Wednesday, February 13, 2008

Why the Free Market II

From the feedback I got, it seems that I was convincing on why not the controllers, but did not explain much in favor of the free market.

As I have stated before, we are the Free Market. It is the sum of all the individual decisions made by each person in society. We also need to be aware that not everyone who says they are in favor of the Free Market understands what they are saying. To merely reject Soviet Communism does not make one a believer in the free market. There are many on the political left who embrace some concepts of the Free Market, but they reject other parts of it and believe in broad limitations to it. Rejecting the truly free market does not make someone a Communist or a Socialist, but it does mean that you believe in control on some level. As I said last week, the Free Market is a rejection of control.

We usually think of the economy in terms of money, but this is the wrong perspective. If we were stuck on a deserted island, a briefcase full of money is worth no more than toilet paper. The real measure of the economy is the amount of goods and services we are able to produce. This is why economists talk about the Gross Domestic Product (or GDP). It is a measure of all the goods and services produced within the United States.

Our economy can grow in three ways.

1) Invention of a new product or service
2) Perfecting an existing product or process of making existing products
3) Discovering a new resource such as new oil deposits, new foods, new water supplies…

The free market is the best at achieving these three things.

Invention – Many dream of that one brilliant idea with which they can make their fortune. If that fortune did not exist, we would spend less time dreaming about new inventions. If we spend less time thinking about invention, fewer things will be invented. Kids dream of flying through the air like a bird, but the laws of physics eventually put this dream to rest. However, many adults still dream about inventions because nothing prevents the hope of making our fortune. We see a little craft we could make, a book we could write, a store we could open, or any of a million other possibilities. It would not just be fun to try; it is that we could make money too.

It is not that no one in other economic systems invents; it is that the reward is less so they think about it less. I showed evidence recently how countries with socialized medicine invent fewer medical breakthroughs. It is because they limit the rewards. No system rewards invention more than the free market.

Perfecting - We all do this every day. When we are at work or home, we figure out time and effort saving techniques. It can range from learning a short cut key in Microsoft’s Excel to a hip bump to shut a drawer. The primary way that we increase the economy, is to figure out how to produce more with the same amount of resources, or to produce the same using fewer resources. Our resources are our time, our labor, and the physical like wood and steel.

In a free market system, employers bidding for your services offer you wages and you take the best offer. If you are consistently discovering better ways to get more with less, employers will value that skill and reward you with higher wages. Sometimes people find new ways of doing things that offer a reward so large they leave their old job to start their own business. The phrase, “I could do it for half that price” has launched thousands and thousands of businesses.

However, the controllers often think that wages do not match their ideas of “fair”, so they try to set wages arbitrarily by a committee or law using some arcane formula. Teachers and government workers suffer under this practice and have less reward for perfecting resource saving techniques. No system gives as large an incentive to work on perfecting production of goods and services than the free market.

Discovery – Heroic figures fill the pages of American history taking enormous risks to make their fortune by setting out into the wilderness. Settlers went west in search of new land to farm. Miners rushed out to the Rockies in search of gold and silver. Wildcatters in Texas would bet their life savings to find oil. All of these people took huge risks to find new resources because the potential for reward was huge. Today we have people on the left who complain about “excess” profits and they want to take that reward away. If there is less reward, there is less incentive for discovery. No system gives as large an incentive to expand discovery as the free market.

The free market creates the largest incentives for invention, perfection, and discovery. Bigger incentives beget bigger ideas. No other system can match the growth of ideas and the growth of production than the free market. The more we embrace it the smarter and wealthier we will all become.

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