Dive Deeper:  How Does a Market Work? - Dr. Brian Baugus

The reading below has 7 videos to watch.  It should take you about 1 hour and 30 minutes to complete.  

Essential Factors:

Adam Smith, the famous Scottish economist, argued that the market system was not only the moral solution but also the best arrangement for prosperity. We looked at the morality issues now we want to look at how the market actually works. Certain essential factors must be present for a functioning market. When I say present, I usually mean these exist in a nation but it could be that some sub-section, like a tribe or a region or collection of villages of a nation, has these and others do not. This would allow the subsection to prosper better than the surrounding areas. However, the more of a nation that adopts these factors, the better off all will be.

Private Property – In order to buy and sell people must own stuff and feel safe that they will be protected by the law should someone violate that ownership. When the government stops arresting and jailing thieves, or becomes the main thief, markets and prosperity are impossible. Property includes land, equipment, and material goods, but also labor and ideas and one’s own life.

Trust – Buyers and sellers must be able to trust each other. If people lie and cheat on a regular basis no one will want to do business with each other. Who will buy a car or even an apple if you think the seller is selling junk or rotten goods? Who will sell anything if all the buyers promise to pay but never do? Everyone doesn't need to be a cheater, it could be a small number but if that number is large enough that it happens frequently, then markets will break down. Trust issues is why markets often start among people who already know each other then expand from there.

These two are essential for the most basic market; I have something you want and you have something I want (private property) and we trust each other, we can and will trade. Both will be better off. But if we are going to expand beyond people we already know and trade with people we do not know we need some other things: 

Legal System - A set of laws that everyone agrees to is important. It is laws about property and contracts that let people who do not know each other trade with each other. It is best if a nation has a set of laws that applies to all but it can be local laws that apply to only a region as well. Plus the laws need to help make trade possible and not be laws that stop trade or make it more difficult and they need to be applied by courts fairly and favoring one tribe or rich people or showing any other bias.

Watch this video for a greater insight on the issues regarding law and economics.  This video is 56 minutes long:

These three factors will allow one to trade with people from all over and that will create greater prosperity as resources, goods and services flow to their best use. But how does that happen without someone organizing it and deciding what the best use is? The two videos below will help answer that question:

Trade will get you a long way towards prosperity because it allows other factors to develop that we may not even think about such as: 

Division of Labor and Specialization  - Nations that have a division of labor, that different workers do certain tasks different from each other and specialize in those tasks and develop an expertise are wealthier than those in which people do it all. If you have to build your own home, grow your own food, and make your own clothes you will be poor, as a person and as a nation. 

The government has a role in all of this. While trade and specialization and entrepreneurship (what this whole course is about) grow the economy, the government must provide the soil. The right soil is called economic freedom. This video tells you more. The government provides this proper soil with good institutions, trustworthy courts, police that are not corrupt and laws that apply fairly to all. There are also private institutions such as banks and churches and media that can be critics or supporters of entrepreneurs and influence others to do the same.

The bad news is that there are many critics in the world and in your country and maybe even in your family of capitalism and entrepreneurship. They will tell you it is just about being greedy and exploiting people and they will claim that capitalism is just like colonialism. This is not true as the following video explains. 

The good news is that wherever there is a problem, there is an entrepreneurial opportunity. You are going to learn how to make the most of it. Entrepreneurship is about serving and helping others and even if your country has not set up a system you can start small and carve out a system within your country, do not let any stop you from prospering. Here are two videos that may give you some ideas: