Two hundred years ago in Scotland, Adam Smith taught at the University of Glasgow. His brilliant book, The Wealth Of Nations, was based on the lectures he gave here.The basic principles underlying the free market, as Adam Smith taught them to his students in this University, are really very simple. Look at this lead pencil, there is not a single person in the world who could make this pencil. Remarkable statement? Not at all. The wood from which it’s made, for all I know, comes from a tree that was cut down in the State of Washington. To cut down that tree, it took a saw. To make the saw, it took steel. To make the steel, it took iron ore. This black center, we call it lead but it’s really compressed graphite, I am not sure where it comes from but I think it comes from some mines in South America. This red top up here, the eraser, a bit of rubber, probably comes from Malaya, where the rubber tree isn’t even native. It was imported from South America by some businessman with the help of the British government. This brass feral __ I haven’t the slightest idea where it came from or the yellow paint or the paint that made the black lines __ or the glue that holds it together. Literally thousands of people cooperated to make this pencil. People who don’t speak the same language; who practice different religions; who might hate one another if they ever met. When you go down to the store and buy this pencil, you are, in effect, trading a few minutes of your time for a few seconds of the time of all of those thousands of people. What brought them together and induced them to cooperate to make this pencil? There was no Commissar sending out orders from some central office. It was the magic of the price system __ the impersonal operation of prices that brought them together and got them to cooperate to make this pencil so that you could have it for a trifling sum.That is why the operation of the free market is so essential. Not only to promote productive efficiency, but even more, to foster harmony and peace among the peoples of the world.These people are crossing between two very different societies. This is Lo Wool, the official border crossing point between China and Hong Kong. Nowadays there’s a considerable amount of traffic at this border. People cross a little more freely than they use to. Many people from Hong Kong trade in China and the market has helped bring the two countries closer together, but the barriers between them are still very real. On this side of the border, people are free not only in the marketplace, but in all their lives. They are free to say what they want, to write what they want, to do pretty much as they please. Not so over there.That is why people in China who cannot get permission to leave go to desperate lengths to escape. They risk their lives in the process. Many lose their lives, but that doesn’t keep others from following. Some are attracted by the higher material standard of life in Hong Kong, but more by the natural human desire to be free.

The people who get official permission to leave China are fortunate. They are going to be able to enjoy the benefits of the economic freedom they will find in Hong Kong. More important, that will give them a much wider freedom.

Human and political freedom has never existed and cannot exist without a large measure of economic freedom. Those of us who have been so fortunate as to have been born in a free society tend to take freedom for granted __ to regard it as the natural state of mankind __ it is not. It is a rare and precious thing. Most people throughout history, most people today have lived in conditions of tyranny and misery, not of freedom and prosperity. The clearest demonstration of how much people value freedom is the way they vote with their feet when they have no other way to vote.

Of course, many of the people who pour into Hong Kong will end up in conditions that most of us in the West would find appalling. Hong Kong is very far from utopia. It has its slums, its crime, its desperately poor people. But the people are free. That’s after all, why so many of them have come here, despite having to live in leaky house boats in one of Hong Kong’s many small harbors. Here they have the freedom and the opportunity to better themselves, to improve their lot, and many succeed. There’s appalling poverty in Hong Kong, it’s true, but the conditions of the people have been getting better over time. They’re far better off now than they were when they first came across the border from China. And that poverty, appalling to us, because we’re accustomed to much higher standards of life, is not poverty as viewed by most of the people in the world. It’s the poverty to which they would aspire. A state of affairs they would like to achieve.

There is an enormous amount of poverty in the world everywhere. There is no system that’s perfect. There is no system that’s going to eliminate completely poverty in whatever sense. The question is, which system has the greatest chance? Which is the best arrangement for enabling poor people to improve their life? On that, the evidence of history speaks with a single voice. I do not know any exception to the proposition that if you compare like with like, the freer the system, the better off the ordinary poor people have been.

Ask yourself what it is that assures these garment workers in Hong Kong a good wage; not high by Western standards; but high enough to enable them to live far better than most people in the world. It is not government or trade union, these workers do well because there is competition for their labor and skills.

When a businessman faces trouble, a market threatens to disappear, or a new competitor arises, there are two things he can do. He can turn to the government for a tariff or quota or some other restriction on competition, or he can adjust and adapt. In Hong Kong the first option is closed. Hong Kong is too dependent on foreign trade so that the government has simply had to adopt a policy of complete noninterference. That’s tough on some individuals, but it is extremely healthy for the society as a whole. Only the businessmen who can adapt, who are flexible and adjustable survive and they create good employment opportunities for the rest.

The complete absence of tariffs or any other restrictions on trade is one of the main reasons why Hong Kong has been able to provide such rapidly rising standard of life for its people. Even Communist China recognizes Hong Kong’s success, it set up shop here and now excepts the universal symbol of capitalism. The Bank of China, the official bank of Communist China is the largest bank in Hong Kong. There’s no doubt that Communist China recognizes the power of the market.

In all this, the government of Hong Kong has played an important part, not only by what it has done, but as much by what it has refrained from doing. It has made sure that laws are enforced and contracts honored. It has provided the conditions in which a free market can work. Most importantly, it has not tried to direct the economic activities of the colony.

No government official is telling these people what to do. They are free to buy from whom they want, to sell to whom they want, to work for whom they want. Sometimes it looks like chaos and so it is, but underneath it’s highly organized by the impersonal forces of a free marketplace. The impersonal forces of a free marketplace at work back here in the United States, prices are the key. The prices that people are willing to pay for products determines what’s produced. The prices that have to be paid for raw materials, for the wages of labor, and so on, determine the cheapest way to produce these things.

In addition, these self same prices, the wages of labor, the interest on capital, and so on, determine how much each person has to spend on the market. It’s tempting to try to separate this final function of prices from the other two. To think that some how or other you can use prices to transmit the information about what should be produced and how it should be produced, without using those prices to determine how much each person gets. Indeed, government activity over the past few decades has been devoted to little else. But that’s a very serious mistake. If what people get is not going to be determined on what they produce, how they produce it, on how successfully they work, what incentive is there for them to act in accordance with the information that is transmitted. There is only one alternative: force __ some people telling other people what to do.

The fundamental principal of the free society is voluntary cooperation. The economic market, buying and selling, is one example. But it’s only one example. Voluntary cooperation is far broader than that.