No branch of the U.S. government is entrusted with ensuring the general economic efficiency of our market economy—we don’t have agents who go around making sure that brain surgeons aren’t plowing fields or that Minnesota farmers aren’t trying to grow oranges. The government doesn’t need to enforce the efficient use of resources, because in most cases the invisible hand does the job.

The incentives built into a market economy ensure that resources are usually put to good use and that opportunities to make people better off are not wasted. If a college were known for its habit of crowding students into small classrooms while large classrooms went unused, it would soon find its enrollment dropping, putting the jobs of its administrators at risk. The “market” for college students would respond in a way that induced administrators to run the college efficiently.

A detailed explanation of why markets are usually very good at making sure that resources are used well will have to wait until we have studied how markets actually work. But the most basic reason is that in a market economy, in which individuals are free to choose what to consume and what to produce, people normally take opportunities for mutual gain—that is, gains from trade.

If there is a way in which some people can be made better off, people will usually be able to take advantage of that opportunity. And that is exactly what defines efficiency: all the opportunities to make some people better off without making other people worse off have been exploited. This gives rise to our eighth principle:

Because people usually exploit gains from trade, markets usually lead to efficiency.

However, there are exceptions to this principle that markets are generally efficient. In cases of market failure, the individual pursuit of self-interest found in markets makes society worse off—that is, the market outcome is inefficient. And, as we will see in examining the next principle, when markets fail, government intervention can help. But short of instances of market failure, the general rule is that markets are a remarkably good way of organizing an economy.