As buyers purchase goods and services, they signal to the producers what ought to be made. If people want to wear pants with farm animal designs, they buy them. Producers have to be observant to anticipate demand. As they see that the stock of cow pants is flying off the shelves, they will create many more of them. Buyers and sellers are able to communicate effectively using just money.
All societies must answer three questions. The answers they select determine what type of economy, or economic system, the society primarily has a command or market economy. The three questions are:
What should we produce?
How should we produce?
For whom should we produce?
A free market system answers the questions in the following way:
BUYERS decide what will be produced.
SELLERS decide how to produce.
MONEY determines who gets the goods and services.
As buyers purchase goods and services, they signal to the producers what ought to be made. If people want to wear pants with farm animal designs, they buy them. Producers have to be observant to anticipate demand. As they see that the stock of cow pants is flying off the shelves, they will create many more of them. Buyers and sellers are able to communicate effectively using just money. No one has to send emails to the company to ask for more pants with sheep designs; the fact that the pants sell quickly sends the message quickly. Likewise, when people move away from barnyard fashions and don’t buy them anymore, producers know to slow or stop production based merely on sales. Again, no one calls the company to request fewer pairs of chicken pants. Money talks, as they say, so buyers decide what will be produced. The producer of the good or service selects the best, most profitable way to produce. They use the factors of production—land, labor, capital, and entrepreneurship—to maximize goals of the company. Finally, to establish distribution of the good or service, price is used. In market economies, when consumers want anything from food to dental services to a new hat, they need only go to the correct place and give enough money to fulfill the price requirement.
A purely free market economy has several important characteristics. The first requirement is great freedom to buy and sell goods and services to satisfy one’s own desires. Individuals are responsible for making their own decisions regarding if, where, and how hard to work.
The father of economics, Adam Smith, wrote in The Wealth of Nations, “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest” (Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776).
A purely free market is not devoid of government. Rather, the government has a limited, small, and important role to play in the economy: protection of private property might require a lot from government in certain conditions. The ownership of factors of production as well as finished goods and services relies on clearly-defined and well-enforced property rights. We have paperwork like receipts, ownership titles, and deeds to prove that we own things. We are able to enjoy all the privileges that go along with ownership, including the right to sell the objects.
If property rights are threatened, the police and court system get involved to solve problems.
That role for government, while critical, is small. There are no public goods such as roads, streetlights, or public parks provided under a purely free market. There also exists no governmental safety net. People who are permanently or temporarily unemployed or disabled receive no government assistance. In this scenario, private individuals, civil organizations, or businesses must provide these goods and services.
On the opposite side of the spectrum is a command, or socialist, economy (Cuba, India, and North Korea). In these countries, central planners make decisions about what, how, and for whom to produce. Using complex computer models, government workers make output and supply decisions and businesses fulfill orders.
In a command economy, the government owns the factors of production; all decisions about land, labor, and capital are made by the state. Bureaucrats analyze enormous sets of data about current stock levels, predicted demand, and availability of resources. They determine output plans which are checked and sometimes adjusted at lower levels by regional directors and company managers. Orders are set, supplies ordered, and then the workers need only fulfill the job. Since the government planners also get to determine what individuals’ occupations are, they can effectively command the entire economy. Once the good or service is created, the price is also set by the government planners. The overall goal is equity. By having fair prices and wages that are set by the government, all of society will have needs met, and there will not be a division between rich and poor people.
The logic of a command system has been described in this way: “experts would plan, zealots would compete in zeal, technology would tame nature, labor would make free, the benefits would accrue to all. From each according to his ability; to each according to his deserts; and eventually, to each according to his needs” (David Landes, The Wealth and Poverty of Nations: Why Some Are So Rich and Some Are So Poor, 1998).
There are many problems with a command system. Perhaps the most stifling problem is the lack of freedom resulting from the coercion needed to make a command economy function. In a command economy, the state is the coercive force that determines many facets of individuals’ lives, including what job to work, where to live, and what and how many goods and services are available. The command system is also encumbered by the vast amount of information needed to properly make production decisions for an entire country. It is invariably beyond the scope of planners to comprehend. In terms of the nation’s productivity, the incentives to work hard or invent new products do not exist. This coercive system results in major inefficiencies. Without rewards for hard work, people naturally complete just the bare minimum required. For example, China transitioned its agricultural sector from pure command to more of a market-based system between 1978 and 1984. Over that time, total agricultural production increased by 42 percent as farmers were able to keep, use, and sell any crops above the government’s quota (Justin Yifu Lin, “Rural Reforms and Agricultural Growth in China,” American Economic Review, 1992). The market-based transition gave famers incentives to work hard and improve what they do to utilize fertilizers and other machinery helpful in producing crops. The reality of a command system is that production decreases and with it, overall happiness decreases.
