Wednesday, 27 April 2011

The free market does more good than harm - for proof, see China

After writing a couple of items about the socially liberal half of the blog's title, today's column focuses on the economic rational side.

So, let's start with my main premise - the free market does more good than harm.
And ... The main benefit of the free market is INCENTIVES.

Source: Wikipedia
A quick aside. My academic training is in Psychology. That means I have a good understanding of what makes people behave the way they do. One of the main drivers of behavior is the expectation of a personal reward - we call it positive reinforcement. Positive reinforcement works for people, rats, and every animal in between. If we receive something that we want, in return for doing something, then we will respond, and do it. In most cases, positive reinforcement is more effective than punishment - offering an incentive is more powerful than issuing a threat.

These reinforcements, or incentives, are at the heart of the free market system - it allows personal rewards to be offered to individuals in return for certain behaviors that are valued by others. The incentives inspire action. If I do something that the market wants, I'll get something I value in return. This simple process unlocks many powerful forces - creativity, innovation, design, production, technology, and more.

The free market is often criticised, particularly by those on the economic left of the spectrum. They would favor a system that focuses on the collective rather than the individual. That is, a socialist system. From a social perspective, this is underpinned by the ideal of treating everyone equally within a society. However laudable that goal is, from an economic standpoint, it just doesn't work.

So, to make this point clear, let's look at the most compelling chart that shows the benefit to economic systems that have moved from socialist to free market.
Chart source: Wikipedia

The big one of course is China, and the statistics are compelling. China is now the world's second largest economy - and all of the growth has occurred since the shift to a market economy.

Incentives drive economic activity. By and large, this is a very good thing.

Let me know what you think.

Mark S

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