1. History of the
Free Market

2. Characteristics of the U.S. Economy:
Freedom of Enterprise and Choice
Producers are free to transform the factors of
production into
(legal) products to
sell
Consumers are free
to purchase the
products

3. Characteristics of the U.S. Economy:
Competition
Rivalry among producers/sellers of goods
and services
encourages products that are innovative,
high in quality,
low in price.
encourages efficient
use of resources

4. Characteristics of the U.S. Economy:
Equal Opportunity
Every citizen has the right to gain an
education and to
compete in the
marketplace for
wealth

5. Characteristics of the U.S. Economy
Binding Contracts
Agreements between people that, once
entered into, must be
fulfilled

6. Characteristics of the U.S. Economy:
Property Rights
Individuals and businesses own the factors
of production, not the government
People can also own their ideas and artistic
work

7. Characteristics of the U.S. Economy:
Profit Motive
Because people have
the freedom to earn a
profit, they have the
incentive to work hard
and produce quality
goods/services

8. Characteristics of the U.S. Economy:
Limited Government
Preserves competition
Protects consumers, workers and the
environment
Stabilizes the
economy

9. Market Economy: Flow
“The reason markets work so well is because
one person’s output always becomes another
person’s input.”
-- Ch. 3, p. 43

10. Adam Smith
Founder of
modern economic
thought
Wrote The Wealth
of Nations in 1776

11. Self-Interest
“It is not from the benevolence of the butcher,
the brewer, or the baker, that we expect our
dinner, but from their regard to their own
interest. We address ourselves, not to their
humanity but to their self-love, and never talk
to them of our own necessities but of their
advantages. Nobody but a beggar chooses
to depend chiefly upon the benevolence of
his fellow citizens.”
-- Adam Smith, The Wealth of Nations

12. The force that makes this possible:
the Invisible
Hand of the
Marketplace

13. The Invisible Hand:
“Every individual . . . neither intends to
promote the public interest, nor knows how
much he is promoting it . . . He intends only his
own gain, and he is in this . . . led as if by an
invisible hand to promote an end which was no
part of his intention. Nor is it always the worse
for the society that it has no part in it. By
pursuing his own interest he frequently
promotes that of the society more effectually
than when he really intends to promote it.”
-- Adam Smith, The Wealth of Nations

14. How does it work?
Self-interest drives producers and
consumers to help one another
Competition leads to more efficient
production and lower prices
Jobs are created, trade occurs, the
economy prospers, all without
government intervention

15. This theory led to the doctrine:
Laissez-faire (“Let it Be”)
Absence of government control
Economic competition weeds out the
weak and preserves the strong (like
natural selection)

16. Free Market System = Capitalism
The late 1800s and early 1900s was an
era of rapid industrialization

17. Capitalism
Government stayed out of business, and
monopolies formed, controlling prices
and production

18. Capitalism
Millions worked long hours for low
pay in dangerous factories and
mines
no work-safety regulations, no
minimum wage laws, no child labor
laws, no social security or pensions

22. A Response: Karl Marx
Marx believed
Capitalism would eventually
destroy itself
Those at the bottom would rebel
against the owners of the factories

23. Final Stage: Communism
A new society would
rise in which all were
equal and private
property would
disappear