This loss of freedom and happiness is the opportunity cost of coercion.
In reality, there is no such thing as an economy that is only market or only command. Rather, all systems are mixed models and fit along a spectrum. The United States is primarily market-based, but the government plays a role, too. The government provides a social safety net. In 2011, the United States spent over $2 trillion (13.5 percent of the overall GDP) on Social Security, Medicaid, Medicare, and other social services like unemployment compensation. There is also the extensive regulation of the economy with policies about the environment, working conditions, taxes, and subsidies.
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Law of Demand
As prices decrease, the quantity demanded increases or as prices increase, the quantity demanded decreases.
Rights which belong to us by nature and can only be justly taken away through due process.
Rights which belong to us by nature and can only be justly taken away through due process.
Except where authorized by people through the Constitution, government does not have the authority to limit freedom.
The power of government flows from the people.
Separation of powers
A system of distinct powers built into the constitution, to prevent an accumulation of power in one branch.
Checks and balances
Powers distributed among the branches of government allowing each to limit the application of power of the other branches and to prevent expansion of power of any branch.
The people delegate certain powers to the national government, while the states retain other powers; and the people, who authorize the states and national government, retain all freedoms not delegated to the governing bodies.
Fairness or reasonableness in the way people are treated or decisions are made.
The natural right of all individuals to create, obtain, and control their possessions, beliefs, faculties, and opinions, as well as the fruits of their labor.
Citizens are best able to pursue happiness when government is confined to those powers which protect their life, liberty, and property.
(or republican government) Form of government in which the people are sovereign (ultimate source of power) and authorize representatives to make and carry out laws.
(or representative government)Form of government in which the people are sovereign (ultimate source of power) and authorize representatives to make and carry out laws.
Reasoned and respectful sharing of ideas between individuals is the primary way people influence change in society/government, and is essential to maintain self-government.
The fundamental principles by which a state or nation is governed. The United States Constitution, written in 1787, lays out the roles and powers of each of the three branches of government (legislative, executive, and judicial), the protections of due process and rule of law in the states, a republican form of government, and the manner in which to amend the document.
Jefferson was a Virginia plantation owner who was the principle author of the Declaration of Independence. Jefferson served as a legislator and governor in Virginia, as well as an ambassador to France, Secretary of State under George Washington, Vice President under John Adams, and the third President of the United States. During his political career, Jefferson founded the Democratic-Republican Party with James Madison, and he bought the Louisiana Purchase from France. After his presidency, Jefferson started the University of Virginia near his home, Monticello.
Bill of Rights
The first ten amendments to the Constitution, ratified in 1791, which limit government power and protect individual liberties, including the freedoms of speech, press, religion, petition, and assembly, as well as protections against cruel and unusual punishment, unreasonable search and seizure, and other due process rights.
Ratified in 1791, it protects citizens’ rights to create a militia and to bear arms. “A well regulated militia, being necessary to the security of a free state, the right of the people to keep and bear arms, shall not be infringed.”
The government must interact with all persons according to the duly-enacted laws; applying these rules equally among all persons.
Every individual is equal to every other person with respect to natural rights and treatment before the law.
Consent of the governed
The authority of the government must come from the people through elections and through the people’s interaction with government.
Individuals must take care of themselves and their families, and be vigilant to preserve their liberty and the liberty of others.
Rule of law
Government officials and citizens all abide by the same laws regardless of political power.
Declaration of Independence
The document written in 1776 by the Founders to send to Britain’s King George III in which independence from Britain was declared and the reasons for the separation were explained.
Articles of Confederation
The first national government document developed in 1781 by the Founders. The Articles created a federal legislative branch, but there was no executive or judiciary. The states retained most of the governmental powers.
The group of people who wrote and influenced the Declaration of Independence, the Articles of Confederation, the United States Constitution, and the United States Bill of Rights. These men were instrumental in establishing the nation and its governmental documents and practices.
A series of 85 essays written to convince the people of New York to ratify the Constitution. The authors were James Madison, Alexander Hamilton, and John Jay. These documents are considered to be the most authoritative explanation of the political theory of the Constitution.
Ratified in 1791, it protects the freedom of speech, the freedom of religion, freedom of the press, freedom to assemble, and freedom to petition the government.
“Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the government for a redress of grievances.”
Law of Supply
As the price drops, the quantity supplied also drops.
