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Economics

What Does Economics have to do with Freedom?
 
We experience economics every day. From the price we pay for our favorite cup of coffee – set by the principle of supply and demand, to the computer we use with components from a dozen countries – made possible by free trade, economics is a permanent part of our lives. The global economy is better off when nations and individuals are free to act according to their comparative advantage, by producing something they can produce cheaper than anyone else, while freely trading with others according to their various comparative advantages.
 
The amazing thing is that much of this happens without government direction. Prices are determined by the amount an individual is willing to give up to purchase an item or service. Free trade allows countries to focus on what they can produce best and trade with other nations for the benefit of all. Competition rewards performing enterprises and causes unsuccessful ventures to go out of business. Ultimately, the world goes around because of the individual desire for profit, which forces people to collaborate, and indirectly causes people to serve others before making a profit. As a result of competition, people want to serve others more so they can gain their business. This is what Adam Smith referred to as the “invisible hand.”
 
Yet, time and time again, nations experiment to see if they can hijack the system for their benefit, in order to reap only the positive elements of economics, attempting to protect themselves from the risks. Governments have tried to produce their own systems of economics – from communism to socialism – yet it’s clear that nations built on capitalism and freedom produce the most dynamic and successful societies.
 
The great economic debate has been whether the economy can be controlled or “guided” by the government. History has shown that such efforts fail in the long run. Adam Smith, in Wealth of Nations, in 1776, made the strongest case for the fundamentals of capitalism stating, “In every country it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest.”[i] Adam Smith is best known for his theory that an “invisible hand” guides free market capitalism, causing all participants to be better off as a result of an open exchange of goods and services. Domestically, that means maintaining an environment where competition can flourish and where businesses are encouraged to innovate and compete in pursuit of profits without government interference. Internationally, it means promoting free trade between countries, utilizing each country’s comparative advantages (what each country does best with given resources) to create the most value for all nations.
 
This is important to understand as the federal government and institutions such as labor unions continue to interfere with the free market economy. It is important to understand why such intervention is not consistent with free market economics – or the intentions of our founders.
 
Free trade – Over the years there has been a debate over trade and protectionism, trying to “protect” the nation from the “threat” of overseas competition. Ironically, such policies end up being more harmful than good. The economist Henry Hazlitt wrote, “Labor in each country is more fully employed in doing just those things that it does best, instead of being forced to do things that it does inefficiently or badly. Consumers are in both countries are better off” (p. 65).[ii]
 
Capitalism can exist within a legal framework – It is important to distinguish the difference between socialism and a legal framework in which a capitalistic system can work. Basic provisions such as road construction do not constitute socialism. Basic infrastructure and a legal framework based on the rule of law are necessary for capitalism to truly work. Yet when the government reaches the point where it is making decisions which would otherwise be made by free market economic actions, it has exceeded its role of providing a legal framework to controlling the specific operations of the economy. Basic economic laws consistently can adapt to changing conditions, whereas if government bureaucrats control the economy, we have to blindly have faith that they will make the right decisions.
 
Friedrich Hayek wrote,“[T]he important point is that all coercive action of government must be unambiguously determined by a permanent legal framework which enables the individual to plan with a degree of confidence which reduces human uncertainty as much as possible” (222).[iii] … “If there is to be an efficient adjustment of the different activities in the market, certain minimum requirements must be met; the more important of these are, as we have seen, the prevention of violence and fraud, the protection of property and the enforcement of contracts, and the recognition of equal rights of all individuals to produce in whatever quantities and sell at whatever prices they choose” (229).
 
Conclusion – Economic principles show us that when individuals and businesses are given the freedom to make independent decisions within a basic legal infrastructure, society is led by an “invisible hand.” As suppliers provide more of a product, the price decreases, while prices increase for items with a limited supply. Simply stated, the economy naturally distributes these resources rather than government bureaucrats deciding who will receive them. Comparative advantage allows the most economical producers to provide a product and freely trade it with products produced as a result of others’ comparative advantages. A legal framework is necessary; however the federal government seems to have trouble with limiting itself to a framework. It is time citizens start reminding elected officials that we want economic freedom and value it as a necessity for a prosperous future.
 

[i] Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations. London: W. Strahan and T. Cadell.
[ii] Hazlitt, H. (1946). Economics in one Lesson. New York: Pocket Books.

[iii] Hayek, F. (1960). The Constitution of Liberty. Chicago, IL: The University of Chicago Press. 

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