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and because people are social creatures, a major emphasis must be on surviving through ass ociation with others. But the fundamental focus must be on the requirements of one individual standing alone, for a society is simply a collection of individuals.

What is a Market?

The fundamental means of survival available to a group are the same as they are for one person. The only significant differences arise from the degree of complexity

with which the actions of production and exchange are performed. The individual acting alone can exchange one state of affairs for another, but only through the expense of his own energy.

Within a free society, he can exchange the product of his effort (his property) for the products and services of others, gaining enormous benefits through the division of labor, specialization, and the innovation of others. Thus, a market economy makes survival easier, but through more complex means than any one person can achieve alone. Economic activity is more complex in terms of the resources and choices available; but in terms of survival and growth, it is much simpler. Crusoe couldnt have survived by acting as the janitor on his island, but there are many people who make a decent living washing the windows of skyscrapers in New York City.

Given knowledge as elementary as Crusoes, and if protected from coercion by others, people attempt to trade their property by voluntary consent to their advantage. They evaluate the products and services offered for trade, and based on their ability to strike a bargain, choose those that are deemed most needed or desirable. On each side of the trade, one person exchanges something judged to be of lesser value for something judged to be of greater value. The trade is a matter of individual judgment, of each persons estimate of the value of holding one item versus another. The process of evaluation is necessarily subjective: that is, it depends on each persons specific preferences, judgment, values, and goals.

The fact that value is subjective-that people value things differently-both drives people to trade and makes it possible for both sides to profit. The farmer who has excess com but not enough meat values his surplus com less than the rancher who needs com to fatten his cattle-the opportunity for a trade exists. As more and more people associate and get involved in the process of exchanging their surpluses, trading becomes more complex. The interaction of numerous individuals, the social device of production and trade through free association, is called a market.

A market is the means people use to engage in the voluntary exchange f property according to the law of supply and demand. This definition applies equally to a local flea market and to the New York Stock Exchange. The system of exchange may be simple or complex, but the defining characteristic of a market as such is that it is composed of a group of individuals engaged in trade-engaged in the process of trying to exchange property in their self-interest.


Money is necessary only after members of the marketplace have achieved a high level of productivity and long-term control over their lives. In its essential form, money is simply a commodity which is so generally desirable that it is acceptable to virtually anyone in an intermediate exchange. It is no less a commodity than pickled herring, but it has a longer shelf life (durability), has a universally recognized value, is divisible, and is portable. Money so simplifies the process of exchange that direct barter becomes unnecessary. It makes economic calculation possible; it provides a

means for people to translate the inherently subjective hierarchy of their economic values into numeric terms. And it provides a means of quantifying and saving the surplus of products over consumption. By accepting dollars or gold (or whatever the accepted medium is), a n individual relies on its buying power in the future, whether that be minutes, days, or years. Thus, money is a product which serves as a

medium of exchange and a store of value, but which is no more and no less subject to the laws of supply and demand than any other product or service.

Another form of money arose from a sophistication in the extension of credit. Credit is a market innovation created to utilize the otherwise idle savings of individuals. In the early history of credit, when gold and/or silver were the accepted money, the metal itself was loaned (usually secured by specified collateral) in return for a promise to pay the original amount borrowed plus interest. Then a new innovation was created-the money certificate or bank note.

Lenders discovered that a certificate promising to redeem to the bearer a specified amount of gold or silver was a suitable and convenient medium of exchange. Once these certificates were recognized as acceptable due to the soundness and reputation of the financial ins titution which issued them, it didnt take a genius to realize that more certificates could be issued than actual deposits of hard currency, and fiduciary medial were created.

As long as the issuer carefully scrutinized the prospects of repayment and maint ained a reputation of soundness with depositors, it could create money substitutes (bank notes and money certificates) by extending credit beyond the limits of its hard currency deposits. In this way, and for the first time, the rate of growth of wealth could be accelerated beyond that possible by loaning hard currency-all based on the lenders judgment of the borrowers ability to produce and trade in the future.

When the govemment stayed out of it, the growth of fiduciary media was regulated primarily by market factors. That is, the bank was ultimately liable to redeem all outstanding notes in gold or silver, so the quantity of precious metal deposits provided an objective standard and a check on the limit of credit expansion. Like any other business, some banks prospered and other banks failed; and some depositors eamed interest on their savings and other depositors lost everything. But overall, the innovation of extending credit beyond actual savings dramatically accelerated the growth of wealth.

Today, fiat money-paper declared to be legal tender by the govemment-is the accepted medium of exchange. Fiat money is similar to fiduciary media in the sense that the currency itself has no use except as a medium of exchange, but it is different in that there is no objective value backing it. In a fiat money system the govemment, not market factors, determines the supply of money and credit. The objective limits are gone, replaced by the subjective limits imposed by govemment bureaucrats.

