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Understanding the Free-Market

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Source; Cartoon Movement

Under Adam Smith’s view, the metaphor of “the invisible hand of the market place” describes the self-regulating behavior of the market because of two factors: self-interest and competition. Free markets are the fundamental connection in exchanging things, such as products, between buyers and sellers. Free markets came about because no one is self-efficient. Parts of society must specialize into a concentration of a small number of productive abilities. Therefore, specialization of a specific product or products requires exchange in order to meet needs and desires. This exchange requires the free market to be the connection of society through transactions in the market. This market works through the cooperation of competition and self-interest. The pursuit of self-interest in the market is a benefit to individuals as well as the country. Self-interest requires businesses to be competitive with other businesses for profit. This ideal is the reason why the market is self-regulating with no government intervention. This self-regulative nature is why Adam Smith coined the phrase “the invisible hand of the marketplace.”

Self-interest plays a crucial role in the free market because it not only benefits the individual, but society as a whole. In Adams Smith’s Wealth of Nations, he states that “By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.” The term “invisible hand” describes the nature of self-interest in a free market. Adam Smith argues that self-interested competition keeps prices low. The pursuit of one’s own gain creates a demand for competition between businesses or individuals. This indicates that the free market is self regulating and, therefore, government intervention is unnecessary. However, in pursuit of one’s own personal gain, consumers have the incentive to search for lower prices, consequently leading to the important aspect of competition.

On the opposite side of the spectrum, firms compete with each other to sell their products to consumers and make a bigger profit. If a firm sets the price of a given product higher than the price set for the same product by another firm, sales will increase for the firm with the lower-priced product. Consequently, the struggle to make profits ultimately forces the higher-priced product to drop the cost to better compete with other firms. This action begins a pattern that ultimately leads to a price similar to the cost of producing it. This circumstance is why Adam Smith coined the phrase “the invisible hand of the market place.” This is why the free market is self-regulating. Self-interest motivates consumers to get products at a lower price, and firms will react with competition to the self-interest of individuals, thus self-regulating.

I found this topic very interesting because I better understand what keeps the free-market going. Since free-markets do not require government intervention, I have always wondered how the market regulates itself. Understanding the two factors of self-interest and competition helped me see how the free-market is self-regulating. This leads me to believe that the U.S. government should not intervene when society may work more efficiently on its own. It was fascinating to learn that free-markets can regulate themselves because of human motivation and competitive nature. Although there are many other types of markets, free-markets stood out as the most interesting of those we have studied in class. I understand that the United States is a mixed economy, not merely a pure free-market nor a planned economy, but somewhere in the middle. Therefore, seeing how a pure free-market economy flows creates a better understanding of how the United States economic system works, excluding the aspects of a planned economy.

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