Economics 101: The Principles of Free Market Economics

Economics, at its most fundamental, is one of the ways by which human beings work to achieve the good. The American Founders believed that economic freedom and property rights are rooted in the natural competition and cooperation of human beings.

Free markets provide order through the voluntary exchanges of goods and services. Cooperation and coordination naturally occur in the most efficient manner without central planning because markets respond to consumer demand.

Demand for a product depends on the additional benefit that product brings to consumers, the corresponding cost of that product to consumers, the preferences of consumers, and the demand for related products.

Supply is determined by how much product producers are willing and able to make available at various prices. The price at which supply and demand meet is called equilibrium, which is when markets are most productive. Any government action that interferes with prices will necessarily reduce market productivity.

A profit-driven market benefits everyone because profits increase innovation and overall prosperity. In a free market system, profits, and therefore wealth, is created by serving the needs of others.

Central planning can promote specific goals, but it cannot create systematic incentives for growth. The free market system responds to the input of information naturally, whereas central planning requires complete information beforehand.

John Maynard Keynes developed an economic theory to use government policy to increase the productivity of economies. This model calls for an activist government that manipulates the aggregate demand of an economy through tax policy, government spending, and interest rates.

Money must serve as both a store of value and a medium of exchange. The Federal Reserve attempts to control the economy by manipulating the money supply to affect interest rates.

Contrary to the Keynesian model, the Austrian school argues that government intervention is the primary cause of recessions.

The Founders believed that the best economic system should consist of private property under certain rules, a market system that is allowed to operate freely, and reliable money.