Download Free Market economics lecture

From Mercantile
to Free Market
Economics
Strong Central Control
over Commerce (i.e., a
King or a Queen)
Mercantile
Economy
Positive
Trade
Balance
Colonies (for raw
materials and to
buy finished
products!)
Private Property (No
more King!)
Free-Market
Economy
Positive
Trade
Balance
Market forces
control price,
supply, and
demand!
US Constitution; Article I, Section 8
The Congress shall have Power To lay and collect
Taxes, Duties, Imposts and Excises, to pay the Debts
and provide for the common Defense and general
Welfare of the United States; but all Duties, Imposts
and Excises shall be uniform throughout the United
States; To borrow Money on the credit of the United
States; To regulate Commerce with foreign Nations,
and among the several States, and with the Indian
Tribes;
Despite Constitutional authority
to regulate trade, early Presidents
and Legislatures chose a hands-off
approach known as Laissez-Faire
(“Hands-off” in French)
5 Pillars of the Free Enterprise System
1.Private ownership of businesses
2.Competition
3.Private Property
4.Profit motive
5.Consumer sovereignty
The Law(s) of Supply and Demand
* If demand increases and supply remains unchanged,
a shortage occurs, leading to a higher price.
* If demand decreases and supply remains unchanged,
a surplus occurs, leading to a lower price.
* If demand remains unchanged and supply increases
a surplus occurs, leading to a lower price.
* If demand remains unchanged and supply decreases
a shortage occurs, leading to a higher price.
Why are we doing this? We’re
getting ready to talk about the Tariff
of Abominations, which was called by
that name because it was despised in
the South! (An abomination is
anything that is hated!)
Hopefully you know by now that a tariff is a
tax on imports. The Tariff of Abominations was
hated in the South because the South had little
or no manufacturing capability (unlike the
North). The Tariff was a Protective Tariff, that
is, a tariff designed to protect American
(“domestic”) manufacturers from foreign
competition.
Since most of the nation’s
manufacturing was in the North,
the South saw the Tariff (the
highest in the history of the
country) as a “South Only” tax;
they despised it!
If we’re going to understand why the
South was upset, we have to know how a
tariff works and why it caused higher
prices in the South. First, we have to
understand what goes into the
determination of the price of any retail
merchandise.
Prices are the sum of the costs
associated with production (“the cost
of doing business” or CoDB from now
on) plus the profit expected on the
item. Remember that profit is one of
the five pillars of the Free Enterprise
system!
What goes into the CoDB? Usually, labor
is the largest expense for any business,
followed closely by the cost of raw
materials and supplies necessary for the
production process. Administrative costs
(office supplies, for example), fees,
licenses, taxes, and other assorted
expenses usually come last.
We could add it up like this:
CoDB + Profit = Price
Labor
Materials
Rent, tools, maintenance, etc.
Fees, licenses, taxes.
Before you start saying “Those evil
corporations charging their obscene
profits!” consider that MOST of the
profits from any business usually go back
toward operating expenses (the CoDB) so
that the company can keep operating!
So, what happens when two companies
that are in competition in the same
market are given an uneven playing field?
Let’s say that two companies are in the
rocking chair business. One company
makes rocking chairs here in the United
States; the other imports rocking chairs
from England.
American Rocking Chair Company
Rocking Chair Company
of Great Britain
CoDB
CoDB
Labor
Materials
Rent, tools, maintenance, etc.
Labor
Materials
Rent, tools,
maintenance, etc.
Fees, licenses, taxes,
and a Tariff
Fees, licenses, taxes.
Did you notice that the expenses for the two
companies were not equal? Because of higher
operating expense, the Rocking Chair Company
of Great Britain will have to charge more for its
chair. Recall the Law of Supply and Demand;
Higher price means lower demand, which
mean more people will buy the cheaper chair
from the American Rocking Chair Company.
That’s how a protective tariff works!
It gives the domestic manufacturer a
competitive advantage so that people
are more likely to buy the domestic
product rather than the imported
product!
In short, the South saw the Tariff as a punishment!
South Carolina passes a nullification (“cancellation”)
ordinance in protest. They were NOT going to pay
this “South only” tax!! Andrew Jackson threatened
to send Federal troops to enforce the ordinance, but
cooler heads prevailed; South Carolina repealed its
ordinance and Congress acted to reduce the Tariff,
eliminating the crisis! However, many historians
consider the Nullification Crisis of the Jackson
Administration to be the first act of the Civil War!