Posted by: Greg Huff | March 31, 2010

Free Market 101

Ok, OK. I am not an economist and besides the economics courses I took in college, I have not read an economics book since (other than “Free to Choose” by Milton Friedman which I highly recommend.)

But I felt I needed to come out and help to educate some of those among us (such as the President and most of Congress) that seem to have no clue what the “Free Market” means let alone what it means when you try to “control” the Free Market.

“Controlling” the free market is a bit like trying to hold down part of a balloon. (You know the kind that street entertainers use to amuse your kids with a balloon dog.) When you have one part tamped down because you don’t like that part, you find that another part of that balloon will (if you’ll forgive me) balloon out to accommodate the difference of air pressure inside the balloon.

The only way you can EVER prevent the balloon distending in another part is to totally control ALL parts of that balloon. In other words, completely surround the entire circumference of it with something ridgid. You can then pressure parts of the balloon, which will not result in it bulging out in another part. It will however bring the air pressure up inside of the balloon. As more pressure is applied from outside, the higher the air pressure goes inside. At some point the balloon *pops*…or it finds a crack in the restriction and seeks exit through that crack.

As with the balloon, a market is either free or it is distorted and forced into areas that it would not ordinarily go.

What is a market?

According to Webster:
1. buying and selling; trade in goods, stocks, etc. an active market
2. trade in a specified commodity the wheat market
3. a place where such trade is carried on
4. the group of people associated in such trade

What happens when you try to regulate a market (other than protecting those involved from force or fraud)?  Say…the labor market.

Labor IS a market. Workers are constantly providing their asking price for their labor. Employers are constantly bidding for that labor. When both agree to the terms, the labor is hired.

However, labor is highly regulated by government (for the protection of the workers of course).  For instance the government tells employers the minimum rate they can pay the labor they bid for.

So, even though some person may ask less for their labor, the employer cannot enter into that mutually beneficial agreement. So what happens? Where the employer perhaps would have employed ten people, they may now need to get by with five. Now five people are out of work that might gain experience and be able to “graduate” to a (now) better offer by his current or another employer. Unemployment rises as well and they either go on unemployment compensation or perhaps welfare.

In a global economy this also means that companies are bidding for the labor in other countries where there are no, fewer or less onerous restrictions on what the company can offer. If you want to know why we are “out sourcing” jobs…it is the market at work. Like the balloon example, pressure is applied one place and that pressure manifests in another.

The same idea applies to illicit drugs. Like it or not this is a market where there is high demand and thus high pressure to get product from the provider to the consumer. As restraints are put in place on this market, like the balloon, the increased pressure finds cracks in the restrained areas. Smuggling of drugs, corruption of law officials, murders, beheadings, innocent people killed is the result and as well organized groups are set up to find and exploit the cracks.

Of course the reason for the restraint on this market is the benevolent reason of keeping the product away from kids. Unfortunately, it has the exact opposite effect. Drugs are plentiful, easily accessible to adults as well as children and it has the added allure of being naughty or dangerous or a blow against authority.  It has other effects that make a more dangerous world as well which I will not go into here.

A better approach would be to handle this constitutionally i.e., let the states, counties and cities allow or not allow drugs as they see fit and keep the federal government out of it completely. Certainly there are still counties in the U.S. where alcohol is illegal to consume (called dry counties). Also, many companies now test for drugs, making it harder to get ahead in ones career if you are using.

The examples above are only two of many areas where Federal government interference in markets causes an effect opposite of what was intended.

The Federal government needs to be placed back into its Constitutional box of enumerated powers. Instead leave interference in markets to local and state governments where the effects are smaller and people can vote with their feet and migrate to a more hospitable state if they don’t like the restrictions. Or vote out those causing the unintended consequence of that interference.
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