Why We Have Free Markets
Table of Contents
1. Video Explanation
2. Lecture Notes
Say there is a storm that destroys a large proportion of two countries' wheat crop. One country is centrally planned, and the other has free markets.
| Type of Country | Wheat Price Change | Price of Substitutes | Total Production of Wheat & Substitutes |
|---|---|---|---|
| Price-Setting Country | Unchanged | Unchanged | Decreases |
| Free-Market Country | Increases | Increases | Unchanged/Increases |
Free markets aggregate information and organize society.
2.1. Aggregating Information
2.2. Organizing Society.
2.3. Alternative Methods Of Aggregating Information and Organizing Society
2.3.1. Information Aggregation
An alternative approach is to have people who specialize in observing the supply and demand of each commodity, and setting a market clearing price.
2.3.2. Organizing Society
2.4. The Role of Competition
Competition and the profit motive are important to get people to incur the cost of forming correct predictions, however they not why markets exist. If we could similarly motivate people using another method, then that would work. However, there is no known motivation that works as well as profit1. IT is imperative to understand, however, that money and competition are a means to an end, and not the end itself.
2.5. Further Reading
Footnotes:
This is meant specifically for motivating people to make predictions regarding asset prices and then speculate based on these predictions. There are other, and possibly better ways, to motivate people for other purposes. For example, physicists and mathematicians are often motivated by the mere idea of discovery, and it is not clear they would be significantly more motivated by money, particularly if it caused them to have to work on uninteresting problems. Members of the military are also an example of those motivated by reasons other than money.