The Key 2 Liberty involves learning the principles of freedom for yourself and then sharing your knowledge with others.

Free Markets

The role of government in a free market

Of course the government does have a legitimate role in protecting people from fraudulent business transactions and businesses that involve activities such as prostitution or gambling where the majority of the public believes that the particular type of business must not be allowed to operate or must be carefully regulated in order to insure that they will not be detrimental to the general welfare of society.  The government must also guarantee that people will not be forced by coercion to purchase any product(s) or service(s).

The role of the federal government in the free market of the United States

There is no question that there is a certain role for government to play in regulating certain aspects of the economy.  The question is which level of government should handle the regulation of the economy?  The role the federal government plays in the free market should be extremely limited.  The federal government is assigned its responsibilities in the Constitution.  Article I, Section 8, Clause 3 of the Constitution grants Congress the power; “To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.”  But what exactly is meant by the power to regulate commerce?

The Founders wanted to make sure that any duties or taxes on exports and imports were uniform for all of the states.  This is laid out in Article I, Section 8, Clause 1 of the Constitution; “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States; but all Duties, Impost and Excises shall be uniform throughout the United States.”  The Founders also wanted to make sure that there was free trade between the states.  This was assured by Article I, Section 9, Clause 6 of the Constitution; “No Preference shall be given by any Regulation of Commerce or Revenue to the Ports of one State over those of another: nor shall Vessels bound to, or from, one State, be obliged to enter, clear, or pay Duties in another.”

Article I, Section 8, Clause 8 of the Constitution grants Congress the power; ”To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries;”  The work of an author is protected by a copyright and the work of an inventor is protected by a patent.  The guarantee to inventors that they will have the right to benefit exclusively from their own inventions for a limited period of time encourages the invention of new products.  It would be difficult to find people willing to invest the time and money that it takes to create a new product if other people were permitted to copy the finished work.  The same applies to authors of books, movies and similar media.  Very few people would take the time to write a book if someone else could come along and copy it and then sell it on the free market.

It is important that patents be given a specific time period.  This guarantees that a person or company cannot create a permanent monopoly for a certain product or service.  For a free market to work properly there must be competition between companies to make the best products for the best price.  If a company would be allowed to permanently have the exclusive right to an invention then competition from other companies to improve the product or produce it at a lower cost would never happen.  That is why a limited time of having the exclusive right to an invented product, usually 17 years, is assigned to patents.  After this time others are then allowed to copy the invention and sell their own version of it on the free market.  Competition between companies always produces better products and lower cost of production.  Due to the lack of competition, monopolies, over a period of time, will tend to deliver products and services of poorer quality at higher prices.

A good argument can be made that the most important part of a free market is having an honest currency system to allow people and businesses to trade goods and services with each other.  This was supposed to be guaranteed by Article I, Section 8, Clause 5 of the Constitution; “To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.”  Unfortunately, Congress unconstitutionally gave away the people’s right to a fair currency that holds it value by assigning the responsibility of issuing the nation’s currency to the private Federal Reserve with the passage of the Federal Reserve Act of 1913.  The Federal Reserve has allowed the currency system of the United States to become unstable by discontinuing the use of gold as the source of collateral to back up the value of the dollar.  The US dollar is no longer backed up by anything of value.  It is a total fiat currency system.  Every year that the United States creates a budget deficit by spending more money than it receives in tax revenues it must borrow money from other people, banks, corporations and even other countries to cover it.  This is mostly done by selling government bonds to people, banks, corporations and other countries that are willing to buy them.  Very often, especially recently, the United States has not been able to sell the number of bonds needed to cover the spending deficit.  When this happens the Treasury Department is left with no other choice but to have the Federal Reserve print additional money backed by nothing of value and then use the freshly created money to buy the government bonds.  This is called monetization of debt.  This causes the value of every existing dollar to fall and thus in turn causes the prices of all goods and services to rise.  This is the true cause of inflation and is truly a hidden tax on every single person that has US dollars in their possession.  Having an unstable currency makes it difficult for people to trade with each other and especially with foreign nations.  If people believe that the money that is given to them to pay for the goods and services they sell is going to lose its value they will demand a higher price for the goods and services and charge a higher interest rate for loans.

