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A Summary of what Makes a Free Market Work

A Summary of what Makes a Free Market Work
by Alex Merced

1) Voluntary Price Systems
Resources are best allocated by a voluntary price system where prices are set by volutary exchanges by people in a free market. If the market is free from intervention prices will reflect the supply and demand of goods helping them be used more efficiently, and encourage individuals to invest in innovations that will address scarcity.
Let's say without subsidies and intervention the price of energy under current technology becomes high, since energy is a need it will encourage investors to invest in research in development of alternate energy sources. Since many market actors will invest in different types of alternatives, over time the most efficient one will survive since it will provide the lowest costs.
Problems that cause goods not to be priced efficiently are many, and are generally cause by the government intervening in the pricing system. Here's a list of some ways a government can manipulate a pricing system and cause economic inefficiencies.
Taxes: By taxing the people, it can create market incentives by giving tax deductions or credits which will increase the demand for a good increasing the price and lower the demand for other goods decreasing the price relative to where it's voluntary price should be. This will create false price indicators to innovators and investors of where innovations and capital are needed.
Price Fixing: By fixing prices the government can cause shortages or surpluses of goods. A government creates a central bank to in part fix the price of money (interest rates) although creating an artificially cheap money will cause overinvestment which will turn into malinvestment (cause of bad price indicators) which will create a shortage of capital later on when the malinvestment causes economic problems. Another price typically fixed is wages by putting controls on the minimum wage it makes low-skilled labor more expensive than it's supply, so then employers are able to attain less laborers meaning less jobs creating a surplus of labor(unemployment).

2) Competition
In a free market free from intervention, anyone with even little to no resources can make an attempt to compete with the biggest actors in the market. While dealing with one small competitor would not make a dent in a large established company, a plethora of competition can diminish enough of their business that if they don't innovate or improve their serivce/product they will be removed from the market. This competetive pressure improves products and services, and requires that no artificial barriers to entry be put such as regulations, licensing, and other controls that prevent competition.
If there is no intervention in competition there can be no monopoly pricing even if there are monopolies, cause if a monopoly changes his price or service it would trigger competition. Monopoloy pricing can only exist if government imposes rules and fees to prevent competition and reduce competitive pressures on established actors.

3) Innovation
At the End of the day the goal is to increase the standard of life which can only come from innovations that make life more efficient, make less labor neccessary to do chores, make leisure time more enjoyable, etc. Innovation is encouraged through competition. Innovation in the most valued products and services occur with a voluntary pricing system since it indicates to innovators where innovations are most desired. This is why a free market is important to maintaining an improving standard of living.

4) Money
Money, or the medium of exchange is just as prone to all benefits of a free market as any good or service. Allowing voluntary pricing and competition in money will allow for more stable money that will make pricing as an indicator more clear and efficient to innovators and investors. So government monopolies and regulation of money have all the same negative effects it would on any other good or service. Central Banks & Legal Tender Laws only give the government a mechanism to borrow money to infinetly expand at the cost of market and the price systems ability to work efficiently reducing the standard of life of governments people.

Posted Mar 31 2010, 10:10 PM by Alex Merced