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Mickey Mantle baseball cards will swap for a Babe Ruth, depends on all the participants in the newspaper mar-
ket or the baseball card market – on how much each one values the cards as compared to the other goods he
could buy. These terms of exchange, called "prices" (of newspapers in terms of money, or of Babe Ruth cards
in terms of Mickey Mantles), are ultimately determined by how many newspapers, or baseball cards, are avail-
able on the market in relation to how favorably buyers evaluate these goods. In shorthand, by the interaction of
their supply with the demand for them.
Given the supply of a good, an increase in its value in the minds of the buyers will raise the demand for the
good, more money will be bid for it, and its price will rise. The reverse occurs if the value, and therefore the
demand, for the good falls. On the other hand, given the buyers' evaluation, or demand, for a good, if the supply
increases each unit of supply- each baseball card or loaf of bread – will fall in value, and therefore, the price of
the good will fall. The reverse occurs if the supply of the good decreases.
The market, then, is not simply an array, but a highly complex, interacting latticework of exchanges. In
primitive societies, exchanges are all barter or direct exchange. Two people trade two directly useful goods,
such as horses for cows or Mickey Mantles for Babe Ruths. But as a society develops, a step-by-step process of
mutual benefit creates a situation in which one or two broadly useful and valuable commodities are chosen on
the market as a medium of indirect exchange. Money, generally but not always made of gold or silver, is then
demanded not only for its own sake, but even more to facilitate a reexchange for another desired commodity. It
is much easier to pay steelworkers not in steel bars, but in money, with which the workers can then buy what-
ever they desire. They are willing to accept money because they know from experience and insight that every-
one else in the society will also accept that money in payment.
The modern, almost infinite latticework of exchanges, the market, is made possible by the use of money.
Each person engages in specialization, or a division of labor, producing what he or she is best at. Production
begins with natural resources, and then various forms of machines and capital goods are sold to the consumer.
At each stage of production from natural resource to consumer good, money is voluntarily exchanged for capi-
tal goods, labor services, and land resources. At each step of the way, terms of exchanges, or prices, are deter-
mined by the voluntary interactions of suppliers and demanders. This market is "free" because choices, at each
step, are made freely and voluntarily.
The free market and the free price system make goods from around the world available to consumers. The
free market also gives the largest possible scope to entrepreneurs, who risk capital to allocate resources so as to
satisfy the future desires of the mass of consumers as efficiently as possible. Saving and investment can then
develop capital goods and increase the productivity and wages of workers, thereby increasing their standard of
living. The free competitive market also rewards and stimulates technological innovation that allows the inno-
vator to get a head start in satisfying consumer wants in new and creative ways.
Not only is investment encouraged, but perhaps more important, the price system, and the profit-and-loss
incentives of the market, guide capital investment and production into the proper paths. The intricate lattice-
work can mesh and "clear" all markets so that there are no sudden, unforeseen, and inexplicable shortages and
surpluses anywhere in the production system.
But exchanges are not necessarily free. Many are coerced. If a robber threatens you with "Your money or
your life", your payment to him is coerced and not voluntary, and he benefits at your expense. It is robbery, not
free markets, that actually follows the mercantilist model: the robber benefits at the expense of the coerced. Ex-
ploitation occurs not in the free market, but where the coercer exploits his victim. In the long run, coercion is a
negative-sum game that leads to reduced production, saving, and investment, a depleted stock of capital, and
reduced productivity and living standards for all, perhaps even for the coercers themselves.
Government, in every society, is the only lawful system of coercion. Taxation is a coerced exchange, and
the heavier the burden of taxation on production, the more likely it is that economic growth will falter and de-
cline. Other forms of government coercion (e.g. price controls or restrictions that prevent new competitors from
entering a market) hamper and cripple market exchanges, while others (prohibitions on deceptive practices, en-
forcement of contracts) can facilitate voluntary exchanges.
The ultimate in government coercion is socialism. Under socialist central planning the socialist planning
board lacks a price system for land or capital goods. As even socialists like Robert Heilbroner now admit, the
socialist planning board therefore has no way to calculate prices or costs or to invest capital so that the lattice-
work of production meshes and clears. The current Soviet experience, where a bumper wheat harvest somehow
cannot find its way to retail stores, is an instructive example of the impossibility of operating a complex, mod-
ern economy in the absence of a free market. There was neither incentive nor means of calculating prices and
costs for hopper cars to get to the wheat, for the flour mills to receive and process it, and so on down through
the large number of stages needed to reach the ultimate consumer in Moscow or Sverdlovsk. The investment in
wheat is almost totally wasted.
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