Four misunderstandings about free markets

Economics is notorious for its imprecise and contradictory science. The famous President Harry S. Truman asked for a one-armed economist, so he didn’t have to hear “on the one hand” first, and then “the other.” For better or worse, economics and the policies it inspires affect every corner of the world. In this article, we will explore the four most dangerous misconceptions that have plagued free market economists since the time of Adam Smith.

Inflation is inevitable

Inflation seems to be a natural phenomenon; your father paid a quarter for a movie, your grandfather paid $3 for a suit, but now you pay $5 for a cup of coffee. The ugly truth is that inflation is not natural. Inflation is a product of the printing press, and worse, it imposes additional taxes on people’s income. Inflation can help select groups in the short term: for example, farmers may demand higher prices and make more profits until the prices of other supplies catch up. However, in the long run, it will only bring more funds to the government, while also reducing the real value of its debt.

It is no coincidence that it is very difficult for the main beneficiaries of inflation and the sole proprietors of printing presses to “control inflation”. There are many different solutions to inflation, but critics believe that there is a lack of incentives to stop it.

The government can save us

The government’s solution to the problem is questionable at best. Most solutions have become “pig barrels”, which means that they have inserted various special benefit additional clauses, thereby increasing the cost and damage of government intervention. Many government interventions end up with the political agenda as the main priority. The New Deal reforms of the 1930s were expensive at the time, but one of the surviving political creations, social security, has been an increasing tax burden ever since. In many cases, the government’s solution to economic difficulties may turn into a debt-heavy plan to redistribute wealth (that is, your taxes) to areas where it can gain political support.

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From the perspective of a truly free market, the real motivation behind political decisions often seems to be to involve decision makers in politics. If votes are in danger, fiscal responsibility will soon disappear. This often overlooked reality has not kept people away from government intervention; one day, thousands of dollars spent on Pentagon toilet seats or multimillion-dollar bridges may not do anything.

Free market means no regulation

The free market is a bit of a misnomer, because people tend to equate “free” with “unregulated.” Unfortunately, the “self-regulated market” did not speak out, so we were trapped by this misunderstanding. The fact is that there are many signs of what an unregulated market will look like. Every time you ask consumers for reviews of products (such as cars), you will see that non-government regulation is at work. Automakers will pay attention to what people say about their cars, and then they will change the model for next year to eliminate things that annoy the reviewers.

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Consumer interest groups and self-imposed industry standards are the two powers that free market economists believe can replace most government regulation, while saving taxpayers money and bureaucracy. In a sense, these two groups do control regulation, and lobbying by consumer groups and industries that influence legislation may be considered a more expensive and less efficient way to get the job done.

Tax does not affect output

Taxation is sometimes described as a zero-sum game. The government takes a certain amount of money from private hands and spends it on other things, so the sum of economic activity remains unchanged. We pay taxes, we get roads and schools. However, free market thinkers believe that taxes will reduce the incentive to produce more, thereby reducing national output, which will have a negative impact on the economy.

Whether it is profit or personal income, the truth is that the more you earn, the less percentage of total income you retain. When the increase in income is purely an inflation phenomenon, removing the bracket creep can alleviate this personal situation, but as you work hard to get more and more income, the government only takes up a larger and larger part.

Although not everyone responds the same to this stimulus, the overall effect may be a decline in production. Even the government understands that taxes will drag down the economy. It also recognizes this when it uses temporary (one to five years) tax cuts or redemptions to stimulate the economy. However, the government is addicted to taxes. Every time government revenue increases, the government itself expands to use it and write more IOUs.

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Instead of using temporary tax relief measures to stimulate the economy into production, an effective free market alternative is to reduce government spending and reduce the tax burden. After all, almost all the most productive and prosperous periods of peace have experienced substantial tax cuts.

Bottom line

Despite the outcry, academic opinions seem to follow the rules of supply and demand. The economics of Adam Smith, Frederick Hayek, and Milton Friedman are simple and straightforward, suggesting an ideal world of low taxes, self-regulation, and hard currency. The desire of governments around the world to run printing presses runs counter to this economic brand. Therefore, we need competition theories that are contrary to experience, which require deficits, government stimulus, inflation targets, and large-scale public spending.

Although it is good to expose the fallacy, it is difficult to be excited about the possibility of change. Whether we have one-handed economists or not is not important, because governments are often victims of another obstacle: hearing only what they want.


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