Why The Market Economy Works

John Stossel, who very well may be the best advocate for free markets since Adam Smith, has a great column at RealClearPolitics explaining just why the free market may be the greatest invention in human history:

How many times have you paid $1 for a cup of coffee and after the clerk said, “thank you,” you responded, “thank you“? There’s a wealth of economics wisdom in the weird double thank-you moment. Why does it happen? Because you want the coffee more than the buck, and the store wants the buck more than the coffee. Both of you win.

Economists have long understood that two people trade because each wants what the other has more than what he already has. In their respective eyes, the things traded are unequal in value. But this means each comes out ahead, having given up something he wants less for something he wants more. It’s just not true that one gains and the other loses. If that were the case, the loser wouldn’t have traded. It’s win-win, or as economists would say, positive-sum.

We experience this every time we have that double thank-you moment in a store or restaurant.

And the reason we experience moments like that is because of the simple fact that in a free market each side benefits from a transaction. You have something I want. I offer you a price and, after a little negotiation, you accept. And you give that something to me.

I don’t force you to buy what I’m selling. And you don’t use some outside authority (the government) to dictate to me the terms on which I have to sell it to you.

It’s worked for hundreds of years and, outside of the regulatory state, it works the same way on an everyday basis. If you happen to be lucky enough to live in an area where farmer’s markets are a common occurrence, you know what I mean. The posted price for produce is just the starting point most of the time. Depending on the time of day and the season, you can usually negotiate a much better deal.

And that’s what the free market is all about. Yes, it doesn’t work like a farmer’s market all the time. You can’t go into Crate & Barrel or Pottery Barn and negotiate the price of a high-end piece of furniture, but, then again, you don’t have to buy your furniture at a high-end store to begin with.

What matters is that you have a choice.

  • http://unrepentantindividual.com/ Brad Warbiany

    Who says you can’t go in and negotiate at a place like that? Have you ever tried?

    Back in the day (when I was about 16), I worked selling computers at Best Buy. Most people came in, paid the price on the tag, and walked away with a purchase. The more savvy consumers knew that if they were buying a package deal (such as computer, monitor, printer and accessories), they could negotiate. That’s on computers, where the margins were razor-thin. Over in audio/video, or appliances, it was common to have people get deals on any big-ticket item if they tried.

    You can often get better prices if you try, even at some of the big-box stores.

  • http://www.belowthebeltway.com Doug Mataconis

    Brad,

    Point taken.

    My most recent experience with high-end retail was with Crate & Barrel on Michigan Avenue in Chicago.

    Perhaps not the most scientific survey.

  • rajeev hegde

    the opeerative word in your article is “you have a choice”, but unfortunately, if you take the example of coffee, small coffee growers and labourers dont(have a choice). the choice for them is either slightly starve or starve to death. labourers now are getting paid less then 1.50$ for an 8 hour day.
    so by your 100% free market economics at least 30% of those engaged in growing cofee should starve to death before the rest can make a decent living?
    100% free market economics, will not work in every kind of situation.

  • http://unrepentantindividual.com/ Brad Warbiany

    That is a nice Crate & Barrel though :-)

  • http://unrepentantindividual.com/ Brad Warbiany

    rajeev,

    If you give those people property rights and the rule of law, they might be able to do something other than grow coffee. It worked for the kids and grandkids of American farmers, who embraced the industrial revolution and found more productive (and more lucrative) things to do.

  • Bret

    Brad,

    Stop living my life. I also (around 16) worked at Best Buy and we had a strict moratorium on negotiating. In fact, the only thing we had to really sell was the $99 4-year computer service plans, which, by the way, was a great deal. I always thought the no-bargaining rule was BB policy. I worked at the one in Laguna Niguel about 10 years ago.

  • js290

    If you give those people property rights and the rule of law, they might be able to do something other than grow coffee.

    Which the US Govt then burns down in the name of “War on Something” to protect the big pharm companies. We have no “free markets” here.