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The Free Market: How the Market Economy Serves Us

Updated on August 7, 2013

Free Markets Deliver

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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?

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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

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    • rfmoran profile imageAUTHOR

      Russ Moran - The Write Stuff 

      5 years ago from Long Island, New York

      Good points. It's a "sort of free" economy. But it beats the hell out of a formal planned socialist economy, which it appears where we may be headed

    • rfmoran profile imageAUTHOR

      Russ Moran - The Write Stuff 

      5 years ago from Long Island, New York

      dsgf dfg

    • ib radmasters profile image

      ib radmasters 

      5 years ago from Southern California

      rfmoran

      Great hub on socialism and free market.

      The problem for the United States is that it no longer has a free market.

      The middle of last century, the US had hard anti monopoly laws and one the biggest monopolies then was the phone company. So they took the giant down, and made little companies out of them, then at the end of the century the little companies kept merging until now they are big again.

      There may be a technical free market, but when you heavily regulate business by the government, and you allow monopolies the concept disappears.

      Today, free market is more like global market and we are a service country and not a manufacturing country. So we depend on the globe to provide most of our products.

      Today, instead of simple domestic monopolies, we have what I call super global conglomerates. It used to be that when you traveled across the country you experience something unique from the local you came from. For instance, department stores were not national, but today a few companies own most of the large department stores.

      They may have retained the stores original names, but the real owners have changed. The point is that these holding companies have little competition and they can control the market because of their size.

      They have forced many small to medium businesses to leave or fail.

      The government both state and federal also have made a lot of impact in the free market by their taxing and regulations.

      California has regulated a different formula for gasoline here, than in other parts of the country, and consequently gas is very high here in comparison.

      Trader Joes has increased the price of two buck chuck wine by twenty five percent, but only in CA.

      Thanks

    • rfmoran profile imageAUTHOR

      Russ Moran - The Write Stuff 

      5 years ago from Long Island, New York

      Thanks Don

    • Don Bobbitt profile image

      Don Bobbitt 

      5 years ago from Ruskin Florida

      A very good Hub.

      Ienjoyed your logical presentation of the concepts involved.

      Voted UP!

    • Sustainable Sue profile image

      Susette Horspool 

      5 years ago from Altadena CA, USA

      When greed overwhelms common sense, private companies start acting in extremely competitive, destructive ways. They force smaller competitors to sell out to them or be taken to court on trumped up charges. They buy up all the raw materials a competitor needs, whether or not they need it themselves, to force them out of business. They lower prices well below the production cost, until competitors close up shop, then jack the prices up high to make back the difference. They collude with each other to all charge the same high price, so customers have no choice but to pay it. This is why we have government regulations in the first place - to keep the market sane and somewhat fair. Companies like this forget (or never knew) that good service or a great product is what creates ultimate success. They don't stop to realize that word of mouth advertising - a direct result of providing quality - is much cheaper and more effective than direct mail or television commercials. So they grab and jostle and buy favors and push competitors around (and lie to clients and cheat their staff) to get what they want, thinking that's the way to do business. I know, I worked for a company like that. I also knew a company that provided great quality, and they'll ultimately succeed better and more easily than the one I worked for. So I really "get" what you're saying, Russ, and the example you used shows an awesome evolution of great technology. But I agree that it couldn't have developed the way it did without reasonable regulation to keep the market stable.

    • tamarawilhite profile image

      Tamara Wilhite 

      5 years ago from Fort Worth, Texas

      Excellent points. The government provides few services well and hurts everyone when it uses its power to favor its attempt to compete with the market or throw its weight behind chosen companies to the detriment of everyone. And when the government picks winners and losers, we see more corruption as businesses compete for government favors instead of customers. Voted up.

    • secularist10 profile image

      secularist10 

      5 years ago from New York City

      The free market certainly has many beneficial qualities. Yet every single rich country today, without exception, got rich with both market exchange and government intervention. In addition, every rich country today has a mix of government/ socialist actions AND private free market activity. They understand that both are necessary for lasting, widely-shared prosperity.

      It would be nice if life was simple. Just privatize everything and everything will work out. Unfortunately reality is more complex.

      In the 19th century, many jurisdictions in the US had private fire protection. Individual households or landlords would pay private fire companies to protect them from damage. The result was that the fire companies would rush to the scene of a fire... but they would not do anything. Only when their client house caught fire, would they spring into action. But by then, many houses may have been on fire. Entire neighborhoods and city sections would be destroyed by a fire that could have been prevented if the first company to arrive on the scene had just put out the fire.

      So people realized that fire protection is probably something not best left to the market, but rather socialized. This is just one example.