In matters concerning the economy the basic role of the federal government is to make certain that commerce can take place between people and businesses.  Other than a few basic things; making sure that taxes are uniform between the states with relation to imports and exports, making sure that there is free trade between the states, protecting shipping routes to allow trade with foreign nations and issuing an honest currency system to enable people and businesses to engage in trade the federal government should have no other purpose.  Many people argue that the federal government should be responsible for making sure that people are protected from every possible bad thing that can happen to them and have created enormously expensive bureaucracies such as the EPA, FDA and ATF to control every aspect of our personal lives.  The Founders at least attempted to set up a federal, constitutional republic which is a group of sovereign states that give up a small portion of their sovereignty to a general government for limited purposes, the most important of which is self-defense.  In a properly operating federal, constitutional republic the states maintain the power to make all laws that affect the day to day lives of the people including the regulation of commerce.

Characteristics of a free market

The beauty of a free market economy is that it is profit motivated.  The opportunity for a person or business to make a profit is what drives people to invent new products and services, improve existing products and services and then sell them on the free market.  The highest level of prosperity occurs when people and businesses are allowed to compete against each other with a minimum of interference from the government in order to earn the greatest possible profit on the sale of their products and services.  This is the general concept of the free market.  One of the first persons to develop the ideology of the free market system was Adam Smith who wrote a famous book called “The Wealth of Nations” and was read and admired by many of our Founders.

The opposite ideology of Adam Smith was that of Karl Marx who believed that the economy should be centrally planned and administered by the government.  He believed that people could be motivated to work without profits and that all means of production should be owned by the government.  No successful example of his ideology has yet to be realized.

There can be little doubt that countries with economies that operate using the principles of a free market are much more successful than those with government planned economies.  The United States was for the most part the first country in the history of the world to have a free market economy.  For the first time people were allowed to own property and businesses without massive government regulations.  The motivation of free citizens to provide new goods and services that people wanted and earn a profit propelled this country from having just a few settlements to a major, world economic power within a few hundred years.  By the end of the 19th century the United States had only 6% of the world’s population but produced over half of the products being made in the world at the time.

Another natural characteristic and benefit of a properly operating free market is that people tend to choose professions that involve doing what they do best.  There can be little doubt that people are most productive when they are left free to engage in the professions of their choice.  Using specialized labor for the production of goods and services is what helps make a free market economy stand out from a controlled economy where people often have to take jobs doing things they do not enjoy or do well because of the lack of jobs available.

A properly operating free market economy is a self-correcting system.  When there is a demand for a product or service entrepreneurs that are willing to risk their capital in order to provide it to the public create businesses for that purpose.  When a free market system operates with minimal regulations the people decide which products or services are the best by voting with their wallets.  If people think the price of a certain product or service is too high they will not buy or use it.  This encourages others to attempt to make the product or deliver the service at a less expensive cost.  This concept is what makes a free market system a self-regulating system.

Products and services that by their nature are more difficult to produce will have fewer entrepreneurs willing to produce the product or deliver the service.  Products and services that are difficult to produce or deliver will naturally cost more since they typically will require employees with above average training and or education along with more expensive equipment to produce or deliver them.  For instance, it takes more skill and requires more tools and equipment to install a light fixture than make a glass of lemonade.  Therefore it should not be a surprise that an electrician charges a higher price to install a light fixture than a person would charge to mix some lemon juice, sugar and water together and pour it into a paper cup.  By this same logic it should not be surprising that underwater welders or brain surgeons charge more than electricians for their type of work.  Underwater welding work is considerably more dangerous than electrical work so there is less of a supply of workers that are qualified to complete that type of work and the equipment for it (ships, SUBA gear, etc.) cost more than an electrician’s van, hand tools, ladder, etc.  The same goes for brain surgeons.  Brain surgeons require a considerable amount of education and training to be qualified to do their work and their tools (hospitals, operating rooms, advanced medical equipment, etc.) also cost more than the average electrician’s outfit.