Which statement explains why a follower of laissez-faire capitalism would argue that the economy grows when government avoids regulations? A-In a planned economy, lack of regulations increases wages and profits. B-In a free market economy, prices and wages result from natural forces. C-In a mixed economy, wages rise faster than profits. D-In a capitalist system, government limits businesses.
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B is the only plausible answer, because it's the only true statement. The problem is that it doesn't explain WHY allowing prices and wages to be determined by natural forces grows the economy faster than having them controlled by government, e.g. to avoid "gouging" or "invest" in "win the future" technologies, et cetera. The answer, as Thomas Sowell has always wisely pointed out, is that price is a signal (wages are the price of labor, so they fit under the definition). A signal of what? A signal of what it costs, in terms of time, energy and materials, for the good or service to be provided by others. If you want to know the actual real cost, in terms of wages paid to employees, cost of machinery, cost of R&D, et cetera, to produce one gallon of gas at the pump, ready to be used, the best guide is its price -- IF the price is the result of natural forces, instead of some government decision. And why is this useful? Because then the person buying the gasoline can decide whether or not his use of the gasoline is sufficiently important (in the social sense) to demand the consumption of social resources to produce it. He does this by comparing the price of his own labor (which tells him how valuable what he does is to the rest of society) against the price of the gas. If the comparison is favorable, that tells him that society as a whole would rather he used the gas -- that this will make us all better off -- and if the comparison is unfavorable, that tells him society as a whole does not want him to buy the gas. In short, having fully transparent price signals allows the greatest good for the greatest number to be automatically and easily created. Individual decisions are automatically those that maximize social utility, which leads to improved prospects for all. When government gets in the mix, even with the best intentions in the world, it is too clumsy to do anything but mess up the price signals, with the result that social utility is not maximized, and the economy does not grow as fast as it could. This has been borne out by direct experiment over and over again. Planned economies never grow as fast as free economies.