Economics Lesson – The Miracle of the Free Market
by Theresa Camoriano
(This is intended to be a five-minute lesson that you can use in the monthly meeting of your book club, church group, scout group, or other group. Each of the lessons includes a souvenir or memento to help the participants remember the lesson.)
Give each person a small zip-lock bag containing a mustard seed and a wheat seed. (I found some bags in the craft department of WalMart for one cent each. Mustard seeds can be found in the spice department of a grocery store, and wheat seeds can be found in the bulk grain section of a health food store.) This memento represents the parable of the mustard seed and the miracle of the loaves and fishes, which will help you remember this lesson.
The lesson:
When two people freely and voluntarily exchange goods or services, they both become better off as a result of the exchange.
Imagine that one man is a farmer who grows apples, and another man is a shoemaker. One day, the apple farmer decides he wants a new pair of shoes, and he goes to the shoemaker and negotiates an exchange of two bushels of apples for a new pair of shoes.
The apple farmer is better off, because he wanted the pair of shoes more than he wanted the two bushels of apples, and the shoemaker is better off, because he wanted the two bushels of apples more than he wanted the pair of shoes. We still have the same number of apples and the same number of shoes as before, and yet both people now are better off. It is almost like a small miracle, in which one plus one equals three! How can that be?
The reason both people are better off as a result of the exchange is that the exchange has enabled the resources to go to the party who values them more. The shoemaker’s family has plenty of shoes but could really use some apples, and the apple farmer has plenty of apples but could really use some shoes.
This exchange also makes everyone better off because it enables each person to focus on doing what he does best – growing apples or making shoes – which allows each person to be more productive than he would be if he had to do everything himself.
Sometimes exchanges make people better off because they allow resources to go to a place where they are in short supply or to a person who has figured out a better way to use them. The reasons why an exchange makes both people better off can be as numerous as the people who engage in the exchanges, and the prices at which goods and services sell send messages to the market – maybe telling the farmers to plant more apple trees or telling the shoemaker to make sandals or boots instead of shoes.
Remember, the free market encourages competition, so sellers compete with each other to provide the best value in products or services, and buyers compete with each other as well. Sellers try to get the highest price they can for their goods or services, while buyers try to pay the lowest price. The haggling goes on until both sides reach a point at which they believe they will benefit from the exchange and a deal is struck.
Sometimes, we see an exchange in the free market and think it is a bad deal. For example, we may see a person take a job at a low wage that we would not accept. We need to remember that this person is free to negotiate a better deal whenever he can find it, so this deal must be the best arrangement he has been able to find so far, and if we were to eliminate this opportunity, we would make him worse off. It may be that he sees some benefits to this arrangement that are not obvious to us. Maybe he has very few skills and expects to obtain training in this job that will enable him to become more productive and thus be able to negotiate a better deal later on. Or maybe this job fits his schedule or transportation limitations better than another job, thus making it a better deal than it seems to us from the outside.
Since free market exchanges make both parties better off, any interference with these exchanges generally makes people worse off. That is why regulations that interfere with free market exchanges often are enacted with good intentions but result in bad “unintended consequences”.
When you imagine millions of free market exchanges taking place, you can imagine millions of people becoming better off as a result of those exchanges. It is almost like the parable of the tiny mustard seed growing into the huge mustard plant or like the miracle of the five loaves feeding the multitudes. Your little bag with the mustard seed and wheat seed will help remind you of the amazing benefits that occur in a free market and of the great harm that can be done when free market exchanges are restricted.
(This lesson and others may be found at JeffersonReview.com. Permission is granted to reproduce these materials.)
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