And Henry Ford was a bit of a crackpot. Hence crackpot theory. ;-)

wut, your explanation of how a free market economy works is about as correct as Aristotelean physics.

First, you have entrepreneurs who try to predict what people wish to consume in the future and spend money now to meet those future needs. They purchase stuff that other people have made, and also purchase labor services from workers to transform the things they have purchased into these goods. Some entrepeneurs take as inputs to their processes not the products produced by other entrepeneurs but natural resources such as oil, or ore as inputs.

Entrepeneurs compete with each other for labor. If a guy will earn $10.00 more per hour by hiring an additional dishwasher, he will be willing to pay up to $10.00 – some desired profit margin in wages to a dishwasher. If all the available dishwashers are being paid $5.00 per hour, he will offer one of them more money in an attempt to get a dishwasher that was working for someone else.

Thus, the upper limit on wages is the marginal product of the worker.

The lower limit is how little workers are willing to work for. Of course, when workers see other workers earning more, they tend to try to earn the same amount by switching companies/trades. As a result, in a free market, the cost of labor tends to move toward the upper limit, the marginal revenue product.

This trend is exacerbated by the development of capital goods. A diswhasher who heretofore only had access to a bucket or rag can wash fewer dishes than one with access to running water. That guy in turn can be outdone by a guy with access to a spray nozzle on the end of a flexible hose. Put in an automatic industrial dishwasher, and that one guy can easily wash 100 X the dishes that he could with only a bucket and a rag.

Increases in productivity tend to lead to increases in marginal revenue product since the market clearing price of the additional production is not sufficiently lowered to offset the income generated by selling more units. Thus, as new devices get invented, workers tend to get paid more because they become more valuable.

The notion that workers can’t afford what is being produced is kind of laughable. That is because once a good is produced, the price will not be set by the cost of production, which is a sunk cost, but by the market clearing price, which is the price at which all the units are sold, which is the scenario where the seller maximizes his income from unloading his stock.
See Brad’s wonderful post on the subject.

Nah, free markets are actually pretty stable. I hold to the view that these boom bust cycles are the product of fractional reserve banking, and exacerbated by Central Banks’ attempts to prevent little busts (which lead to malinvestments growing – eventually creating big busts).

But guess what, the workers and the consumers are actually the same people *gasp*. If there is no regulation the free market, what the companies begin to do is lower wages while increasing prices. This continues until the workers can no longer afford the products on the market.

Nice crackpot theory. When has it ever actually happened that way?

This is called a depression, and this is what happens when there are no reasonable regulations on how companies in the free market can do business.

Gloom and doom everywhere, can we have some bread and circus? I’m getting bored with TV.

You are trying to marginalize supporters of the free market and capitalism as being an extreme view that suggests:

*Any attitude that opposes government intervention doesn’t want to try to fix a problem*.

Actually its rather the opposite.

Let me marginalize the socialist attitude with a more correct phrasing.

*The only way to solve a particular problem is to empower government to deal with it through force and coercion and to avoid the voluntary interactions and exchanges that would be made by free individuals and enterprises*

I’d rather have a stop sign as president than Obama or Bush. Even better would be a president who understands the limits and bounds placed on his power by the constitution.

Government interventions into our everyday lives easily do more harm than good. And much is achieved through the free market. You organise your life, your property and your work through your own efforts, not because the government tells you what to do.

It is the same forces that would end this recession shortly and sharply and allow labor and capital to move to more productive enterprises rather than being tied down in huge bail-out packages to banks and auto-makers, and massive government debt to be repaid by future generations.

If you want a Greater Depression, which lasts for decades, than vote for more government interventions.