The free market is a system of voluntary commerce (trading). Government rules and laws, whether "worthy" or not, must be seen within the parameters of economic literacy as a marketplace distortion, creating scarcity, queues, or both.
Free-market economics are often referred to as Austrian economics. The "Austrian" school is fairly modern – neo-classical as opposed to classical. Many economists who promoted this sort of economics were Austrian – thus the name. Ludwig von Mises was the Austrians' prime 20th century exponent. Perhaps his greatest work, Human Action, shows clearly that people can – and do – take action to remold economic circumstances and better their lots in life. Such perspectives invalidate the logic of central planning and of the modern sophistries of Western law in general, which tend to assume that trends are static and human behavior inelastic and unadaptive. For this reason, among others, von Mises never received wide circulation in America during the 20th century. It is only thanks to a stubborn few (notably the Mises Institute), aided now by the Internet, that his thought, and that of the Austrian free-market school itself, is becoming better known.
Free-market thinkers are individuals who seek to implement the above definition as a basis for an improved, freer social order. Free-market thinkers are financially literate and unafraid to face the realities of the world around them. They have been self-actualized by their independent studies of the market and how humans relate to each other within the ambit of private and public commerce. They seek to make the most of their abilities and talents within a realistic framework, rather than a money-power promotional meme.
Free-market economics got its start back in the 1600s with the followers of St. Thomas Aquinas – "The Late Scholastics" – who built on the ground-breaking observations of Aquinas to explain how inflation really works and how economic value accretes. Anne-Robert-Jacques Turgot followed on the heels of the Scholastics. The pro-market French aristocrat and finance minister under the ancien regime produced economic writings that were few in number but very profound. His paper, Value and Money, spelled out the origins of money and the nature of economic choice: that it reflects the subjective rankings of an individual's preferences.
Turgot was a leading member of the physiocrats, a group of economists who believed that the wealth of nations was derived solely from the value of land agriculture or land development. Their theories originated in France and were most popular during the second half of the 18th century. Physiocracy is perhaps the first well developed theory of economics.
The physiocrat movement immediately preceded the first modern school, classical economics, which began with the publication of Adam Smith's The Wealth of Nations in 1776. The most significant contribution of the physiocrats was their emphasis on productive work as the source of national wealth. This is in contrast to earlier schools, in particular mercantilism, which often focused on the ruler's wealth, accumulation of gold or the balance of trade.
Richard Cantillon demonstrated that relative prices are reducible to land-absorption rates. Cantillon can be said to have derived a fully-working "land theory of value." Cantillon's careful description of a supply-and-demand mechanism for the determination of short-run market price (albeit not long-run natural price) also stands him as a progenitor of the Marginalist Revolution. In particular, his insightful notes on entrepreneurship (as a type of arbitrage) have made him a darling of the modern Austrian School.
"Free-market" economic theory was codified, in part, by Adam Smith, who came up with the term "invisible hand" to describe the workings of the "marketplace." A Scottish moral philosopher and a pioneer of political economy, Smith was one of the key figures of the Scottish Enlightenment. He is the author of An Inquiry into the Nature and Causes of the Wealth of Nations. Usually abbreviated as The Wealth of Nations, the treatise is considered his magnum opus and he is widely cited as the father of modern economics. In the opinion of famous free-market economist Murray Rothbard, Smith got it wrong, however, when he referred to the "wealth of nations" in his famous economic treatise of the same title. For Rothbard, it is the wealth of individuals, and nations have nothing to do with it.
Frederic Bastiat was a French economist, legislator and writer who championed private property, free markets and limited government. Perhaps the main underlying theme of Bastiat's writings was that the free market was inherently a source of "economic harmony" among individuals, as long as government was restricted to the function of protecting the lives, liberties and property of citizens from theft or aggression. To Bastiat, governmental coercion was only legitimate if it served "to guarantee security of person, liberty, and property rights, to cause justice to reign over all." Because of his stress on the role of consumer demand in initiating economic progress, Bastiat has been described by Mark Thornton, Thomas DiLorenzo and other economists as a forerunner of the Austrian School.
