There are several ways to organize an economy. In our text, we will be concerned primarily with free markets, which the communist Karl Marx derisively called “capitalism.” The central feature of a free market economy is the “free” part, which leads to “markets.” In a free market, we are free to voluntarily exchange anything that we own for things that others own. We might exchange our labor for a salary, or exchange something we produce for money, or simply trade something we no longer need to a friend for something he or she has that we want. Once individuals have the freedom to exchange, then we find markets quickly emerge to expand the number of exchanges possible. For instance, eBay took advantage of the Internet to bring together more buyers/sellers and has significantly increased the number of trades. Craigslist is currently expanding local trade for similar items. We will see in the next chapter how increased trade leads to higher societal well-being, but suffice it to say for now that voluntary exchange only takes place when both parties in an exchange believe it is in their individual interest to trade. To get an appreciation of the promise of free markets, watch this video:
A polar opposite of a free market economic system is communism. A free market system assumes private property rights, beginning with the idea that man owns himself—no one else does. So anything he creates by the sweat of his brow is his. (This needs to be amended once we consider a Christian worldview. Man has been assigned stewardship responsibilities for assets under his control, beginning with his time and talents. Once he produces something, his treasures are also assets to steward.) Communism, however, assumes that whatever exists is social (or communal) property. Production is guided by what the communist party considers the highest value to produce, using the common resources of the state. Communism suffers from a well-known incentive problem: how do you get people to work hard when the fruit of their labor doesn’t go to them? A common saying of comrades in the former U.S.S.R. (while under a communist system) was “we pretend to work, and they pretend to pay.” We will see in chapter 8 that communism also suffers from a calculation problem; communism is unable to rationally allocate resources. Both of these problems led to the eventual collapse of the Soviet economy.
Many see socialism as a “third way” in-between free markets and communism. Under socialism, individuals can own private property and there can be retail markets, but the tools of production (all capital assets) are owned and production is directed by the state. Socialism suffers from many of the same problems as communism. The closer it approaches communism the worse the outcome, while the more it resembles free markets, the better it functions.
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