Introduction
Adam Smith in the Wealth of Nations:
An inidividual who intends only his own gain is led by an invisible hand…by pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good
Thomas Jefferson in the Declaration of Indendence:
We hold these truths to be self-evident , that all men are created equal, that they are endowed by their Creator with certain unalienable Rights; that among these are Life, Liberty and the Pursuit of Happieness.
Smith and Jefferson alike had seen concentrated government power as a great danger to the ordinary man. They saw government’s role as an umpire.
A wise and frugal government, which shall restrain men from injuring one another, which shall leave them otherwise free to regulate their own pursuits of industry and improvement
The combination of economic and political power in the same hands is a sure recipe for tyranny.
As always, people took the favourable developments for granted.
Academia blaming the great depression on a failure of free market capitalism: Emphasis on the responsibility of the individual for his own fate was replaced by emphasis on the inidividual as a pawn buffeted by forces beyond his control.
The invisible hand: An inidivual who intends only to serve the public interest by fostering government intervention is led by an invisible hand to promote private interests
A complex, organized, smoothly running system can develop and flourish without central direction.
We must rely on inidividual initiative and voluntary cooperation.
The Power of the Market
A command method of coordinating activities can be the principal method of organization only in a very small group. Even in a command method, commands must be supplemented by voluntary cooperation.
Just as no society operates entirely on the command priciple, so none operates entirely through voluntary cooperation.
The Role of Prices
If an exchange between 2 parties is voluntary, it will not take place unless both believe they will benefit from it.
The price system is a mechanism that performs its task without any central direction. Supplies allocated by command in a country as opposed to naturally guided by the pressures of demand reflected in prices will lead to surpluses in some areas and shortages in others.
Transmission of Information
To induce suppliers to produce more of a good, they will have to offer higher prices for the good.This induces suppliers to increase their work force, to grow their work force they will have to offer higher wages.
The price system transmits only the important information and only to the people who need to know.
The market prices reflect both the current price and the price offered for future delivery.
Private monopolies on a commodity or by cartels does not prevent tranmission of information via the price it does however distort the informatino transmitted.
Incentives
The effective tranmission of accurate information is wasted unless the relevant people have an incentive to act and act correctly to that information.
One of the beauties of a free price system is that the prices that bring the information also provide both an incentive to react to the information and the means to do so.
A producer will produce output up to a point where producing a little more would add as much to his costs as to his receipts. A higher price shifts this margin.
For a wood producer, the more he produces the higher the cost of producing more. He must resort to wood in less accessible or favourable locations and must hire less skilled workers or pay higher wages to attract skilled workers from other pursuits.
Interference by government, through minimum wages, or trade unions by resticting entry distor the information transmitted and prevent individuals from freely acting on that information.
You have a choice of how to apply your labour. The decision depends on your interests and capacites.
Statisfaction in a job may compensate for low wages. On the other hand, higher wages may compensate for a disagreeable job.
As an entrepreneur, the major productive resource he owns is the capacity to organize an enterprise, coordinate the resources it uses and assume risks.
The corporation is an intermediary between its owners – the stockholders – and the resources other than the stockholders’ capital, the services of which it purchases. Only people have incomes and they derive them through the market from resources they own.
In the US the major productive resource is personal productive capacity: “human capital”.
Without the maintenance of inherited capital the gains made by one generation would be dissipated by the next. But the accumulation of human capital in the form of increased knowledge and skills and improved health and longevity has also played a role.