Free Market Theory

No, I am not going to try to give you a full treatise on "free market theory".  However, I believe that it is important to give some basics, at a time when leftists (not to mention REPUBLICANS--revisit recenf Farm Bill) are conducting an all out assault on free market theory (see previious entry as to assault on simple arithmetic), without even acknowledging they are doing it (unless you are talking about Maxine Waters).

Free market theory, and history, suggest that a free market BEST accomplishes these 3 things (in additon to the overall goal of best producing economic prosperity):

1.  Free markets BEST allocate resources, because they do NOT rely on a limited numbe of "central planners" with an agenda.  Free markets allocate resources by the "invisible hand" of supply and demand--as private citizens VOTE with their MONEY as to what is most valuable to them.  If a product is not cost effective, or there is not sufficient public demand (alternative energy anyone?) for it, the product FAILS.   Resources are allocated to a different product for which there is a demand (unless Congress puts the product--oil in this case--off limits, and therefore limits the supply aritificially probably more than OPEC is now limiting the supply).

2.  Free markets "regulate"--set the "correct"--PRICE of a product or service by supply and demand.  This, of course, requires a COMPETITIVE marketplace (see previousl etnry mention of mergers).  Again, for central planners to attempt to set prices has proven to be an absolulte DISASTER throughout history.  In theory, it is a disaster to try to set prices by central planning, and in practice it has proven a disaster.

3.  free markets provide FREEDOM.  Some (leftists) may blink at this, but it is absolutely true.  It is one of the delusions of leftists that it is not true.  What is the alternative to free markets?  Right.  It is central planning (in our case, usually by the Federal Government, which has shown itself so very copentent to "plan" everything--NOT). Free markets operate by private individuals, and coompanies, making "free" decisions on what they want to do, without being TOLD what they HAVE to do by a centralized "state".

Let us go back to "profits" again.  See the previous entry, which was more a primer on simple numbers than a real examination of "profits".

First, it is obvious that for the Federal Government to try to "regulate" either prices or profits is a REJECTION of free market theory (a rejection toward which leftist Democrats seem determined to head, as they lurch further and further toward the historically repudiated idea of "central planning"--with Republicans seeming to be heading in the same direction, except slower).

Second, free market theory is not much concerned with "profits" at all.  Certainly, "profit" is the MOTIVATION (freedom to seek it their own way)  for people participating in free markets.  But COST is a major factor in profit, and individual companies might have different costs.  Free market theory has more to do with PRICE, and supply and demand. 

Profit, however, dOES matter in free market theory . It is the engine that runs the whole concept.

Time to go to oil and gasoline.   I know.  It is deabatable how much of a "free market" there is in those commodities.  I will postpone that issue for a later entry, and assume that we can apply free market theory to oil and gasoline. 

HOW do free markets "regulate" price?  It is with PROFITS.  If DEMAND is high, then the PROFITS are potentially HUGE (as they are in oil right now, except we have put most of the country OFF LIMITS for drilling).  People seeking PROFIT increase the SUPPLY, and that lowers the price.  Without the potential PROFIT (for example, the government regulates the PRICE or the profit), free market theory falls apart.  Notice how this WORKS perfectly well on "alternative energy".  Once it is CHEAP enough, and oil is EXPENSIVE enough, "alternative energy" will take off).

Assume gasoline went to $10.00 a gallon (to take a ridiculously high, arbitrary example).  The DEMAND would drop like a lead weight falling off of a sheer cliff, and SUPPLY should rise (again, with two caveats here:  suppply disruptions because we are NOT producing more oil in the U.S., leaving us at the mercy of some unstable countries; and there is that question of exactly how much of a free market there is in oil and gasoline, except that the answer to problems in that area is to INCREASE the "free market" in oil and fuel and NOT to resort to the discredited idea of central planning).

At SOME price, the "bubble" in fuel prices bursts--even with OPEC and the lack of a truly free market in that specific area.  WHY?  Well, first demand simply dries up.  Second, supply MAY increase (certtainly it will "come out of the woodwork" from people actally wanting to cash in on "bubble" prices).  Finally, at SOME price non-oil energy products that "compete" with oil become economic.

Oil and gasoline:   I actually think that there is something the PRESIDENT can do about oil and fuel prices--mabybe a few "somethings--which would not interfere with the "free market" at all.  I will post that entry some time this week. 

P.S.  You dwill note a little less of a directly political/media bashing tone in today's entries (okay, I left in a LITTLE bashing--"colc turkey" is bad for you).  This actually does not repreent a permament change in the blog, since I still expect to comment on current "news" stories.  However, I am going to Boston to visit my two daughers (Kyla is presently living in Kenda's apartement there while she studies for the New York bar exam).  Question:  Does even BOSTON deserve THIS.  My answer is "YES", but there was a slight hesitation (since I KNOW how dangerous my daughers are together).   That means that there will be few, if any, blog entries between June 3 and June 11 (not applause, please).  I thought I would use this coming week as an opportunity, if I have time, to get a little more into economic and political THEORY--with concrete examples from current "news", but more theoretically oreiented.   I even hope to do an entry this week, or this coming weekend (I don't leave until Tuesday) on "What is a conservative".  Yes, I DO think there are some basic principles which define a "conservative", to the extent you cannot be one if you do not believe in them (as I don't think either President Bush or Senator McCain is one).  Nope.  I am NOT talking about detail issues like Iraq, abortion homosexual rights, or the death penalty, although I think they figure in to a degree under the more general principles).   You will have to WAIT for the entry to see if I can pull it off.