The Free Market Economy
We are losing sight of what the Free market Economy is and why it’s so important to us. Investopedia has a very good definition of Free Market.
Investopedia explains ‘Free Market’
“In simple terms, a free market is a summary term for an array of exchanges that take place in society. Each exchange is a voluntary agreement between two parties who trade in the form of goods and services. In reality, this is the extent to which a free market exists since there will always be government intervention in the form of taxes, price controls and restrictions that prevent new competitors from entering a market. Just like supply-side economics, free market is a term used to describe a political or ideological viewpoint on policy and is not a field within economics.”
The free market works best with the least amount of government intervention. The element of this definition is a voluntary agreement between two parties who trade in the form of goods or services. Seller A has a remarkable product and Buyer B is very impressed with it. The cost is reasonable and that exchange is made on a regular basis. Buyer B doesn’t exchange a product or a service for Seller A’s product, he exchanges cash as a common medium for goods and services.
The agreements made by buyers and sellers for exchange are also effected by the cost of labor, the cost inventory, the cost of advertising and marketing and the cost of government regulations. And let’s not forget the cost of city, state, and federal taxes.
Seller A understands the market their product sells in and understands the competition. Seller A wants to maximize the sales of the product, so they make the price low enough to make it competitive, but high enough to cover the cost and to provide a profit.
Seller A has to spend a lot of time and consideration on determining the price of the product. A careful list of details must be maintained to understand how much labor is used to produce the product, how much was spent on Research and Development, so that can be included in the price as well, how much the overhead is for the product. Seller A must have a clear understanding of what the costs associated with the product are.
With that information Seller A has to understand the market; how much can they sell this product for and not drive off customers. A high volume product would allow for a smaller profit that could be made up by numbers. A high value product that will not be sold in high volume would require a higher profit because fewer will be sold. Seller A understands these things and will do a good job of establishing a price that will maximize profit by maximizing sales.
Remember this is a free market economy, the agreement between buyer and seller is made freely. The buyer wants the product for the listed price and the seller wants to sell the item. The least government intervention the better, government intervention in almost every way has a negative impact on the process.
Minimum wage requirements will always cause an employer to freeze employment levels or lay off workers. The company knows how much the labor portion of their cost of goods has to be in order to make a profit. The requirement, due to government intervention, to artificially pay the employees more than they are worth increases the price of the product in the market and will reduce sales. Reduced sales do not keep people employed in a company.
The motivation for irresponsible legislators to require an increase in the minimum wage is to force employers to pay what they consider is enough to support a family. What the irresponsible legislators don’t understand is the way an employer establishes the compensation for a job, it’s based on the value of the job as it relates to the cost of goods and the selling price of the goods or services sold, not on what the employee can do with the wages earned.
The free market applies to employment as well. If an employer needs 20 workers at minimum wage for unskilled tasks (minimum wage almost always means unskilled) then that’s how many minimum wage employees they hire. As long as the employer can keep a steady workforce of unskilled labor to accomplish what is needed then the wage is set properly.
When an employer can’t keep a steady workforce at that wage because people leave for better jobs, then the wages are too low and the employer has to increase the wage to keep an adequate work force. When the cost of labor increased due to the forces of the free market then the employer will increase wages and probably increase the price of the product.
This is the way the free market increases wages, not from the efforts of incompetent legislators who are trying to buy the love of unskilled workers. The elected idiots don’t or refuse to understand that the profits must exist or the company can’t exist. Without profits the company closes, employees are unemployed and the government loses tax revenue from the company as well as each employee.
Another way an employee can get more income is to get promoted to a potion with more responsibility and a higher wage. That is something that is earned and acquired through hard work and good performance, not legislation inflicted on businesses.
Better pay checks are earned through better education and a business friendly environment. Not sucking up to teachers unions and other unions and taxing the bejesus out of anything that moves.
Benefits are another area that government tries to inflict pain and punishment on successful businesses. An attempt to require employers to provide paid sick leave to every employee is about as irresponsible a legislative effort as can be made.
The benefit packages provided by employers are based on the strength of the company and the stability of the work force. It all relates to the cost of goods and the marketplace. Employers who want to maintain a stable workforce will provide the wages and benefits to make sure they have a stable workforce to sell its products and services.
The job may not be worth the expense of paid sick leave. The level and quality of benefits are based on what the employer needs, not the needs of the employee. The goal is to maintain a stable trained and effective workforce. Artificial requirements to provide costly benefits will not get those benefits to the lower wage workers the legislators are trying to buy.
The requirement to increase benefits will make cause the cost of goods to increase and therefore cost the price of the product to go up and will impact the free market. The smarter move on the part of the employer is to not hire or lay off when legislators create artificial and unwise requirements on business.
Legislators try to play with the free market and never help they only hurt. When an employer offers a job with the benefits that exist, that’s what is available. When an employees is unhappy with or cannot support themselves on the paycheck from the job they have they have several free market options.
First they can hold two or three of more jobs at the same time. When your skill sets prevents you from a job that pays more and provides better benefits you can hold several jobs and earn as much as you can. Another option is to get a better education and some experience and qualify for jobs with a much better paycheck and better benefits.
The most important thing someone can do to increase their chances at a better paycheck and a steady job is to stop voting for politicians who can’t understand the free market and create a high tax and a high regulation environment. The free market is the best friend of any employee.
The elected empty suits that cannot understand or refuse to understand the free market are the anchor that’s holds back unskilled labor.