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14 October 2008

I <3 the Free Market Part 1

I'm a dork. I think the economic mechanism refereed to as the free market is one of the most beautiful concepts ever conceived. With all that's happening in finance right now I have been getting a lot of questions about the economy (I was an econ. major at Loyola Chicago... that makes me about eight giant leaps from being an expert). I've had some friends questioning capitalism in general, so I'll explain my love of the free market and why I still think it's the way to go.

My favorite economist is Milton Friedman. He was a brilliant professor at the University of Chicago for over 30 years. U of C, from what I understand, approaches economics very differently than many universities outside of Chicago. It is also highly regarded as one of, if not the, best place to study economics. They have an absurd amount of Nobel Laureates to boot. Anyways, here's a great Friedman quote:

"There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government. And that’s close to 40% of our national income."

The point is that people should choose how to spend their own money because they have the most vested interest and are most apt to spend it wisely, or at least to spend it on goods that they themselves want. When the government collects taxes there is an externality known as a deadweight loss. Essentially, when you give the government $1 they spend $.30 (the U.S. governments deadweight loss is estimated to be .3 last I checked) to collect that dollar. If you're allowed to spend it yourself there is no deadweight loss.

I've always thought of a dollar as a vote. By purchasing a good a consumer is essentially signaling to a producer that there is a need for this good. In turn the producer produces more. If they can not produce more of the good then the price will increase and the good will go to the buyer who needs it the most (the person who pays the most is seen as having the greatest need for the good). In this way goods get manufactured and bought at the most efficient price, and the best part is that no one directs this system.

More on this tomorrow...

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