A system where government influence upon the prices of goods and services are nonexistent. Prices and values of these items are determined by the forces of supply and demand. Competition is key to the pricing of goods and the development of more efficient production methods.
When government sets arbitrary prices or regulations on goods and services, the free market suffers to the detriment of individuals in society. One example of this is the minimum wage.
When the government sets the minimum amount of a wage, they price many people out of the market causing many to not get much needed experience to further their career. The price of labor should be determined by the free market and decided upon by willing parties of the exchange.
Another downside of government interference is the harm it does to businesses, in forcing them to make decisions they should not have to make. In terms of minimum wage, they either have to raise their prices, higher fewer workers, or be less productive overall.
Generally higher prices result, which negatively affects those lower wage workers they were initially trying to help in the first place.
One major influence the government has over most economies in the world is its ability to set the price of money through central banking. Governments have the ability to print money at will and to set arbitrary interest rate values at figures they determine are best for the economy.
When money is printed, generally to pay for government expenses over what it takes in through taxation, the value of existing savings becomes devalued and prices rise as a result. This is generally a detriment to the poor and those living on fixed incomes like retirees.
Government's ability to set interest rates (the price of borrowing money) massively influence peoples decisions unnaturally. Currently interest rates are near zero and have been there for about 8 years now, however, they should naturally be around 5 or 6 percent.
This causes people to go into debt when they would not otherwise do so which may be destructive to these people when interest rates eventually rise. In the 1980s, many people lost their homes because they were over-borrowing and interest rates rose to around 20% to stem the flow of inflation.
The governments ability to manipulate the price of money is a major factor in causing massive boom and bust cycles. Booms and busts are normal but they would naturally correct themselves through the free market and the corrections would be swift and less harmful. Booms and busts are beneficial to help liquidate bad investments in the economy.
The only role the government should have in the economy is to allow the free market to function without interference.
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