The Free Market: How the Market Economy Serves Us
Free Markets Deliver
Socialism - How it Tries to Serve
There is no simple definition of socialism but a good working description is a system where the state owns both the means of production and controls the distribution of goods and services. In a socialist system the exchange of goods and services, that is the price, is also regulated by a central authority. Socialism finds its roots in a world view that, given the selfish nature of human beings, their actions must be controlled and regulated because otherwise they would do ill to their neighbors.
A socialist wants the state to deliver social value, believing that such a noble thing cannot be left in the hands of greedy capitalists. Consider this: a business does deliver social value. Food is certainly a social value; it is also a necessity of life. The next time you go to a supermarket, observe the bewildering array of choices in front of you. Compare this to the reality of food stores in the old Soviet Union. A person would have to wait in line for hours just to pick out a couple of onions. In Cuba, where 85 percent of the people work for the government, the average salary is $20 per month. It’s good that the benevolent government provides free health care because with such lousy nutrition that $20 a month provides, one needs it. The Cuban government even has a specific list of enterprises that it allows private citizens to indulge in. With the government’s blessing, you can even embark on a private career as a bed frame repairman. I’m not kidding. Cuba recently began to expand the list of jobs that can be performed in the private sector, mainly because its economy is a festering carcass, especially since the collapse of its patron, the Soviet Union. A society dedicated to the redistribution of wealth is based on the view of human nature that private individuals need to be controlled and cannot be trusted to deliver the goods and services that a society needs. The motivations that we take for granted in a free society are suppressed in a totalitarian socialist state. In a society based on free enterprise, on the other hand, people are motivated to get ahead in life, to seek advancement and, yes, to make more money. Soviet Man, the mythical character of the old Soviet ideology, the man who was to be motivated to provide his best efforts for the good of all, never showed up. Recall the dark joke of the communist era: “They pretend to pay us; we pretend to work.”
Free Markets Get the Goods on the Table
The reason your local supermarket is awash in such a wide array of choices is that somebody is making a buck. Someone profits from providing nutritious food; someone profits by providing choices; and someone profits from getting the food to market in a timely manner. The greedy capitalists who stock our supermarkets know a little secret: the better they serve us, the greater theirprofit because we want to visit their stores and buy their products. It is the invisible hand of Adam Smith at work. See the video above and to the right for a quick primer on the invisible hand. The better you run your business, the more clients and customers you can serve. And the better you will serve them. Show me a well-functioning government agency, and I will show you an agency that is run like a business. The same is true for not-for-profit organizations. A non profit organization, of course, does not seek a profit to be distributed to shareholders, but it does seek to bring in more revenues than it lays out in expenses. Think of money as the blood of an organization: run low on it, and you get sick and die.
What is the best way to bring goods and services to consumers?
Consider the Lead Pencil - It's Impossible to Make - But it Happens
The following is based on a classic essay written by Leonard E. Read in 1958 entitled “I, Pencil: My Family Tree as Told to Leonard E. Read.” Let’s follow the pencil as it is made. The pencil begins its journey to becoming a writing instrument with cedar, grown perhaps in northern California or Oregon. The loggers, cutters, fabricators, and road clearers all use countless pieces of equipment, all manufactured by somebody. The logs are shipped to a mill in San Leandro California, on rail trains or flatbed trucks. The timber is cut into small, pencil-sized pieces of wood. Once at the pencil factory, multimillion dollar machines go to work. Each slat is given eight grooves by a complex machine, after which another machine lays the “lead” in every other slat, applies glue, and places another slat atop—a lead sandwich, so to speak. The lead is really graphite and comes from Ceylon, and it is mixed with clay from Mississippi. Then wetting agents are added and, after passing through numerous machines, the mixture finally appears as endless extrusions—as from a sausage grinder—cut to size, dried, and baked for several hours at 1,850°F. To increase their strength and smoothness, the lead is then treated with a hot mixture, which includes wax from Mexico—paraffin and hydrogenated natural fats. The cedar receives six coats of lacquer. The metal ferrule is what holds the eraser and is made of brass. After that the eraser is added, made of ingredients from the Dutch East Indies and pumice from Italy.
The amazing thing about the simple lead pencil is that no single person makes it, nor even directs how it is made. Countless miners, woodsmen, truck drivers, shippers, and metal fabricators from all over the world are involved in its raw materials and its manufacturing. It is the classic example of the “invisible hand” of capitalism at work. No central planning committee could possibly accomplish such a task as making a lead pencil. The entire essay can be viewed at the website of the Library of Economics and Liberty.
Ludwig von Mises saw that the key problem of the central planner in a socialist state is its inability to calculate what is needed and where it is to go. As with the lead pencil example, the millions of decisions needed to get goods from A to B is beyond the ability of a central planner to fathom. F. A. Hayek, in The Road To Serfdom, viewed the problem as one of lack of knowledge. How does a central planner know that the Village of Anywhere doesn't have enough food stores to serve its population? He can't. But a local entrepreneur in Anywhere can spot an opportunity and start a new grocery store. He will make a buck and the citizens of Anywhere will be able to stock their home shelves.
Free markets deliver the goods, it's that simple. The actors in a free market system may not behave with a desire to be of service, but they know that providing service is how they make their profits.
Parts of this article were excerpted from The APT Principle: The Business Plan that You Carry in Your Head, by Russell F. Moran.
Copyright © 2012 by Russell F. Moran