What are certainly two of the most important laws of economics were developed by Jean Baptiste Say and Carl Menger – along with several other economists not identified with the Austrian school. Say proposed what is now known as "Say's Law," which simply states that supply and demand will reach equilibrium if allowed to adjust within a free market, and without interference. But the cleverness of Say's law lies in the perception that supply can stimulate demand as well as vice versa.
Carl Menger is at least partially responsible for the concept that has become the dividing line between the static analysis of classical economics and the active analysis of neo-classical economics. The concept, known as diminishing law of marginal utility, states that the individual value of a unit decreases as the amount or volume of units increases. When we have more, what we have more of is worth less. Additionally, the market itself must make the calculation as to the exact worth of units "at the margin."
Eugen Ritter von Böhm-Bawerk was an Austrian economist who made important contributions to the development of Austrian economics. He trained at the University of Vienna as a lawyer where he read Carl Menger's Principles of Economics. Though he never studied under Menger, he quickly became an adherent of his theories. Joseph Schumpeter said that Böhm-Bawerk "was so completely the enthusiastic disciple of Menger that it is hardly necessary to look for other influences."
Frank A. Fetter participated in a notable debate with English economist and proponent of econometrics (mathematical modeling) Alfred Marshall, both through his 1904 Principles of Economics and a number of journal articles in the American Economic Association's journals and in the Quarterly Journal of Economics. Fetter believed in the subjective theory of value, and thus supported a pure time preference theory of interest. Fetter's treatise, Principles of Economics (1904) has been described by Herbener as "unsurpassed until Ludwig von Mises's treatise of 1940, Nationaloekonomie."
Ludwig von Mises, and later his students, F.A. Hayek and Murray Rothbard, developed or expanded upon the concepts of human action and the business cycle and today their work is continued by organizations such as the Mises Institute. The business cycle, as defined in the modern day, is a primarily central bank-driven phenomenon. The central bank prints more money and injects more credit into the economy than is necessary. The volume of money leads to inflation, which in turn stimulates a "boom." As the economy overheats, products and services that are an unnecessary outcome of the artificial boom become commonplace, leading to glut and, inevitably, to a collapse. During the credit boom, the central bank may artificially increase interest rates while also raising the amount of money available via credit and its printing plants. This gradually eases the economy (best case) into a "soft landing" – after which the cycle begins again.
In a free market, the volatility of the business cycle would be radically reduced because gold and silver, either hoarded or dug out of the ground, would respond to market forces. First, hoarders would release precious metals. But it is likely, too, that mining would respond to price fluctuation as well. Too much gold or silver in the economy and prices would go down, closing mines. Too little gold and silver and the prices would go up, stimulating mining production. If the government and the monetary elite would agree to allow gold and silver coins to circulate next to fiat money of all kinds, the world would soon be back on the only kind of money standard that truthfully can be called "honest money" – the free-market standard of gold and silver.
Benjamin Anderson is another individual associated with Austrian economics. A leading opponent of the New Deal and an enthusiastic supporter of a free-market gold standard, Anderson was a professor of economics at the University of California-Los Angeles from 1939 until his death in 1949. Henry Hazlitt, who is often cited as having popularized Austrian economics in the English-speaking world, credits Anderson with acquainting him with the work of Ludwig von Mises and other Austrians. Henry Hazlitt was a prolific writer, authoring some 25 books in his lifetime. Hazlitt is well-known for his most popular and infuencial book titled Economics in One Lesson, but he also wrote other books, among which are a major work on ethics, The Foundations of Morality, and The Failure of the New Economics, a detailed chapter-by-chapter critique of Keynes's General Theory of Employment, Interest, and Money.
Another great popularizer of free markets, Murray Rothbard, helped found the American-based Mises Institute, which has today carried forward the tradition of free-market thinking to a new and greatly expanded generation of youthful minds who are making a difference the world over. Llewellyn Harrison Rockwell, Jr. is the dogged and brilliant director of this fast-growing operation, which has shaken the foundations of the Keynesian consensus of the 20th century and put humankind back on the road toward something closer to free markets.
As the 21st century continues, despite economic challenges the future is bright for free markets and for the underlying philosophy that supports them.
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