Free Market Economy and American Manufacturing during 1816-1846

Introduction

A free market economy or a free price system is a system where prices are determined by the interaction of competitive market forces of supply and demand (Stiglitz p. 38). In free market economy, as in United States, the government makes minimum intervention in changing the market forces of demand and supply. This essay critically identifies the characteristics of free market economy as the only means of allocating scarce resources. In the second part of this essay, I discuss the American system of manufacturing, and discuss the factors that contributed to industrial development in the United States between 1816 and 1845.

Discussion

The primary function of the free market system is to the transmit price signals between consumers and producers. In practical terms, this means that there will be various factors of production from time to time, which may have an impact on the marginal cost of a good and result in a particular production cost, P1 for example. On the other hand, the consumers, driven by their own circumstances and reasoning, will decide whether to buy the good at price P1 and if so, in what quantity, for example Q1 (Billon & Cervantes p. 844). The fluctuating relationship between P1 and Q1 will be the result of price signals continually being transmitted between millions of economic agents in the form of consumers and producers (Eisend 40).

In order for producers to freely make commercial decisions about what goods to produce and in what quantity and price, and for whom and where, economic independence is required. Likewise for consumers to make informed choices on prices and have variety of goods to choose from in a free and competitive market, it requires the same economic independence. A free market economic system enables a mostly unhindered interaction between consumers and producers and serves to guide producers through the price signals in a free price system.

Given the freedom, both producers and consumers act in their self-interests which enable various resources to be allocated though what Adam Smith called the “invisible hand” (Stiglitz p. 33). This metaphor is widely interpreted as referring that while individuals act in a way which pursues their self-interests; they also promote the benefits to society as well, which was not the intended objective. In the absence of external regulation, internal forces guide the market as if by an invisible hand, and markets are self-regulating and thus are able to allocate scarce resources efficiently.

An alternative argument on the means of allocating scarce resources is by planning the entire economic system from a top central structure and where the government decides what resources are needed in the national interest, what goods must be produced and for whom and most importantly at what price. Since it is the State that is fixing prices of resources and goods and taking strategic decisions on planning, distribution and infrastructure development of the entire economy, there is no interaction between producers and consumers in the form the millions of economic agents described above in ...