II. Market Extremes

A. Pure Market Economy

Hong Kong is perhaps the best example of a pure market economy. It does not have import or export taxes, or restrictions on investments coming in. There is no capital gains tax, no tax on interest gained from savings, no sales tax, and no tax breaks for muddle-butt companies that can’t make it on their own. The corporate tax rate is 16.5% of profits (vs. 33% in the US). The individual tax rate is 15% of gross income (vs. 32% in the US). Hong Kong’s government consumes only 6.9% of Gross Domestic Product (vs. 20.8% in US). Hong Kong has no minimum wage, no unemployment benefits, no Social Security, no national healthcare program, and virtually no welfare. Hong Kong’s average unemployment rate is 3% (vs. 4.5% in the US). Hong Kong’s per capita GDP is $26,000, which is greater than Japan or Germany. Only the US ($28,000), Luxembourg, and Switzerland have higher GDP’s.

Excerpt from PJ O’Rourke’s Eat the Rich

1. No government involvement in business or economy.

The market rules! Where there is a demand, there is a supply.

3. Adam Smith (1723-1790) was a major proponent.

Smith advocated laissez-faire approach; if government keeps its

hands off, individuals, acting in their own self-interest, will make the economy run more smoothly.

“But Adam; if the King isn’t running things, who will guide the

economy?”

Coke Machine on 9/24:

Top Row (9 slots): 3 Cherry Coke (all sold out)

6 Classic Coke (one sold out)

Second Row (9 slots):3 Sprite (all sold out)

3 Vanilla Coke (one sold out)

3 Diet Coke (none sold out)

Coke Machine on 10/13

• Top Row (9 slots) 6 Cherry Coke

3 Classic Coke

Second Row (9 slots)

6 Sprite

2 Vanilla Coke

1 Diet Coke

Smith replied, “It will be as if an invisible hand (all of our

transactions) were guiding the economy.”

By late 19th Century, the US economy strongly resembled

laissez-faire. However, problems arose.

According to Adam Smith, what would prevent a company from making a product like the Ford

Pinto?