The banking system holds reserves not as precious metals, but as demands for govemment notes9 secured by the power to tax and print money. 1° By stipulating fractional reserve requirements for lending, buying, and selling govemment money market instmments, and manipulatin g interest rates, govemment central banks set

the limits of credit availability. These limits largely determine the level of borrowing by businesses and consumers, which in tum sets the rate of growth or decline of the money supply.

Even though the supply of money and credit are govemment controlled, market principles still govem the purchasing power of money and the cost of credit. Money and credit are still subject to the law of supply and demand, but the supply side of the equation is manipulat ed. And savings are still the basis for sound business expansion through the pmdent extension of credit.

Credit, if properly managed, accelerates the growth of wealth because it provides the most efficient use of savings and the potential productive capac ity of individuals and institutions. Money saved is a claim on unconsumed goods. Savers choose to forgo immediate consumption in favor of future consumption or investment. Through the advent of credit, they can make a deal, either directly or through the institution holding their money, to let others borrow their savings for consumption or investment in retum for a promise of greater purchasing power in the future. Borrowers use the loan to purchase unconsumed goods either for consumption or investment, but either way they are obligated to create enough new wealth to pay back the loan plus interest. The lending institution creates new money when it makes the loan, but if the money is not repaid out of newly created wealth, then actual savings are consumed.

What Is Wealth?

Wealth is simply an accumulation of products and services which are both available and wanted for

consumption. The only way to create wealth is to produce more than is consumed, which is made possible through technology. Technology is an applied science, and science means knowledge. People increase their productivity by acquiring new knowledge and applying it. In many ways, our lives are so abundant that this fact is easy to forget. We take for granted the efficiencies introduced in the m arket through innovations such as specialization, the division of labor, and mechanization. These were all discoveries, ideas in the creative minds of individual people that were transformed into reality. In a market economy, everyone gains from the creators discovery. The efficiencies gained through technological innovation cascade through the market so that each person can produce more in less time. As each person produces more, he or she can consume more, according to the law of supply and demand.

No matter how sophisticated the products and services become, no matter how many people get involved in the process, the principles that Crusoe employed on his island remain immutable. To live, one must evaluate what is required or desired to enhance life, and produce in order to acquire it. The price one pays is what one must give up in order to acquire the desired item. To accumulate wealth, one must save so that time and intermediate products can be invested in acquiring other goods. To diversify ones labor requires innovation, which increases the time efficiency of ones industry.


Business is like a man rowing a boat upstream. He has no choice; he must go ahead or he will go back.

-Lewis E. Pierson

A free market economy is a human invention based on a view of humanity as consisting of independent, rational beings capable of providing for their own survival. It is an invention, but one which arises spontaneously, as a natural result of individuals acting reasonably and uncoerced in a social setting. Govemments dont create markets; they take them away through forceful intervention. If govemment leaves its citizens alone, markets arise automatically, almost as if they have a life of their own.

As evidence, I offer the fact that even in societies where production and trade are tightly controlled by autocratic or coUectivist regimes, "black" markets are rampant and are most often silently sanctioned and even patronized by the authorities. For example, a recent television program about Poland explained how the local govemment in a small city took a few acres of land and divided it into small plots (smaller than the back yard which many American suburbanites take for granted) and distributed them to families so they could grow vegetables for their own consumption. Almost immediately, the rights to use the plots were trading on the silently sanctioned black market for amounts far exceeding the average yearly eamings of a Polish family. The reason? Fresh fmit and vegetables were (and I presume still are) practically nonexistent in the state-mn markets but sold on the black market for premium prices. A family that acquired a few plots instead of one and produced small crops for sale in the private market could more than double their yearly income.

While such "gray markets" spring up any time trading in a highly desired item is restricted by any govemment, the idea of markets as such is condemned in coUectivist regimes. For example, in the Soviet Union, a completely different set of principles is derived from the study of "the means applied to the attainment of ends chosen." Human beings are viewed not as independent beings existing for their own sake, but as a disposable natural resource designed to serve the greater whole -the state or the collective. By this view, to act as Cmsoe did to improve his standard of living is self-fulfilling and therefore opposed to the fundamental communist tenet "from each according to his ability, to each according to his need." In any issue, the "common good" is the standard of value; and the "collective wisdom," as interpreted by self-appointed guardians, is the final judge of tmth and falsehood."

For them, the concepts of value, price, investment, and innovation have completely different meaning and focus. Bureaucrats attempt to set value by govemment dictate, and price by decree. State planners invest resources without regard for profit. They try to make people work without personal incentive or potential for substantial self-improvement. And the result is a society of people so tired of

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