The Law of supply and demand, simply stated, holds that supply of and demand for a good or service will tend to find a point of equilibrium at a certain price expressed in terms of money (the equilibrium price). On a graph the relationship looks like this:
Naturally, the opposite is also true. When an item is decreasing in price, one of two things is happening. Either people are demanding less of the good or service or the supply of the item at the previous equilibrium price point is increasing.
In either case, the change in the price of the item in monetary terms is providing crucial information to all of those either producing or consuming the good or service in question, for it guides their inherent speculations.
(Editors Note: Speculation, far from being an illegal or immoral activity, is essential to everyday survival and without it, there is no hope of achieving equilibrium prices and therefore both production and consumption tend to cease. It is important to clarify that the illegal or immoral speculation that is villianized today is generally the act of investing the money of other parties in types of speculations without the knowledge or consent of the other party to do so.)
As a producer, if one sees the price of the good or service that one provides increase, the producer will strive (speculate, as it were) to either increase production to take advantage of the opportunity to profit and/or others will strive to produce the good or offer the service for which the price is increasing.
As a consumer, if one if one sees the price of the good or service that one consumes increase, the consumer will strive to either decrease consumption to mitigate the effects of the higher prices or others will strive to find a less expensive substitute for the good or service to offer in the place of the good or service for which the price is increasing.
The increase in production will increase supply which, as the Natural Law of supply and demand dictates, will eventually lower the equilibrium price as the increase in demand is satisfied. Likewise the decrease in demand will have the effect of increasing the available supply.
In either case, the individual decisions (again, speculations, as it were) of the producers and consumers serve to increase the available supply. The process occurs tacitly, and is an example of what Adam Smith famously called the Invisible hand of the market.
To further sum it up in what may seem at first a paradox, the best cure for higher prices is higher prices.
There are no exemptions from the natural law of supply and demand, however, there are numerous examples of Nation States, guided by the principal that Might Makes Right, manipulating the pure message that price is intended to send to producers and consumers.
This manipulation may be achieved in overt ways, such as price controls (the setting the price of an item by decree). However, most people understand that price controls are bad, so today’s Nation States commonly resort to other tactics. Amongst these tactics are taxes, subsidies, and the granting exclusive privileges to either buy or sell the good or service in question via regulating the purchase of or granting monopolies to produce it.
Regardless of the tactic employed, the result is to always a manipulation of the equilibrium price for a good or service and consequently distort the signal which guides the speculations and ultimately the actions of all producers and consumers. The result of society as a whole is always and in every case achieving suboptimum results to those that would be achieved if the price signal were as pure as possible.
In the case of Central Banking and centralized currency control, the Nation State, in addition to the tinkering mentioned above, adds the complication of manipulating the currency that the equilibrium prices are expressed in. This further distorts the sacred price signal that is universally relied upon to direct the actions of producers and consumers.
You can imagine the confusion occurring all around us, every day.
The True Capitalist ideology, on the other hand, completely subjects itself completely to the law of supply and demand and, in return, provides producers and consumers with best opportunity to obtain and act on the most accurate price information possible.
A Truly Capitalist society quickly settles on Gold and/or Silver as currency and does not recognize the right of anyone to tax, regulate, or grant monopolies. The Truly Capitalist Society continually works to bring supply and demand into balance in the simplest, most efficient way possible: By relinquishing all control to the market participants and by extension, natural law.
Inefficiency is naturally wrung from the system as firms that depend upon the false price signals or special protections or subsidies provided under the Might Makes Right ideology quickly go out of business.
True Capitalism not only quickly eliminates economic waste, it quickly directs the surplus capital into its most urgently needed employ, and it is accomplished by simply obeying and embracing the natural law of supply and demand.