Axioms and Fundamental Principles of a Free Market Economy

1. Axioms and Fundamental Principles of a Free Market Economy Chapter 1

2. What economics is about • Economics is a study of the social and institutional arrangements within a community that determine what gets produced, how it is produced and who receives what shares of that production • Economics also looks at how those arrangements can be improved and how the community can deal with the various economic problems that are certain come up from time to time

3. But it is not about every possible set of arrangements • While economics can be about every possible set of arrangements from primitive caveman society to the Mediaeval village it is mostly about societies that have the following characteristics: • There are producers • There are buyers • And there is money to facilitate exchange

4. The obvious is less obvious than you think • We start with a number of things you think you already know and are pretty obvious anyway • But if you are to understand how an economy works you must understand why they are relevant

5. What must exist if people are to buy If someone is to buy, what must exist is this: • Goods and services already produced and which have already been put up for sale OR • productive enterprises already open for business who will produce what others are looking for based on their particular orders That is, if someone wishes to buy something they need someone else willing and able to sell it

6. The same thing said in a slightly different way That is, if someone is to buy there must be: • sellers who have anticipated their needs and have already made these goods and services available (the usual case) OR • already existing productive enterprises in which the goods they want can be produced or the services they seek can be undertaken based on their specific request

7. Getting the sequence right The sequence is crucial to understanding how an economy works • Supply always comes before demand • Productive activity always comes before goods or services are sold

8. To buy is to exchange • When someone buys they need to offer something in exchange • Almost always what they offer is money in some form – cash, bank cheque, credit card, an IOU of some sort • But whatever the form of payment, that payment represents to buyers a foregone opportunity to buy something else at a later date

9. To sell is to exchange • When someone sells they must receive something in exchange • Almost always what they receive is money in some form – cash, bank cheque, credit card, an IOU of some sort • But whatever the form of payment, that payment represents to sellers an opportunity to buy something else at a later date

10. Why people take money • Money is the medium of exchange meaning that it is the measure against which the relative value of different goods and services are measured • The value of money is determined by what can be had in exchange – a dollar is worth what a dollar will buy – its value is totally based on trust • Someone takes money for the goods and services they sell only because they believe the money received can then be used to buy other goods and services at a later date

11. What sellers do with money they receive • This is what sellers use the money they receive to do: • they buy goods and services for themselves • they pay for the inputs they used in the production process

12. To receive money in an exchange economy requires something to have been produced And to produce requires: • Capital which consists of the humanly produced already existing tools, machinery, factories and buildings that are used in the production process • Labour who are people with skills, abilities, knowledge and the willingness to apply these to productive efforts • Entrepreneurs who bring together particular forms of capital and particular groups of employees and who direct the capital and labour towards particular tasks that need to be done

13. The aim of entrepreneurs • The aim of an entrepreneur in running a productive enterprise is to ensure that enough money is received to pay all costs of production • The money received is then paid out to suppliers, employees, financial institutions as well as to the government • What’s left after such payments are made is called profit – there is no certainty in any business that a profit will be earned

14. Only value adding creates economic growth Successful entrepreneurs receive more money for what they produce than they have paid out to others Only where entrepreneurs receive more in revenue than they pay out in production costs and taxation can there be economic growth Only where the value of the output is greater than the value of the inputs used up in production can an economy grow

15. Money and economic growth • The monetary system work best when • money is only received in exchange for goods and services produced • governments run balanced budgets • the financial system only lends to borrowers who repay what they borrowed on time • Otherwise the supply of money grows faster than the supply of goods and services

16. Requirements of a sound economy • What an economy must have: • entrepreneurs who correctly anticipate what buyers wish to buy • a monetary system that allows sellers to work out how to produce at the lowest economic cost • a system in which buyers are permitted to buy from whichever sellers provide them with the goods they want at the lowest prices

17. What is a Free Market Economy? A free market economy is an economy in which virtually all production decisions are made by individual entrepreneurs and not by governments

18. Why Free Markets? Free Markets are the Foundation for Prosperity and Political Freedom – Without Free Markets You Cannot have Either

19. Axioms There are five axioms

20. First Axiom Nobody Knows the Future

21. Second Axiom Everything is Always in the Process of Change

22. Third Axiom Commercially Useful Knowledge is Diffused Everywhere Across an Economy

23. Fourth Axiom Without Market Prices No One Can Tell what Anything Costs

24. Fifth Axiom In the Commercial World Everyone Does what is Best for Themselves

25. Principles There are ten principles

26. First Principle No One Runs a Free Enterprise Economy – It Runs Itself

27. Second Principle Everyone is Expected to Make Economic Decisions for Themselves

28. Third Principle Businesses are the Spontaneous Creation of Members of the Community

29. Fourth Principle Businesses are Far More Likely to Make Good Business Decisions than Governments

30. Fifth Principle The Most Important Economic Role of Governments is to Structure Laws and Regulations in Ways that Encourage Private Sector Economic Activity

31. Sixth Principle The Goods and Services Bought in an Economy are Financed by the Sale of the Goods and Services Sold in an Economy

32. Seventh Principle Money has Purchasing Power Only Because of the Value Added Created by those who Earned the Money in the First Place

33. Eighth Principle Business Decisions should be Left to Businesses to Make for Themselves

34. Ninth Principle Pricing Decisions should be Left to Businesses to Make for Themselves

35. Tenth Principle [Commercialising] Innovation is How Living Standards are Raised