Free market economy by definition is an economy where the prices of goods and commodoties are defined by the forces of supply and demand with little or no intervention from the government. I came across and article that goes further to say the only role of government in a free market economy is to play the role of a watchdog , to make sure that the prices suppliers are charging are charging a "fair price". All through my college days and post graduation I had believed the supremecy of the Free market system. Having grown up in an India that opened it's economy almost immediately after my birth :) I was convinced that letting the businesses play their part without intervention is the best way of running a country.
I was watching Dr.Milton Friedman's video titled "Free to choose" on youtube , apparently he is considered the Einstein of economics and his video stood to his reputation. Taking the example of UK controlled Hongkong , Mr. Friedman clearly pointed out how industries operate in a free economy and how they change their strategies based on the changes in competition. An example is that of a Hongkong family which has been creating traditional bridal ware for nearly four generations and are now looking for a new product as demand for traditional ware is falling. The raising standards of living in Hongkong and the pain which illegal immigrants from China take , to cross the border kind of vindicated the Free Market principals.
However , nearly 27 years after Mr.Friedman's video things started happening that questioned the foundations of free market economy. American economy , the supposed champion of free market principals came crashing down. Goliaths like Goldman Sachs, AIG, GM, Fanny and Freddie crashed like a pack of cards and exposed the soft underbelly of the US. On the other hand , communist China started making good use of this opportunity and now the US owes nearly $500bn to the chinese. All this made me question the validity of these free market principles. How ideal are they ? Their role in making the US a global power is unquestionable , but then what led to the current crisis? Is the direction of the Obama adminstration more in tune with the socialist form of government ?.
Once while browsing through an article on Wal-Mart , I read that to kill competition Wal-Mart supplies a gallon of pickle at 1/4 of it's cost. While this is probably a free market principle, it's consequences are far reaching. The pickle manufacturer is being squeezed to reduce the cost so that wal-mart can make a profit and a brand that once commanded a premium price is now available dirt cheap. In addition to this, the consumer who is buying the product eats half of the product and throws away the other half as he doesnt really care (the law of diminishing marginal utility). Another example is that of an American woman , who flushes rice down the toilet as it makes her hate it and thus prevents her from eating rice and she does all this as she wants to stay thing. Reading that article at a time when Global prices of rice peaked and when Mr.Bush threw that ugly comment about Indians made me think. This is an abuse of Free Market principles. While free market economy increases the wealth of the individuals , the attitude of the individuals is what determines the economy's success. As the US tried to get more and more out of a cup that already reached it's maximum , while wasting precious resources (gas guzzling SUVs), no doubt the economy crashed. Thomas Friedman once wrote , stop giving the 16yr old kid keys to a car, instead give him a book and ask him to study.
So as I thought , read and analysed I felt while free market principles have their advantages , the country and it's people are to a larger extent responsible for the economy's stability. The recent economic crisis should serve as an example of what not to do in a free economy.
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