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Why do free markets matter?

Why aren’t other economic systems (socialism, communism, any others) better? Why does Sutherland refer to free markets as “the engine of economic prosperity”?

What comes to mind when you hear the term “free markets”? If it’s Wall Street, the stock exchange, cigars, and Michael Douglas, then let’s expand your understanding.

Some people will tell you free markets must be kept alive in order to sustain government funding. Some will tell you they matter because wealth is all that matters in the world. But at Sutherland, we defend free markets because of a very deep perspective on human nature – a perspective best highlighted by Austrian economists Friedrich Hayek, Milton Friedman and Ludwig Von Mises.

Free markets matter because they have reduced poverty more than any other institution.

From the time of the first human on earth until roughly 200 years ago, humanity has never known wealth like we do today. For the vast majority of human history, poverty has defined our existence. Almost every convenience we can think of was invented only a number of decades ago. Only the most recent humans have enjoyed indoor plumbing, grocery stores, Kleenex, Band-Aids, socks, felt-tip pens, etc.

So we infer from human history that poverty is not created – it is the natural state of man. Only wealth is created.

The question then becomes: How do we reduce poverty? This is the heart of economics: the study of rationing limited resources among unlimited desires.

In other words, with the demand for apples changing every second of every day, how do we make sure apples are available to everybody who wants one at any given moment?

From Aristotle’s Oeconomica to Friedman’s Economic Theory and Practice, history has provided scores of thinkers who’ve contributed to the discussion of what economic system best reduces poverty. Primitive arguments centered on mysticism and superstition, while the French and Scottish Enlightenments unveiled new ways of thinking about these issues. For centuries government played an important hand in the economic development of its people.

However, from feudal systems to mercantilism, all historic economic systems had one thing in common: Poverty was the norm; wealth was the exception; and the definitions of neither poverty nor wealth changed very much.

This is why free markets matter so much. The ideas of Baron de Montesquieu, John Locke and other great thinkers permeated the minds of a few individuals in the United States. Today we call those men the Founding Fathers. The Founders took the position of certain thinkers that all men were created equal, and that the notion of the divine right of kingship was false. All humans were equal, and thus all humans required an equal governance because all humans are equally imperfect.

The battle between what economic structure would thus be demanded by the Constitution came down to three options: (1) Alexander Hamilton argued that the government should play a key role in the distribution of products to the citizenry, while (2) Thomas Jefferson proposed an agrarian society – one that prevented business from getting too big, and (3) James Madison argued that no economic structure should be enshrined in the Constitution and that the people should determine the economy on their own.

Clearly Madison won the debate, because no economic system dominates our Constitution. Instead, the people were left to themselves to create wealth … and create wealth they did.

Some might ask how we can defend the free market system when “a billion people around the world are starving.” Here’s how: Because the other 6 billion aren’t starving, and the only reason those 1 billion are starving are because of oppressive governments that blatantly lie to their people.

If it is true that a billion people in the world are starving, then we can say that something is working – because the percentage of starving people in the world has clearly decreased over the course of human civilization. Those who ARE starving depend on aid – aid from countries like the United States that have produced enough goods to help others in addition to taking care of their own.

That’s why free markets matter – they improve the quality of life for every individual. Consider those apples. When you go to the store and buy an apple, you are making a statement: The apple is worth more to you than the 50 cents you paid for the apple. Likewise the store makes a statement: Your 50 cents is more important to it than the apple. And through the price mechanism, you make an exchange in which you both end up better off than you were before – you have the apple that you valued, and the store has the 50 cents that it valued. No violence required – no fear that the apple won’t be there – just a simple trade in which each of you is better off.

One more example: If you travel by air, you have little clue who will be responsible for your travel across the country. You place your life in the hands of pilots, mechanics and air traffic controllers you’ve never met before. But you arrive at your destination safely. You have no clue who will be making your lunch or dinner that day, but somebody always does. It hasn’t killed you yet. And when you’re staying at a hotel, there’s always a room to call your own, with a pillow, water, coffee pot, TV, shower, iron for your clothes, and someone willing to bring you almost anything you wish. Do all these people do this because they love you? Nope. They do it because they want to make a trade – their service for your dollars. Or as Adam Smith famously stated: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

So long as markets are free, people have the ability to create, expand and grow their wealth – but only by meeting other individuals’ needs.  The reduction of poverty requires the ability to meet the demands of those around you – and to the extent you help others, you help yourself. 

Dig Deeper:

Article: Russell Brand’s attack on capitalism is ridiculous — as this chart shows

Article: Towards the end of poverty
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