Americans seem to have forgotten that our wants, desires, opinions, fears, ambitions and most all, our choices are the forces which drive the Free Market. It is based on the simplest of concepts: the freedom to live our lives as we choose. We have the freedom to choose what house we buy and how much we’re willing to pay for it, what car we drive and how much we will pay for it, the companies in which we invest and how much we will pay for a good or service. It’s that simple. The Free Market is the tangible manifestation of our choices.
The price of a good or service is based on what we will pay for it. Competition is what keeps prices in check. If the price of some product rises due to increased demand, an opportunity is created for a competitor to offer a comparable product at a lower price. This competitor cannot sell an inferior product and expect to make sales. The competitor must produce something comparable for a lower price. This takes hard work, dedication, risk-taking and innovation. If successful they make money and the consumer benefits from the lower prices. It also serves as a wake-up call for the first company to increase their efficiency, or they go out of business. The consumers’ choices drive the market. Most people do not realize that the profit, the primary goal of all businesses, is realized most often by producing a superior product or service at prices that benefit the consumer. Exploiting the consumer or providing them with unsatisfactory alternatives is a sure-fire way to bankrupt yourself.
The stock and commodities markets are no different. The price of a stock or commodity is determined by the buyers and the sellers, each operating in their own interests, opposing forces keeping the markets in check. Free choice determines where investment occurs with companies competing to attract investors. Companies strive to increase performance, which leads to sales and profits, allowing them to reward their investors through dividends or increased value of the shares.
Left to its own devices free markets can make short-term mistakes, but they are always self-correcting. If something is overvalued, the true value will eventually become evident and the price will fall. Free Market Capitalism is an economic auto-pilot that will keep an economy on a mostly even keel.
That being said, Government does its best to corrupt free markets, to exert control of the people and limit our freedoms. It does this through tax policy, regulation, price controls, subsidies, interest rates, monetary supply, wage controls, environmental regulations which defy common sense and other freedom-limiting legislation. Government continually makes decisions which limit our freedom, corrupts the natural cycle of supply and demand, disincentivizes competition and reduces choices.
One great example of Government interference is the fossil fuel industry. This country is blessed with an abundance of oil, coal and natural gas. Offshore areas of the US are rich in oil and gas and we’ve recently discovered an oil field in the Dakotas that rivals Saudi Arabia. You wouldn’t know this by where we get our fuel, however. In the name of stopping global warming the Government will not let us drill for these resources. This restricts supply, increases price and exports trillions of dollars a year to Middle Eastern countries not exactly our friends.
Why was there a housing boom for the last ten years? Why were prices rising 20% a year in California, New York and Florida? Why was the demand for new homes so high? Once again the Government interfered in the Market. Through their surrogates Freddie Mac and Fannie Mae, they created the sub-prime mortgage market, encouraging banks to make loans to people who would not normally qualify. They would in turn buy the loans from the banks. This generated false demand for homes and caused existing home prices to rise dramatically. When tens of thousands of these risky loans finally went bad, the bubble burst and the Market tried to correct itself, but Government is still fighting it tooth and nail, pouring hundreds of billions into the banking industry and trying to re-inflate the bubble. The equity of those homes is not coming back up anytime soon. It was never real to begin with.
As Americans we have to be wary of Government tampering with our free markets, recognize it for what it is and act in the best interest of the nation at each election. We cannot sit idly by and watch the economic freedoms which have made this country great be slowly destroyed, only to be replaced with a Government-planned economy designed to cement power for a new political ruling-class. Janis Joplin said freedom is just another word for nothing left to lose. We are rapidly approaching that level of “freedom.”