Free Market Capitalism – Risky Business

Free market capitalism is not without risk to both buyer and seller.

As a buyer in a free market capitalism system, it is your responsibility to determine what the ‘value’ of a product or service is to you.  In seeking a ‘voluntary exchange’ you are going to be evaluating the alternative uses for your ‘resources’.  (I’ll use ‘resources’ in place of money since money is only a medium of exchange.  For most ‘money’ represents ‘labor’, but it may also represent your ‘knowledge’, ‘skill’ or ‘savings’.  Everyone possess ‘resources’.)

The buyer has complete freedom of choice.

As such the buyer (consumer) is in the ‘driver’s seat’.  Only those products or services that are deemed to have ‘value’ for the consumer will be successful.  The seller may be successful offering a product or service to the masses (iPhone) or to a very limited audience (personal trainer), but he/she will only be successful if the consumer finds that product or service a ‘value’.

Competition for the consumer’s approval drives innovation.  We are seeing the result of competition in the phone market.  With the iPhone’s success we see other producers entering the market and offering either more features or lower cost alternatives.  Consumer’s will determine what is successful by their purchases.  There will undoubtedly be a variety of products since consumers have different ‘wants’ and ‘needs’.

It is only through the ‘free market’ that all of these ‘wants’ and ‘needs’ will be fulfilled.

We are seeing ‘intervention’ in the ‘free market’ play out daily as consumers of health insurance are complaining about the loss of coverage that met their wants and needs being replaced by insurance ‘dictated by the government’.  That insurance generally comes at a significantly greater cost in the form of increased deductible or higher monthly fees.

This regulation stifles innovation.  By specifying what insurance must cover the insurance companies are not allowed to offer plans ‘tailored’ to specific consumer needs.  There can be very little if any competition other than simply  ‘what is an acceptable’ profit.  Ultimately this can only result is bigger insurance companies and finally to a single insurer which may well be the government.  Size will lead to economy of scale and that scale will be the only source of ‘profit’.  There is nothing ‘free’ about this market!  There can only be higher costs or reduced services.

A similar situation exists in the energy market.  By using taxpayer money to encourage ‘green’ energy, the free market has been destroyed.  The consumer is no longer ‘choosing’ on the basis of his/her perceived ‘value’.  Instead a select group of producers are being encouraged to produce products that may or may not be acceptable to the consumer.  By doing so we are unlikely to see successful innovation and certainly will not achieve the ‘best’ or ‘lowest cost’ energy.

Sellers (producers) must assume the risk of failure in a free market.  Innovation is driven by failure not success.

As an individual, you have your labor, skill, knowledge and perhaps some accumulated capital for ‘sale’.  If you lack skill or knowledge your labor has limited ‘value’ to a consumer.

By adding skills you increase your value, but you assume the risk that those skills may become obsolete (buggy whip makers) and require you to learn new skills.

The same is true of education and savings.  Knowledge is only valuable if it is recognized as a ‘value’ by the consumer of that knowledge.  Savings may be simply accumulated or employed in an attempt to increase it’s value.  If simply accumulated it will slowly disappear as inflation reduces its ‘value’ (a dollar today has less ‘value’ than a dollar in years past and will buy less in the future).  When you attempt to grow those savings by investing you assume a risk that you will lose those savings.

It is only in a free market (free choice) that we see real economic growth as one innovation fails and another solves a problem and succeeds by being freely accepted by consumers.  Individuals learn what skills and education they need to be recognized as adding ‘value’ and ultimately add to ‘productivity’.

Yes, free market capitalism is risky.  Without risk the economy becomes stagnant or declines.  Productivity and economic growth come from failure.

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