Topic: Economics
In Defense of Free Market Capitalism An economic argument for capitalism.by Christopher Espinal
(Conservative)
Friday, May 23, 2008
When people think about economics, they tend to deviate from the notion of scarce resources. Far too many people, whether they are conservative or liberal, forget that the point of discussing economics is not money, greed, emotions, and all the other junk used to demonize the subject, but how to plan situations given a scarcity of resources.
Because people forget or don't know that the notion of resources is the main concept in question, they automatically associate economics with investment banking or exploiting the land of indigenous tribes in Ecuador.
If we understand the fundamentals of economics, it sheds light on other subjects such as political science, anthropology, and other fields of the social sciences.
Preliminaries
Firstly, let's model the world with its inherent problem: everything is scarce. The amount of money you have, the amount of time in your day, the number of iPods on the market, the number of spaces for a PhD program, are all available in scarcity.
There are many different ways to organize the allocation of these scarce resources. That is economics! Whether you choose to do it communally or just letting folks duke it out for some goods, then you are choosing some system of resource allocation. To say that one system is more economical than another system depends on whether or not resources are allocated efficiently. This term can be clarified with this basic question: has the chosen system of resource allocation achieved a set goal using the least amount of resources possible.
A Goal of Economics
Efficiency is just another way to say that we want to make the best use of the resources available to us. Let's look at this statement just a bit deeper. What does it mean to maximize utility of resources? In the economic sense, it means that we will want to partition our resources to all of the activities that will make us, or some other group in question, better off. However, we want to waste the least amount of resources as possible on things that people and firms don't really want.
This seems like a very complex task. In fact, if you, a designated arbiter of resources, were to compile a list of all of the activities that need these scarce goods, and you were to allocate resources to them, you would realize this is a task beyond the capabilities of humans. For the most part, it's a task beyond the capability of governments.
There is an exponentially easier way to organize resource allocation. Allow consumers and suppliers of goods to set prices, which measures value based on some unit of account. Markets allow a large amount of consumers and suppliers to set a price on a particular good based on its aggregate utility for the population. Assuming that consumers know how to maximize utility, resources will make their way to individuals who will best use them.
The Calculation Error
The fact that some countries actually have arbiters of resources, shows that they don't use pricing to understand consumer preferences. It's a shame because one can imagine the amount of inefficiency that goes on. In these centralized governments resources are used in places that don't improve the well-being of society.
More importantly, the technocrats who run those bureaucracies, and who think they understand people better than people understand themselves, are never subject to costs for making errors. The failure to measure the importance of resources to consumers is what economists know as the calculation error. In general, it's the reason why we normally project socialist leaning societies to fail or critically destabilize. They waste the resources they have on projects that don't matter. Why? Because there's no indicator, such as a price derived from supply and demand functions, bureaucrats can't measure the value of the project to the public. Thus, it's not a public good but a public "bad."
Socialists just don't know what's important to the people. Interestingly enough neither do capitalists, but free markets do! That's the point of allowing the market to deal with these resource allocations. Firms and households will know when supply has met demand. Because of this property, markets signal important information about the preferences of a population.
However, to not take care of the nation properly, by establishing strong institutions that accomodate economic growth, can lead to the kind of disconnect between the people and government that evolves into political strife.
The Greatness of Free Markets
Last, but not least, so many philosophers or capitalist thinkers always try to persuade their fellow socialists to appreciate free markets by using moral arguments. There's no real need for that kind of nonsense. Rather, the best argument for free markets regards its successes with allocating scarce resources. The reason we can eat and live more comfortably has nothing to do with moral human beings inventing for his or her fellow man and woman. It has all to do with what free markets have done to make everyone more productive and efficient with the resources available.
Every discussion of political systems comes down to what works with what is available to societies. To me, Price Theory only justifies the importance and relevance of free-market capitalism. Not only is it technical in that it stems directly from economic concepts, but it is moral in that it has fed and improved the lives of billions of people around the world.
Additional Ideas:
I wrote an article about the real cost of socialized medicine. The point of that article is that a lack of a price on some scarce resource (money for health care) can result in an ambiguity of marginal cost. If there are no costs to derive an efficient scale or general market equilibrium, inefficiencies can arise.
There certainly is something important about equity in economics but this article concerns itself with the importance of free markets in economics. However, measures in favor of equity can still persist in societies utilizing free markets but there's a tradeoff. Just how much equity should we pursue? That's a different question for a different article.
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The views expressed in this
article are those of Christopher Espinal only and do not represent
the views of Nolan Chart, LLC or its affiliates. Christopher Espinal is
solely responsible for the contents of this article and is not an
employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.
Posted By: Christopher Espinal
Date: 2008-05-24 19:19:59
Recently, I attended a lecture called "The Morality of the Market" at the U of C. It was another bogus lecture from the Ayn Rand Institute aiming to persuade people that the market is as moral as big government. The lecturer is a no namer.
However, the question that we should ask those that hail at the feet of Stalin and Fidel Castro is: what system can both improve the lives of everyone and efficiently allocate scarce resources at the same time?
Socialism, and redistributing resources may give "free stuff" to people and temporarily improve their position, but it can't continue to do it without an unlimited supply of resources. Capitalism can achieve both comfort and a responsible allocation of resources!
How do we get the government out of the business of patent protections, restrictions on free flow of immigration (i.e. no more illegal immigrants), restrictions of number of Doctors licences, and other legal mechanisms that keep us from having a free market economy?
The state intervenes in the market every day. For instance the computer i'm using right now was funded via government money over many years, the roads I use--government money, the clean water I drink... and on and on. The government involves itself in the market every day.
Its a political decision of how to do it... or how much intervention is needed. You failed to mention equity which is the political decison of who to protect in the market and where to create competition. Why protect shareholder value at the expense of cheaper perscription drugs, cheaper doctors visits? Well they are better organized politically...
Posted By: Christopher Espinal
Date: 2008-05-28 16:02:03
Jim:
Equity isn't mentioned in this article because it's not about equity. It's about why free markets in general are important.
When societies accumulate enough resources because they have a system that efficiently allocates scarce resources and creates more resources, theses societies can then focus on equity. However, far too many people demonize free market capitalism as a system that doesn't function or work. It does because it's what built our country and made our lives better.
There are arguments that state that government can do some things better than the market. Such as collect money for public goods like roads and projects forwarding equity.
Again, you talk about politics and such. This article has nothing to do with political processes but has all to do with the fundamentals of economics and its relationship to markets. I can write an article about applied economic theories surrounding special interests and other political qualities.
Posted By: Christopher Espinal
Date: 2008-05-28 16:06:51
Another point: if there are no prices then we can't understand important information needed to allocate resources. Markets do just that.
Societies that just focus on equity instead of scarce resource allocation will basically fail, unless they have an unlimited resource that can make the country rich relative to its population.
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