Dynamics of the Free Market
MARCH 01, 1969 by ROBERT H. EAGLE
Dr. Eagle is a free-lance writer and management scientist in Chapel Hill, North Carolina.
Social and economic changes, changes in tastes and technology, appear inevitable. Many of yesterday’s products and processes have passed from the scene, replaced today by countless goods and services unheard of a few years ago.
Recognizing this fact, entrepreneurs attempt to anticipate or initiate change in order to secure a profit. In an active, relatively free market, they are constantly searching for new products and services which they hope will have widespread appeal and consequently produce the profit which successful innovations bring. Some of these attempts succeed; others fail. But the public as a whole is satisfied with the result of the free market mechanism, powered by the profit motive.
The conditions of supply and demand which pace economic changes are simply the expressed desires of willing buyers and sellers. The resources for production thus are attracted into business ventures that are potentially profitable.
However, when the source of investment is heavy taxation, the criterion of profit potentiality is lacking; and the size and impact of projects, thus financed, must inevitably bring about undesired changes. Had the general public’s desire for such undertakings been at all discernible, entrepreneurs would have banded together to take advantage of the obvious profit potential.
Many economists have long recognized the role of profit (positive and negative) in directing economic activity out of certain lines and into others, but the fact that the profit motive paces change, bringing it about but at the same time keeping it within manageable and tolerable limits, has seldom, if ever, been recognized.
Yet the second role of profit—causing tolerable, relatively gradual change, in contrast to the social and economic upheavals which are apparently becoming more drastic and frequent—may be as important as the role of directing economic activity.
The movement into or out of certain economic activities is directed by the consuming public which by its voluntary purchases or nonpurchases bestows positive or negative profits on the entrepreneurs involved. Similarly, the public, in a free market society in which government plays only a minor economic role, would control the pace of change.
A Sense of Stability Midst the Winds of Change
Both a desire for change and a resistance to change are built into human nature, in different proportions among different human beings. Very few people enjoy living in a society of constant and drastic changes. Human nature demands some sense of stability, some assurance that life is not going to be drastically different every day. It is widely believed that the pace of modern industrial society is having deleterious effects on the population, socially and psychologically. On the other hand, not many people wish to live out their lives without any prospect for change. The great mass of Americans fall into the middle ground, desiring change leavened with a certain amount of stability. And this is the kind and pace of change generally afforded as entrepreneurs cater to the general public in open competition.
However, when the government becomes the single largest customer in the economy, dwarfing the world’ s largest corporation, matters are far from the ideal described above. With its virtually unlimited access to resources (gained with the use of compulsion via its taxing powers), catering to powerful special interests (all of whom want the public treasure spent on their own behalf), the government is in a position to bring about vast and widespread changes that are undesirable so far as the general public is concerned.
An example of the disruptions brought about by coercive government intervention is the "diverted-acres program." Under this program, the Federal government pays large landowners handsomely to retire land from production.
Senator Abraham Ribicoff reports in the September, 1968, Reader’s Digest that the average corn acreage has been cut by 15 per cent since 1961, but the corn harvest went up by 376 million bushels. The large operators retired their poorest land and "spent their government checks on more fertilizer and high-yield technology for their remaining acres." Such a program adversely affected "the small farmer who did not have enough land to participate in the diverted acres program." The report continues, "to collect Washington’s cash for diverting acres into growing pulpwood, for example, many landowners have dispossessed tenants and laborers by the thousands…. The net effect… has been to eject 100,000 more farm people per year."
The population movement from farms to industrialized centers goes on in any economy as it changes from predominantly agricultural to predominantly industrial. In the absence of government intervention, this movement tends to be spread out over time rather than to occur in sudden spurts. When farm workers, unprepared by skill or background for city life, move gradually into urban centers, they can be more readily absorbed into the new environment than when they abruptly arrive in large numbers.
The farm program, as Senator Ribicoff explains, is one of "the forces moving poor farm people into urban ghettos." Such environmental wrenchings add to the overall problem of crime and delinquency.
The letting of large government contracts, giant public works, space and national defense programs (as when military bases are located, opened, and shut down for political considerations) such actions, based on compulsion, have a monumental impact on the economy and the disposition of men, money, and materials. In addition, fiscal and monetary policies, usually involving the expansion of money and credit, overstimulate the economy and bring about drastic coerced changes that no combination of entrepreneurs, big and small, could ever accomplish.
If these intolerable dislocations of people and resources are to be avoided, the responsibility must be withdrawn from government and re-assumed by the private sector of the economy.