from The Worldview Literacy Book   copyright 2009            back to worldview theme #19


     Economic systems involve individuals, socioeconomic and political institutions within the society producing, distributing, and consuming goods and services, deciding questions of ownership, and allocating economic resources (and their costs and benefits).  How these functions are handled depends on the particular system: capitalism, collectivism, socialism (theme #49B), co-operative (participatory) economics (theme #48) and combinations or variations of them. 

     Economic Individualism is linked to free market use of capital—which can take the physical form of money, raw materials, buildings, equipment, inventories, etc. or the human form of skills, abilities, know how, etc.  While economists have long distinguished between physical capital and human capital, some have recently extended this scheme to include natural capital (see theme #40).  Capitalism involves 1) private individual or corporate ownership of capital goods, 2) private rather than state control of investment, and 3) pricing, production and distribution of goods (for the most part) by agents or forces operating within the free market system.

     Those embracing "Economic Individualism" believe each individual should be allowed to make economic decisions with little or no government interference.  Big fans of laissez faire capitalism and its 20th century neoclassical economics incarnation, they abhor collectivism and socialism.  They believe the  free market system is far superior to any centrally planned economy in producing and allocating goods and services.

     The participants in the free market system are ideally thought of as independent economic agents behaving rationally: individuals seeking to maximize utility (satisfaction derived from a particular purchase) or businesses aiming for maximum profits.  They do this by buying and selling factors of production: land (including natural resources), labor, and capital.  Prices in the free market system fluctuate according to supply and demand.  In actuality, it is composed of many individual markets where individuals and firms buy and sell a specific good or service—such as the oysters charted in Figure #19.

     In such markets, buyers can be thought of as (all together through their independent actions) establishing a demand curve: a plot of the price they are willing to pay for a commodity vs. the number of commodity units they demand.   This curve pro-vides the details of the general observation that as prices fall the demand rises.  Sellers similarly establish a supply curve: a plot of the price they will charge for various amounts of commodity units.  This curve provides the details of the general observation that if they can get higher prices, sellers will rush to make more of the commodity available—whereas if prices are low they have little incentive to do so.  Where demand and supply meet —where their curves intersect—determines the commodity's so called equilibrium price.  This is the price that can be maintained.  If prices fall below that price there is excess demand, which



soon leads to a price increase.  If prices rise above equilibrium price, sales fall, increasing supply, leading to a price decrease.  In establishing this price, the free market also in effect allocates resources: giving commodities to those who can pay for them, and withholding them from those lacking in money or desire.    

     The market system can be modeled as a closed system, with capital flowing into production, and output being consumed— increasing utility for some and capital for others. Production efficiency is linked to productivity—production output per unit of input.  A business's profits can be reinvested to make labor and capital more productive.  Overall economic efficiency can be achieved by either minimizing costs while maximizing production, wisely allocating consumption related expenditures to maximize consumer satisfaction, or a combination of both.

     The market system has been called "one of the most extra-ordinary social inventions in human history."  In arguing this, economists Robert Heilbroner and Lester Thurow note how its development overcame significant problems of pre-market societies based on 1) tradition and 2) authoritarian command.  The former ones were "inert, passive, changeless," the latter ones "[given] the presence of political power in the economic mechanism [were] an endless source of economic inefficiency."      

     Left alone, the market system can provide a dynamic, self-enforcing framework for economic transactions among knowledgeable, rational, independent agents to occur and for economic problems to naturally work themselves out.  When those agents are ignorant, have perverse, irrational expectations (perhaps due to unfounded rumors or panic), or work in collusion with others, markets can fail.  This can also happen when  public goods are involved, and/or economic problems cross some line and become social, environmental, or health ones. Then public demand can force governments to act for the common good, to right social or environmental wrongs.  Where   markets fail to allocate adequate resources to poor people—pricing them out of participating—governments often step in.  

     When businesses or markets fail and governments intervene, free markets become not so free!  Some intervention is accepted by nearly everyone: laws to support the market system (maintaining the monetary system, enforcing contracts, private property rights, etc.) and its competitive framework (combating fraud, unfair monopoly, etc.)  Beyond that, economic individualists disdain government meddling to set prices,  provide subsidies, bailout private firms in exchange for an ownership stake, etc.  They often oppose raising taxes to fund social programs—which social welfare states (theme #49A) depend on.  They especially don't like programs to redistribute income. 

      With the global economic crisis casting doubt on "markets know best," by 2009 many governments were looking  beyond neoclassical economics to restore prosperity.  In the USA, in particular, it was not a fun time to be an economic individualist!

Figure #19

How the Market Sets the Price

Through Supply and Demand



from NOAA Coastal Services Center











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