Ratified in 1791, it protects citizens’ rights against unreasonable searches and seizures of property and explains that warrants must be issued with probable cause. “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no warrants shall issue, but upon probable cause, supported by oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.”
Ratified in 1791, it protects the right indictment by a jury, against double jeopardy, self-incrimination, loss of life, liberty, or property without due process, and just compensation for private property taken for public use. “No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a grand jury, except in cases arising in the land or naval forces, or in the militia, when in actual service in time of war or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.”
Ratified in 1791, it states that the powers not enumerated or delegated in the Constitution are reserved for the states and the people. “The powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states respectively, or to the people.”
Ratified in 1791, it protects against excessive bail and fines and cruel and unusual punishments. “Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.”
Ratified in 1791, the listing of certain rights protected by the Constitution cannot be used to deny rights not enumerated in the document. “The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.”
One of the Founding Fathers of the United States, Alexander Hamilton served as General Washington’s chief of staff, promoted the ratification of the Constitution in the Federalist Papers, and founded the nation’s financial system and first political party.
Madison was a Framer who was instrumental in writing the Constitution and Bill of Rights. He is known as the “Father of the Constitution.” Madison partnered with Alexander Hamilton and John Jay to write the Federalist Papers in support of the ratification of the Constitution. He also served as a member of the Virginia House of Delegates, the United States House of Representatives, Secretary of State under Thomas Jefferson, and the fourth president of the United States.
First President of the United States, George Washington served as commander-in-chief of the Continental Army during the American Revolution and was one of the Founding Fathers of the United States.
An English philosopher and physician, John Locke was one of the most influential Enlightenment thinkers and is known today as the Father of Classical Liberalism.
The Continental Congress, comprised of delegates from 12 of the 13 American colonies, represented the colonists during and after the American Revolution. The Continental Congress issued the Declaration of Independence and ratified the Articles of Confederation.
King George III
King George III was the King of Great Britain at the time of the American Revolution. His actions towards the American colonies, outlined in the Declaration of Independence, spurred the American Revolution.
Spanning ten years from 1929 to 1939, the Great Depression was one of the longest-lasting economic downturns in the history of the United States affecting the U.S. and most of the world.
An introductory statement, preface, or introduction.
Cruel and unfair treatment by people with power over others.
Using power over people in a way that is cruel and unfair.
Before becoming the second President of the United States, John Adams served as the country’s first Vice President under George Washington. Adams was an advocate of American independence from Britain and a Federalist.
Founding Father John Jay was one of the signers of the Treaty of Paris and served as the first Chief Justice of the United States. He was also one of the authors of the Federalist Papers.
Ratified in 1791, it protects citizens against the quartering of soldiers in private homes without their approval. “No soldier shall, in time of peace be quartered in any house, without the consent of the owner, nor in time of war, but in a manner to be prescribed by law.”
Ratified in 1791, it protects the rights of impartial jury trials, the right to be informed of the accusations against you, the right to be confronted by witness, and the right to be assisted by counsel. “In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial, by an impartial jury of the state and district wherein the crime shall have been committed, which district shall have been previously ascertained by law, and to be informed of the nature and cause of the accusation; to be confronted with the witnesses against him; to have compulsory process for obtaining witnesses in his favor, and to have the assistance of counsel for his defense.”
Ratified in 1791, it protects the right of jury trials in law suits dealing with more than twenty dollars and protects against reexamination of the trial in any court if decided by a jury. “In suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise reexamined in any court of the United States, than according to the rules of the common law.”
Alexis de Tocqueville
French political thinker and historian, Alexis de Tocqueville is best known for his works Democracy in America and The Old Regime and the Revolution. He visited the U.S. in the 1830s and wrote admiringly about many aspects of American law and society.
Democracy in America
Written by Alexis de Tocqueville after visiting the United States, Democracy in America contains de Tocqueville’s analysis of and reflections on the United States’ democratic system and society. The first volume was published in 1835 and the second in 1840.
Written in 1215, it is the oldest document in the British and American heritage of rights. Contributed to the adoption of the First, Third, Fourth, Fifth, Sixth, and Eighth Amendments of the Bill of Rights, and speaks of these rights as ancient.
Two Treatises of Civil Government
Written by John Locke in 1690, the Two Treatises of Civil Government criticize absolute power for kings and outline Locke’s suggestions for a more civilized society based on natural rights and the social contract.
The Thirteenth Amendment to the Constitution abolished slavery and involuntary servitude, except as punishment for a crime. “Section 1. Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction. Section 2. Congress shall have power to enforce this article by appropriate legislation.”
The group of people who actually attended the Constitutional Convention and participated in writing the Constitution.
