2012 ERC Scholarship Essay Program $375 Recipient
Marina Giloi, Redmond (Claremont McKenna College)

Economic Growth through Economic Freedom

Free markets are governed by the principles of supply and demand. Under perfect competition, the intersection of the supply and demand curves represents the optimum point of market efficiency, also known as equilibrium. When the market is free from external interferences and distortions, both consumer surplus and producer surplus are maximized. Equilibrium sets prices and quantity so that resources are allocated in the most efficient way possible. A shift of the demand or supply curve away from equilibrium will result in deadweight loss – an inefficient discrepancy between supply and demand where portions of consumer or producer surplus end up being lost. For example, excessive taxation on sellers by the government will cause the supply curve to shift in, catalyzing a market imbalance. Similarly, excessive subsidization on consumption will shift the demand curve out and create deadweight loss. Without interference, free markets will act and adjust in a way that will ensure a return to equilibrium – Adam Smith famously characterized this phenomenon with his principle of the “Invisible Hand.”

Ronald Reagan said that “we who live in free market societies believe that growth, prosperity and ultimately human fulfillment, are created from the bottom up, not the government down. Only when the human spirit is allowed to invent and create, only when individuals are given a personal stake in deciding economic policies and benefiting from their success — only then can societies remain economically alive, dynamic, progressive, and free.” [1] Reagan’s words ring true, especially upon examination of the basic economic interactions of a free market. Unfortunately, recent government policies have tended toward interfering with this equilibrium in a way that has affected the ability of businesses, consumers, and thus the entire economy, to prosper. The United States is often recognized for promoting some of the freest markets in the world through the minimization of protectionism, the promotion of global trade, and its minimally restrictive economic policies. However, the recent trend toward big government and sweeping economic policy reform is concerning.

The President of the United States should bear in mind the importance of letting markets adjust to their optimum efficiency points in spurring economic growth. Excessive government interference in market interactions, though often aimed at facilitating economic growth, often results in inefficiencies that actually hinder it. This is exemplified in several recent policies such as President Obama’s American Recovery and Reinvestment Act of 2009, his use of deficit spending, and his proposed health care reform – all policies with a misguided approach to economic growth. This approach is misguided because of the resulting market inefficiencies that come with an external force such as government shifting the demand and supply curves away from equilibrium. A President whose true goal is the maximization of the nation’s overall economic health might be more successful in enacting policy that frees up market interactions rather than restricting them.
[1] Remarks at the Annual Meeting of the Boards of Governors of the World Bank Group and International Monetary Fund, http://www.reagan.utexas.edu/archives/speeches/1981/92981a.htm