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3.1: Free Markets and Efficiency

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    If a community is to survive and thrive, then it needs to answer these three questions:

    WHAT to produce?

    HOW to produce it?

    For WHOM to produce?

    The answers to these questions could make or break a civilization. If a country wastes its scare resources on activities which are nonessential, inefficient, and/or haphazardly distributed then it is in danger of collapsing.

    Now, just because there is waste does not mean that a country is on the verge of collapse. But if waste continues, year after year, then a country’s economy becomes weaker and weaker. And just as with people, if someone’s immune system is weakened, then they are susceptible to disease and external shocks (like weather). So, it is appropriate to say efficiency is to an economy as an immune system is to a person.

    Measuring Efficiency

    Efficiency deals mainly with the What and How questions. The For Whom question deals more with equity (i.e., fairness).

    If efficiency is so important to an economy’s health, then it is worth measuring and monitoring (like it worth measuring and monitoring vital health indicators for people).

    One major productivity indicator is worker productivity. In the U.S. this indicator is published once every three months (i.e., quarterly) by the Bureau of Labor Statistics. Worker productivity measures output per worker in the manufacturing sector. Worker productivity and efficiency are positively correlated (i.e., when one increases the other increases and when one decreases the other decreases).

    A graph showing the growth of a stock marketDescription automatically generated

    Figure 1: Worker Productivity

    As you can see from figure 1 the productivity rate steadily increased through most of the 1990s. During this time, labor costs were falling due to the increase in worker efficiency.

    Free Markets

    The free market system (sometimes called capitalism) is simply a framework from which people make choices. Think of any economic system as a decision-makers environment.

    The free market, as well as other market systems (e.g., socialism, communism) has one main task: Answer the What, How and For Whom questions.

    So, why would one society choose the free market system over another system like communism? The free market has only one built-in feature: efficiency. All direct benefits from the free-market system are derived from efficiency.

    At this point there must be clarification. Just because efficiency is the main reason a society would choose a free market system, it would be inaccurate to say that resources are not wasted in free markets or that other economics systems completely lack efficiency. However, it is accurate to say that the free market has been more efficient with scarce resources than any other economic system.

    If one feature of free markets is efficiency, then what are the resulting benefits? The benefits from an efficient economic system can be grouped into two categories:

    1. Sustainability
    2. Enhanced growth

    This page titled 3.1: Free Markets and Efficiency is shared under a not declared license and was authored, remixed, and/or curated by Martin Medeiros.

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