Free Market - Econlib - 0 views
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Free market” is a summary term for an array of exchanges that take place in society.
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Each exchange is undertaken as a voluntary agreement between two people or between groups of people represented by agents. These two individuals (or agents) exchange two economic goods, either tangible commodities or nontangible services
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Both parties undertake the exchange because each expects to gain from it. Also, each will repeat the exchange next time (or refuse to) because his expectation has proved correct (or incorrect) in the recent past.
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Trade, or exchange, is engaged in precisely because both parties benefit; if they did not expect to gain, they would not agree to the exchange.
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This simple reasoning refutes the argument against free trade typical of the “mercantilist” period of sixteenth- to eighteenth-century Europe and classically expounded by the famed sixteenth-century French essayist Montaigne.
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The mercantilists argued that in any trade, one party can benefit only at the expense of the other—that in every transaction there is a winner and a loser, an “exploiter” and an “exploited.”
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We can immediately see the fallacy in this still-popular viewpoint: the willingness and even eagerness to trade means that both parties benefit. In modern game-theory jargon, trade is a win-win situation, a “positive-sum” rather than a “zero-sum” or “negative-sum” game.
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Each one values the two goods or services differently, and these differences set the scene for an exchange.
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Two factors determine the terms of any agreement: how much each participant values each good in question, and each participant’s bargaining skills.
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the market in relation to how favorably buyers evaluate these goods—in shorthand, by the interaction of their supply with the demand for them.
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On the other hand, given the buyers’ evaluation, or demand, for a good, if the supply increases, each unit of supply—each baseball card or loaf of bread—will fall in value, and therefore the price of the good will fall. The reverse occurs if the supply of the good decreases.
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The market, then, is not simply an array; it is a highly complex, interacting latticework of exchanges.
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Production begins with natural resources, and then various forms of machines and capital goods, until finally, goods are sold to the consumer.
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At each stage of production from natural resource to consumer good, money is voluntarily exchanged for capital goods, labor services, and land resources. At each step of the way, terms of exchanges, or prices, are determined by the voluntary interactions of suppliers and demanders. This market is “free” because choices, at each step, are made freely and voluntarily.
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Saving and investment can then develop capital goods and increase the productivity and wages of workers, thereby increasing their standard of living.
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The free competitive market also rewards and stimulates technological innovation that allows the innovator to get a head start in satisfying consumer wants in new and creative ways.
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Government, in every society, is the only lawful system of coercion. Taxation is a coerced exchange, and the heavier the burden of taxation on production, the more likely it is that economic growth will falter and decline
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Under socialist central planning the socialist planning board lacks a price system for land or capital goods.
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The fashionable discussion of market socialism often overlooks one crucial aspect of the market: When two goods are exchanged, what is really exchanged is the property titles in those goods.
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This means that the key to the existence and flourishing of the free market is a society in which the rights and titles of private property are respected, defended, and kept secure.
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The key to socialism, on the other hand, is government ownership of the means of production, land, and capital goods.
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ome critics of the free market argue that property rights are in conflict with “human” rights. But the critics fail to realize that in a free-market system, every person has a property right over his own person and his own labor and can make free contracts for those services.
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A common charge against the free-market society is that it institutes “the law of the jungle,” of “dog eat dog,” that it spurns human cooperation for competition and exalts material success as opposed to spiritual values, philosophy, or leisure activities.
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It is the coercive countries with little or no market activity—the notable examples in the last half of the twentieth century were the communist countries—where the grind of daily existence not only impoverishes people materially but also deadens their spirit.