Editor's note: This is the second of three lessons in Free Enterprise.


The Market Economy

By Fred Schnaubelt
Friday, September 26, 2005

The typical state of mankind is tyranny, servitude and misery as Milton Friedman reminds us in "Capitalism & Freedom". The Western world is a striking exception due to the advent of "Liberalism" in the 18th and early 19th centuries, a time when Liberalism meant limited government, free markets and private property.

Classical liberals, like Thomas Jefferson, James Madison and Thomas Paine understood that more government means less freedom. They agreed: "That government is best which governs least." Classical Liberalism, also called capitalism, the market economy, the free market and free enterprise, is the only system in history where wealth is obtained not by conquest, looting or force, but by production and voluntary exchange.

Many people wrongly associate free enterprise with business and expect businessmen to be defenders of the free market. They are out of touch with reality. Professor Ben Rogge, in "Can Capitalism Survive?", writes that businessmen, by and large, are not defenders of capitalism, the profit and loss system, and "are no more committed to the system of economic freedom than anyone else. Not only are they not the greatest beneficiaries of the system—they are not even the primary beneficiaries." The capable, talented and strong will survive under any economic system, and the plain fact is most businessmen prefer that government guarantee their profits, underwrite losses and limit competition.

"There's a wisdom in the free market a trillion times greater than that of any discrete body of men."—Leonard Read

The basic problem of every complex society is how to coordinate the economic activities of large numbers of people. When decisions number in the billions, it takes the collective wisdom of a market economy, the decisions of all the actors, to bring order out of chaos. One example is the free market's "invisible hand" distributing food to 297 million Americans three times a day through the voluntary cooperation of farmers, distributors, warehousemen, grocers, restaurateurs and consumers, all acting in their "self-interest." The impossibility of government doing this, collecting the pertinent data, sorting it, correlating it, prioritizing it and acting upon it in a timely, efficient manner has been proven in socialist countries over and over, whenever and wherever tried.

Another example is the computer industry. In 1943 Thomas Watson, chairman of IBM, said: "I think there is a world market for maybe five computers." Today, the free market has created and supplied a demand for more than 190 million computers in this country while continuously increasing technology, doubling capacity every four years, and making computers affordable to those with successively lower incomes. It's not luxury goods for the rich and famous that's the hallmark of free enterprise, but production for the masses. Capitalism, as eminent free market economist Ludwig Von Mises described, "... is that system of social cooperation and division of labor that is based on the private ownership of the means of production." The material factors of production are owned by individual citizens, the capitalists and the landowners.

Capitalists, entrepreneurs and farmers are instrumental in making free enterprise work and Mises likens them to the helmsmen that steer a ship. None is free, however, to direct the course, but each is merely a steersmen. Each must unconditionally obey the captain's orders. The captain is the consumer. Consumers, through their buying or abstention from buying, decide what should be produced and in what quantity and quality. Consumers make poor men rich and rich men poor.

"The capitalist system of production," wrote Mises "is an economic democracy in which every penny gives a right to vote. Consumers are the sovereign people." It is the only system that allows for a rational allocation of resources based on what consumers want and are willing to pay for, and not dependent upon the guesswork of bureaucrats.

The role of profits, stripped of emotional demagoguery, is to determine what consumers are asking for most urgently and at the cheapest possible price. The greater the urgency, the greater the profits. Whenever the resources consumed have greater value than what's produced, there's a net loss to society. Profits come out of savings and are incentives to minimize waste. Profits allow a CEO on the 110th floor of the Sears Tower in Chicago to know if the store manager in San Diego is satisfactorily serving customers of Sears.

The only way to increase the general standard of living for all mankind is to increase profits; for example, increase the growth of capital faster than the increase in the population, and thereby improve the methods of production. All that good government can do is minimize constraints on the progressive accumulation of capital by promoting free enterprise and by creating a fair field without favor. In Tom Paine's words: "The government is best that governs least." How do you stand on free enterprise?


This appeared in:
Daily Transcript

on Monday, September 26, 2005


Schnaubelt, president of Citizens for Private Property Rights, has been a commercial real estate broker for 35 years and was a San Diego City Councilman from 1977-81. Send comments to editor@sddt.com. All letters are forwarded to the author and may be published as Letters to the Editor. [Reprinted with permission.]



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