Forum Post: Respective mechanism for the “Free Market” and Capitalism.

Let’s look at the respective mechanism for the “Free Market” and Capitalism. “Free Market” - Prices are set by the interplay of supply and demand. Capitalism - There are many interruption for this term however, they can be boiled down to a societies’ enforcement of ownership.

If society is okay with these then there will be nothing wrong. If prices goes toward the extremes then one goes thru a business cycle. If one’s economy goes thru a down turn then either the owners has to lower their return of invested capital or cut labor. The question is a matter of multiplicity. Which action will lead to deterring business conditions. Labor, in the end, are your customers. If owners cut labors’ pay, demand follows suite. Note: cutting labor force, in effect, cuts demand.

Notice how one does not assume owners will spend capital to increase production. This path is based on Risk Analysis. Also notice that demand can change. Economic Elasticity with respect toward demand price.

BUT, we do not have this. The Federal Reserve is determine to keep prices from deflating. The Republicans are determine to cut labors’ pay.

Democrats are determined to keep the social safety net and regulator laws while the Republicans want to remove them. Cutting labor lose, in effect, allows starvation, disease and crime to sky rocket. Owners can not make a profit because they have to pay for security.

Think about history and what happens when a government protects the Aristocracy. The owners will want the government to protect them This is not Laissez Faire. Remember, capitalism requires that the owners pay for their own security.

The greatest cost to producing an output is Labor. The Regulations add very little. The cost of regulation is add to the price a consumer pays. Free Trade affects the interplay of regulation. Regulation affects consumer prices which affects labor which affect owners’ return of investments.

In other words, We all Starve like Paupers or Live like Kings.

BUT, both parties want all to live like Kings. Which means a Stable Society. Which means Compromise. Which is Currently Impossible. Which Destabilizes Society. Which Effects Labor. Which Effect Owners’ Return on Capital. Which Deteriorates Society. Which Effects Labor. Which Effect Owners’ Return on Capital. AND SO ON!!!!!!!!!!!!!!!!!!!!!

                                MATH SPEAK 

Economist use a concept known as Maximum Likelihood with respect toward a probability density.

A great primary for Maximum Likelihood: Economic Choices at http://www.nobelprize.org/nobel_prizes/economics/laureates/2000/advanced-economicsciences2000.pdf

This year’s Nobel Prize in Economics: Empirical Macroeconomic at http://www.nobelprize.org/nobel_prizes/economics/laureates/2011/advanced-economicsciences2011.pdf

When owners have many labor markets then there is a mathematical way to combine two probability densities.
Convolution of Probability Densities - http://en.wikipedia.org/wiki/Convolution

A good visual application is at: http://demonstrations.wolfram.com/ConvolutionOfTwoDensities/

In reality, owners’ have to take into account other labors’ market regulations. This means a transformation is needed. Economist can not treat probability densities as pure numbers. See Probability Space at http://en.wikipedia.org/wiki/Probability_space

Use your favorite search engine to find a subject called Dynamic Economics.