The answer to this question is simple. In a society characterized by free markets, the audience "votes" for the best movies through a very simple and direct mechanism: buying tickets. This gives producers all the right incentives to produce movies that people want to watch. Meanwhile, in a society characterized by government controls, money is allocated according to the preferences of bureaucrats, which, independently of being elected or not, can never truly represent the preferences of the public. Government control over which movies should be produced is, in the best case, an inefficient way to allocate funds, and, in the worst case, a tool of oppression and thought control.
The arguments against letting markets judge which movies are good or bad are based on paternalistic, elitist and chauvinistic notions. For example, some people think that consumers don't know how to differentiate good from bad, and therefore government officers should choose for them. Besides the dangerous slippery slope implicit in the argument, it fails for assuming that good or bad can be measured according to some universal quality scale. That's obviously impossible. Some people believe that a good movie is a movie that entertains ("Back to the Future"), others think that a good movie is a movie that's touching ("Eternal Sunshine of the Spotless Mind"), and some prefer a movie that makes you think ("Judgment at Nuremberg"). Preferences may even change according to mood, season, time of the day, or state of the economy. Free markets allow for all these different preferences and variations to exist. Government control does not.
Markets reward good movies and punish producers that carelessly ignore audience's preferences. Suppose that, for ideological reasons, somebody would make a movie romanticizing the "exploits" of mass murderers like Mengele or Blokhin. I believe that the movie would be a box office failure, independently of the amount of marketing and pseudo-intellectual propaganda that would be rallied behind it. Most people would be put off by a movie of this kind, and it would not sell.
As a good example of that, director Soderbergh and actor Del Toro are taking their deserved dose of market poison with their latest movie titled "Che," a movie that falls exactly in the category above. Let's compare the poor box office performance of "Che" with the performance of "Traffic," a successful movie made by the same duo, but that at least cared to tell a decent story. Here are some statistics from IMDb:
Highest weekend gross box office revenue:
"Traffic": $15,517,549 (USA) (7 January 2001) (1,510 Screens)
"Che": $ 233,653 (USA) (18 January 2009) (25 Screens)
"Traffic": $48 million
"Che": $30 million
Ratio of highest weekend gross box office revenue to budget:
The last two numbers tell it all: the audience voted with their dollars, and "Che" is an unqualified bomb, despite the massive efforts by IFC and its European partners to convince the public of the contrary.
"Che" was not produced with money from Hollywood, which rightly chose to stay away from this turkey. Nonetheless, Hollywood has produced movies throughout its history that glorified political and economic ideas that are the exact opposite of the ones behind the system that allowed these same movies to be successful. The irony here is exactly that, in a free society driven by free markets, as long as there are people willing to watch a movie, there will be someone ready to produce it, independently of its ideological content.
As a side note: referring to Che, Del Toro said in an interview given to a French magazine (Femina, January 2009) that "I could have been his buddy" ("j'aurais pu être son pote"). I'll let the video below serve as commentary: