bubbles before they get too big?

This idea—that economies work like machines you can tune and adjust—shaped pretty much every decision that led to the 2008 financial crisis. There’s just one problem: economies aren’t machines. And thinking they are might be one of the most dangerous myths in all of economic policy.

The economist Friedrich Hayek spent a good chunk of his career explaining why this doesn’t work. He didn’t argue that the people trying to plan or manage economies are dumb or evil. He pointed out that what they’re trying to do is literally impossible. Not hard. Not complicated. Impossible.

Think about just one ordinary day. Millions of people deciding what to buy for dinner, whether to save money or splurge a little, which job offer to take. Thousands of business owners figuring out what to stock, how much to charge, whether this is a good time to expand. Investors trying to figure out where to put their money. An aspiring entrepreneur trying to decide if now’s the time to finally start that business they’ve been thinking about.

Every single one of these decisions is based on knowledge that’s incredibly specific and personal. You know what your family likes to eat, what your budget looks like, what skills you have, what opportunities you’re seeing. The owner of your local coffee shop knows her regulars, knows what sells and what doesn’t, knows which supplier is reliable and which one always shows up late. An investor knows his own tolerance for risk, how long he can wait for returns, what he understands well enough to bet on.

Now imagine trying to collect all that information from everyone, process it, and then tell everyone what to do in a way that works better than what they’d figure out themselves. Even if you could somehow gather all that data—which you can’t—everything would have already changed by the time you analyzed it. Plus, so much of this knowledge isn’t the kind of thing people can even explain fully. Hayek called it “tacit knowledge”—the practical understanding you have in your head that you’d struggle to write down or say out loud. This is the knowledge problem, and there’s no way around it.

So, how do markets handle this? They don’t try to centralize all that information. That’s the clever part. Prices do the coordinating work without anyone needing to understand everything. When copper gets scarce, the price goes up. You don’t need to know why it’s scarce. Maybe there’s a strike at some mine in Chile, maybe tech companies are suddenly buying more. You just need to know the price went up. That signals you to use less copper, find substitutes, whatever makes sense for your situation. Nobody had to send out a memo to every person and business that uses copper. The price took care of it.

Prices are incredibly sophisticated tools for processing and communicating information. They aggregate millions of individual decisions into a signal that everyone can act on. No central planning committee could come close to matching that.

The thing is, the people who caused the 2008 crisis thought they could do better. The Federal Reserve, under Alan Greenspan and then Ben Bernanke, genuinely believed they could fine-tune the economy by adjusting interest rates. After the 2001 recession and 9/11, they dropped rates to 1% and kept them there for years. The goal was good: help the economy recover, prevent deflation, keep people employed.

But here’s what they missed: interest rates are just prices. Specifically, they’re the price of borrowing money over time. And like any price, they’re supposed to be telling you something real about the world—in this case, the balance between how much people want to save versus how much they want to borrow, between spending now and investing for later.

When you artificially push interest rates down, you’re not changing the underlying reality. You’re just lying about it. Suddenly, investments that wouldn’t actually make sense look profitable. Housing looks like a sure thing. Families think they can afford mortgages they really can’t. Banks think loans that are actually pretty risky are safe bets.

What’s frustrating is that none of these people were being stupid or irrational. If interest rates really are at 1%, then yeah, borrowing does make sense. If home prices really are going up consistently, then yeah, that house does look like a smart investment. The problem wasn’t that people made bad decisions. It’s that they made perfectly logical decisions based on false signals about what was actually happening in the economy.

At the same time, you had politicians pursuing what seemed like an obviously good goal: more homeownership, especially for lower-income families and minorities who’d historically been shut out. The Community Reinvestment Act pushed banks to lend in underserved communities. Fannie Mae and Freddie Mac stood ready to buy up increasingly risky mortgages, and because they had government backing, the risk seemed… manageable.

Nobody set out to create a disaster. Everyone had good intentions. But the whole approach assumed something that turned out to be completely false: that policymakers could engineer a specific outcome—more people owning homes—without creating a bunch of problems they weren’t anticipating. They couldn’t.

You’ve probably heard about Adam Smith’s “invisible hand,” right? It sounds mystical, but it’s pretty straightforward: when people pursue their own interests and coordinate through voluntary exchange, you can end up with good outcomes for society without anyone having to plan the whole thing. The key insight is that coordination can emerge from the bottom up. Nobody’s in charge of making sure your city has enough food, but somehow grocery stores stay stocked. Nobody coordinates how many people become plumbers versus how many become electricians, but you can get both when you need them, and the prices are usually reasonable.

This doesn’t mean markets are perfect or that everyone always makes great choices. It just means that this kind of decentralized coordination, guided by price signals, handles complexity way better than any centralized management ever could.

What happened in 2008 showed what goes wrong when policymakers decide they can override these signals. The Fed thought it could manipulate interest rates without creating weird distortions elsewhere. Housing policy advocates thought they could boost homeownership through government programs without inflating a bubble. Financial regulators thought they could engineer safe lending through government backing. All of them were wrong, and their collective mistakes created the perfect conditions for everything to fall apart.

The real lesson from 2008 isn’t that we need smarter people in charge or better computer models. It’s that the whole project of managing an economy from the top down is built on a faulty assumption. That doesn’t mean the government shouldn’t do anything—enforcing contracts, preventing fraud, keeping the currency stable are all important. But those jobs don’t require knowing what everyone should produce or consume. They just set up a framework so that decentralized coordination can actually work.

The trouble starts when policymakers think they can steer the economy toward specific outcomes—higher homeownership rates, lower unemployment, whatever the goal might be. When they try to do that, they’re claiming to have knowledge they simply don’t and can’t possess. They’re overriding the judgment of millions of people who are making decisions based on their own circumstances and what they actually know about their own lives.

Price signals work when they reflect real conditions. When government policy distorts those signals—keeping interest rates artificially low, subsidizing certain kinds of lending, creating incentives for specific behaviors—the whole coordination system breaks down. People make decisions based on information that’s just plain wrong. Resources flow toward things that can’t actually be sustained. And eventually, reality catches up. Usually in the form of a crisis.

The 2008 crash wasn’t capitalism failing. It was the failure of thinking you can manage an economy like it’s a machine—like if you just pull the right levers and turn the right dials, you’ll get the outcomes you want without any messy unintended consequences. But economies aren’t machines. They’re enormously complex systems made up of millions of people making billions of decisions based on knowledge that simply cannot be gathered and centralized. When you treat them like machines you can manage and control, you don’t make them work better. You break the very mechanisms that allow them to function at all.

Learn more about capitalism here.