Basic Free Market Principles

Part 1: A Price System

This is what the free market does; it helps us to receive feedback of profit and loss through a price system that we can use to calculate.  A price system tells us specifically were the losses are coming from and adjust our sales according to what we receive in feedback. Through pricing, we can know which one of our products the customers think has a fair price in relevance to its quality and how much demand there exists of it. It is like an auction, where in this case the best bid wins. In other words, there exists a voluntary agreement between buyer and seller in the price of a product. There is also an agreement in the buying and selling of the input supply for companies. This ends up increasing the economy and creating efficiency in the use and allocation of resources.

Pure socialism lacks this calculation efficiency. Why? Well, because in the socialist commonwealth, a central planning committee owns all the means of production and there can’t be any buying and selling of them. Therefore, if a baker establishes the prices of his products through the calculation of what the flour, eggs, milk, butter, cocoa, etc. (which are means of production owned by the government) will cost and they have no price at all because they are owned by the government, how will the baker know at what price to set his products or where to do it? What if the baker sells more strawberry cupcakes in his area, a few chocolate ones, and none of vanilla, and the government keeps supplying him with much more vanilla than strawberries or chocolate?

When the government owns and controls all the means of production, they cannot calculate which products are sold in all areas of society. Therefore, and most probably, they might supply less input to products that are sold a lot or might supply a bunch of input to make products that are sold very little. In the free market, if a baker is selling more chocolate cupcakes and no vanilla ones, he stops baking vanilla cupcakes and focuses all his resources to obtain specific input supply and make chocolate cupcakes, not wasting resources, and making rational economic decisions. A government that owns the means of production has simply no idea of how to manage these things because it can’t calculate them or compare his capital goods (means of production) with consumer goods (products).

Now, some may say, “Yes, that is true, but we don’t live in a socialist economy.” I say, ok, maybe your nation has a price system, meaning that the government doesn’t own all the means of production and knows that chocolate cupcakes are highly valued and vanilla ones are not. However, all government spending encounters calculation problems, because the government does not have a profit and loss feedback mechanism, it has no way of knowing, where, how much, and what to produce, because it has no genuine revenue. The government doesn’t sell goods to the public; therefore, they don’t know how the public is responding to their production. The government’s income comes from plundering the people through taxes, so it can’t tell what people want.

The government doesn’t even know how many judges the people needs or how many police officers there should be in the city. Do they need one judge per town or 500? Two cops per street, or one per dog? The government can’t ever know because there is no feedback mechanism coming from the people. In the end we have more police officers looking out for robbers than solving homicides. A private security firm would know what laws to enforce, what criminals to look out for, for they receive feedback from their buyers in the products or services they voluntarily buy more or less.

This is why the government can’t be run like a business, because it is not financed like one and has no voluntary feedback from the public. The government doesn’t know how to supply things in the right amount, because it has no revenues taken voluntarily from the people and that is why you see long lines in all the places that give governmental provision. Today’s governments are run by bureaucrats making arbitrary decisions.

Note: In order to have a broader understanding of what is here written, the reading of the essays Price Control, Price Controls are People Controls, and A Capitalist Economy is recommended.

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