The Role of Government in the Free-market Economy – Part I

The wonder of the free-market economy has always been how self-interest, the “invisible hand” espoused by Adam Smith in his work The Wealth of Nations, guides that economy to an optimum distribution of goods and services and a steady growth or accumulation of wealth.  Given, for example, two products, bicycles and scooters, and society’s increasing preference for more bicycles and less scooters, if consumers’ demand for bicycles should increase while that for scooters should decrease, prices for suppliers’ limited inventory of bicycles will be bid upward by consumers bidding against each other to obtain them, while prices for scooters will drop as suppliers compete to sell overstocked inventory.  Due to the rise in prices and profits on sales of bicycles, suppliers are given a profit-incentive to employ more capital and labor to produce more bicycles.  In turn, the decrease in prices and profits on sales of scooters encourages suppliers to employ less capital and labor to produce less scooters.  Hence, like an “invisible hand” self-interest guides society to the optimum result, a greater number of bicycles but a lesser number of scooters, just the result that society had needed and sought.

But while self-interest in free markets has been a principal force in driving our economy, guiding it to an optimum distribution of goods and services and a steady growth or accumulation of wealth, there is no doubt that a certain instability pervades any free-market society, whereby periods of economic growth, marked by increasing productivity, employment, and prosperity, can be followed by periods of recession in which productivity falls, unemployment rises, and the overall standard of living worsens.  As Karl Marx in his work Das Kapital observed, the free-market society tends toward a growing disparity between rich and poor, or between a diminishing population of wealthy capitalists owning the means of production and a burgeoning population of workers who own little except the value of their own labor.  In positing capitalism’s downfall in favor of communism, what Marx failed to account for are some of the corrective forces that are available to combat a weak or failing economy.  In fact, Marx’s theory of class struggle between the bourgeois and the proletariat has been supplanted, in the U.S. especially, by the political struggle between left and right, or liberal and conservative.