The answer must be discovered in all contexts wherein scarcity exists no matter the desired end.

From Doing Bad by Doing Good: Why Humanitarian Action Fails by Christopher J. Coyne. Page 63.

Let me begin with some basics of the economic way of thinking. The core economic question is how decisions are made about how scarce resources will be allocated among competing uses. Scarcity necessitates choice, which in turn implies trade-offs since one use of scarce resources precludes another. Economic actors must decide: Should a good or service be produced at all? If the answer is yes, how much of the good or service should be produced? And what is the least cost means of producing that good or service? The answers to these questions, which constitute the “economic problem,” are not a given, but rather must be discovered in all contexts wherein scarcity exists no matter the desired end—whether purely humanitarian concerns, or maximizing monetary profit or some other end.

In a stylized sense, there are two options for solving the economic problem. One option is markets in which buyers and sellers exchange goods and services, typically for a monetary price. In markets, individuals and groups of individuals have plans they pursue, and they utilize market exchanges as a means of coordinating their activities in order to accomplish their desired ends. Prices and profit and loss, which guide people in discovering the answer to the economic problem, serve as coordinating devices by providing continuous feedback as to whether resources are allocated to their highest-valued uses. These signals provide the information and incentive for people to adapt their behaviors accordingly. Within the market setting, resource (re)allocation is not guided by a central planner(s) but instead by the actions of millions of dispersed people each pursuing his or her own individual plans. The allocation of resources emerges out of numerous diverse and independent interactions of individuals with different goals instead of from a consciously predetermined plan with a single set of ends developed by one or a few individuals.

An alternative means of allocating resources is through central planning. Under this method, the plans of many dispersed individuals are replaced by a single overarching plan developed by whoever is designated as the central planner(s). Whereas markets rely on prices and profit and loss as signals to coordinate the activities of people, central planning relies on the allocation of resources according to a prearranged blueprint that attempts to achieve a single set of ends that are predetermined by the planner. Further, the absence of market prices and profit and loss signals means that central planners cannot utilize them as feedback to guide the adaptation of their behaviors. Instead, they have to rely on alternative sources of feedback (such as actual output versus output targets) that do not provide the same information or efficiency as prices and profit and loss, as will be discussed in more detail further on.

There is widespread agreement among economists that markets are superior to central planning as a means of allocating resources in complex contexts precisely because they are so adaptable. However, even though humanitarian action typically takes place in complex settings, humanitarians tend to rely on central planning as the way in which decisions regarding resource allocation are made. As one study of government provided foreign aid indicates, efforts to improve the human condition are often carried out by “unwieldy bureaucracies that centrally plan [the] economies of developing countries, by making large-scale choices. If the international aid regime were a national economy, one thing is clear: the World Bank and International Monetary Fund (IMF) would be after it to reform.” Similarly, in his discussion of the focus on “aid effectiveness” by humanitarian donors, Owen Barder, a development economist, notes that “the coordination mechanism envisaged . . . for bringing it [aid effectiveness] about is that of a planned economy not a market: it is a collective decision among the donors about who will do what, according to where they believe their strengths lie.”