      Finally, here is an alternative "history of the pencil" for you:

      The pencil begins its journey in a forest in Oregon, which is regulated and protected by government agencies that prevent over-logging and regulate the ownership of the land. The loggers, cutters, fabricators, and road clearers all work in facilities and machines that are regulated by the government for worker safety. They are also protected by labor laws that prevent their bosses from overworking them or exploiting them.

      The logs are then shipped to a mill in San Leandro California, on railroads or highways that have been built with government funding (such as the Eisenhower interstate highway system).

      Once at the pencil factory, workers are again protected by various laws regulating the health and safety of their workplace.

      In the factory, new ingredients are added: graphite from Ceylon (today Sri Lanka), wax from Mexico, rubber from the Dutch East Indies (today Indonesia) and pumice from Italy--all of which have been shipped over shipping lanes that are secured by governments through their militaries, and processed in ports that are also monitored, secured and regulated by government authorities.

      Finally, the entire process is funded by investors and shareholders, who are able to buy and sell stock in the various companies involved over financial markets which are, again, regulated by authorities such as the SEC.

      So the government and law plays an essential role at all stages of the process. Without government intervention, the pencil would not be possible.

    • e-five profile image

      John C Thomas 

      5 years ago from Chicago, Illinois, USA

      The so-called "free market" was created as an artificial tool to serve people. It can only function well when it has agreed-upon rules, such as those banning naked theft and deceit.

      Even staunch "free market" economists admit to such a thing as "market failure," in which insufficient rules result in a dysfunctional system that ultimately does more damage than good. For instance, without sufficent rules to protect the environment, what's to stop dumping polution into our water supply, overfishing to extinction, bad farming practices that result in dustbowls and soil ruination, etc.?

      The people who promote laissez faire "free markets" as the only solution to everything have adopted a kind of religious zeal. They seem to think that people were created to serve the market, rather than the other way around. Any attempt to impose limits or regulation on the market is seen as some sort of blasphemy and derisively labeled "communism" or "socialism." Their concept of a totally free market is often not much different than the law of the jungle. Why shouldn't the strong and wealthy be able to use their power to corner markets, employ deceit, cut corners in ways that are harmful to others, or simply grab what they want? To many of them, the meddling of judges, laws, governments, and any artificial contraint against harmful actions is ridiculed as an attack on "free markets."

      The market is a human construct created to facilitate the exchange of goods and services. It is not a god to be served by people, it's a tool created by people to serve people, and it's too bad that some people have lost sight of that.

    • safiq ali patel profile image

      safiq ali patel 

      5 years ago from United States Of America

      Before India allowed liberalization the nations resources from food to water and transport and many of the other essential resources that people need were organised and delivered along socialist lines. The plight for India's people then was getting enough of what they needed. Shortages were common. Food ran out, water was dirty and even a flight out of the country for the vast majority of indians was impossible due to cost.

      Now India is starting to organise and deliver its resources to its people along commerical lines in similar to free market economics. This had led to over pricing and inflation but some indians agree that provision of resources is better under free market. However many people are priced out of the market when it comes to buying food and transport. Perhaps what will really work is economies that organise along both capitalist and socialist models. But whatever the system used there has to be a committment to making sure that people have and can get what they need. Be that food, transport, clothing or medicine.

    • Tom Koecke profile image

      Tom Koecke 

      5 years ago from Tacoma, Washington

      Russ, I certainly appreciate the difficulty in putting such a vast philosophical viewpoint into several paragraphs. However, in attempting to do so, it becomes important that significant details not be blended with a wide brush.

      Your description of socialism is actually more a description of communism. Though there are similarities, the differences are as easily distinguishable as are cats and dogs, even though cats and dogs have similarities.

      Medicine seems to be a hot topic at the moment, and serves fine to expemplify the differences between communism, socialism, and free market.

      In communism, doctors work for the government. The stipend doctors receive, and the treatment patients receive, are controlled by central planners. Doctors who exceed the treatment parameters, or patients who bribe doctors for additional treatment, violate the law.

      In socialism, doctors can be public or private, or a combination of public and private. The payment a doctor receives, and the treatment a patient gets, is only limited if the source of payment is the government. Doctors are free to perform treatments beyond the specified ration, and patients are free to pay for treatments beyond the ration, without fear of government reprisal, but the deal is between them.

      In a free market, doctors are on their own as are patients. They can agree on exchanging money or chickens for treatment. The doctor need not treat a patient without fear of repurcussion, and the patient is free to experiment with Granny's elixir to cure whooping cough based on her claim that it will work.

      Most people who espouse von Mises' and Hayek's views do so with limitations to preserve their self interests. For example, I suspect you would take issue with someone copying your article verbatim, and leaving the decision on whose article to read to the free market, since copyrights, and other intellectual property rights, create unjust monopolies, but copyright is the only protection you have against the free market on this article.

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