Ratified in 1868, it states that all people born or naturalized in the United States are citizens and ensures that “No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any state deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.”
Ratified in 1913, the Sixteenth Amendment gave Congress the ability to collect income taxes. “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census of enumeration.”
atified in 1919, the Eighteenth Amendment introduced Prohibition, the period of United States history when the manufacture, sale, and transportation of alcohol was made illegal throughout the country. “Section 1. After one year from the ratification of this article the manufacture, sale, or transportation of intoxicating liquors within, the importation thereof into, or the exportation thereof from the United States and all territory subject to the jurisdiction thereof for beverage purposes is hereby prohibited. Section 2. The Congress and the several states shall have concurrent power to enforce this article by appropriate legislation. Section 3. This article shall be inoperative unless it shall have been ratified as an amendment to the Constitution by the legislatures of the several states, as provided in the Constitution, within seven years from the date of the submission hereof to the states by the Congress.”
The Twentieth Amendment was ratified in 1933, and it establishes procedures for presidential succession and the start and end of federal officials’ terms of office.
“Section 1. The terms of the President and Vice President shall end at noon on the 20th day of January, and the terms of Senators and Representatives at noon on the 3rd day of January, of the years in which such terms would have ended if this article had not been ratified; and the terms of their successors shall then begin.
In 1933, the Twenty-First Amendment repealed the Eighteenth Amendment, ending Prohibition. “Section 1. The eighteenth article of amendment to the Constitution of the United States is hereby repealed. Section 2. The transportation or importation into any state, territory, or possession of the United States for delivery or use therein of intoxicating liquors, in violation of the laws thereof, is hereby prohibited. Section 3. This article shall be inoperative unless it shall have been ratified as an amendment to the Constitution by conventions in the several states, as provided in the Constitution, within seven years from the date of the submission hereof to the states by the Congress.”
English Bill of Rights
Passed by the British Parliament in 1689, the English Bill of Rights limited the power of the British monarch, outlined the rights of the Parliament, and guaranteed Protestants the right to bear arms.
The legislative body of the United Kingdom (known as Great Britain or England during the Founding era).
One of the Founding Fathers of the United States, Benjamin Franklin was a statesman, author, publisher, scientist, inventor and diplomat. He served in the Second Continental Congress during the American Revolution and helped draft the Declaration of Independence. In addition, Franklin helped negotiated the Treaty of Paris which ended the Revolutionary War and later served as a delegate to the convention that produced the U.S. Constitution.
The right to vote.
A government in which the power belongs to citizens through the right to vote.
Ratified in 1870, it states that the right could not be restricted based on “race, color, or previous condition of servitude.” “Section 1. The right of citizens of the United States to vote shall not be denied or abridged by the United States or by any state on account of race, color, or previous condition of servitude. Section 2. The Congress shall have power to enforce this article by appropriate legislation.”
Ratified in 1913, the Seventeenth Amendment introduced direct election of Senators. “The Senate of the United States shall be composed of two Senators from each state, elected by the people thereof, for six years; and each Senator shall have one vote. The electors in each state shall have the qualifications requisite for electors of the most numerous branch of the state legislatures. When vacancies happen in the representation of any state in the Senate, the executive authority of such state shall issue writs of election to fill such vacancies: Provided, that the legislature of any state may empower the executive thereof to make temporary appointments until the people fill the vacancies by election as the legislature may direct. This amendment shall not be so construed as to affect the election or term of any Senator chosen before it becomes valid as part of the Constitution.”
Ratified in 1920, the amendment stated that a citizen’s right to vote must not be restricted based on gender. “The right of citizens of the United States to vote shall not be denied or abridged by the United States or by any state on account of sex. Congress shall have power to enforce this article by appropriate legislation.”
Direct democracy is a political system in which the people vote directly on policies or laws, as opposed to voting for representatives who enact laws on their behalf.
Not planned or chosen for a particular reason; done without concern for what is fair or right.
The process by which courts analyze the constitutionality of an act of government.
Majority rule/minority rights
laws may be made with the consent of the majority, but only to the point where they do not infringe on the inalienable rights of the minority.
An arbitrary order or decree.
Something that is owned by a person, business, etc. This includes possessions, beliefs, faculties, and opinions, and the fruits of one's labor.
A government in which the power is held by the people.
A body of electors chosen by each state to vote for the president and vice president of the United States.
Conduct that reflects universal principles of moral and ethical excellence essential to leading a worthwhile life and to effective self-government. For many leading Founders, attributes of character such as justice, responsibility, perseverance, etc., were thought to flow from an understanding of the rights and obligations of men. Virtue is compatible with, but does not require, religious belief.