Insights from Milton Friedman and Adam Smith

Insights provided below came after reading “Free To Choose, A Personal Statement, The Classic Inquiry Into the Relationship Between Freedom and Economics” by Milton and Rose Friedman

Adam Smith surmised the simple truth that voluntary exchange only happens between two parties when each believes they have something to gain by it.  Most economic fallacies assume that one party’s gain necessitates another party incurring a loss or being required to make a sacrifice.  Such views often arise when people confuse money with wealth, or become too familiar with fixed pie scenarios as is often the case with allowances (e.g. fixed weekly money from daddy or mommy)and government budgets (from a relatively fixed sum of taxpayer based revenue).

How can people from different parts of the world voluntarily cooperate in a way that promotes their separate interests and respects their individual initiative?  Adam Smith demonstrated in his seminal work “The Wealth of Nations” how the price system often accomplished this amongst various peoples and nations despite the many obstacles and interferences with the free market even in his day.  People can maximize the accomplishment of this ideal when living in a real free market system where prices truly reflect supply and demand.  When prices are uninhibited by government controls they are able to accomplish three things:

  1. Prices in a free market transmit information to various producers and consumers of specific good and services efficiently and accurately.  Such prices accurately express the conditions of demand and supply.  However, when price controls and other forms of government interference with the free market system are introduced, how much a person or party can afford is no longer an option of individual or party choice and discretion (e.g. I can afford to fill up my car four times this week with gas if I start working a second job or if I sell my other car) but an imposed mandate that all too often rations consumption irrespective of individual demand.  Certainly people could satisfy their particular and variable needs by trading or trading for ration cards.  Yet the very issuance of ration cards presupposes a predictable demand for something.  The introduction of such artificial demands results in future artificial fulfillments of such demands that may not reflect true demand (often distorting either the natural timings or quantities of such demands).  The inevitable over and under compensation of such artificially adjusted price systems is like having someone towing your car with a rope and driving too slow or too fast in relation to your car.  The rope goes from being too slack one moment to suddenly being too taut and perhaps breaking and/or ripping the bumper off one of your cars.  On the other hand, when the price system is left alone to work as well as it naturally does, then the positive and negative feedback signals provided keep the rope just taut enough so that the lead car of supply or the towed car of demand braking or speeding up just enough to stay in synch with each other in a way that doesn’t cause undue tension. 
  2. Prices in a free market system economy provide an incentive to adopt those methods of production that are least costly and therefore use available resources for the most highly valued purposes.  (the most highly valued purpose in a free market system isn’t simply a dictum of government propaganda touting sacrifice for the good of the whole, but an objective consensus established by the labors of people for the happiness of people).
  3. Prices in a free market system determine how products and wealth are distributed in a way that is just and impartial.  The free market is no respecter of persons — if you produce more of what others want to consume then you in turn can afford to consume more of what others produce.  Such a free market system doesn’t preclude either greed or generosity, but instead welcomes the spirit of free choice and any aspirations to bless oneself and others. 

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