IPO and the Free Market

In economic theory, humans are utility-maximizing. Utility is the amount of satisfaction one receives from the consumption of a good or service. You might remember the “law of diminishing marginal utility,” in which the consumer gets slightly less satisfaction from every additional piece of pizza consumed.

If we think of this in terms of the IPO model of the individual, utility is effectively input minus output. An individual wants the most possible from his inputs (income and goods consumed) and the least possible from his outputs (work exherted and cost of goods). An individual wants to receive the highest quality good while paying as little as possible for it. He also wants to receive the highest possible income while exherting as little work as possible.

For the individual in a free market economy, the amount of work he exherts as an output will have an effect, immediate or not, on the income he inputs. With that greater input, he is now able to output more money back into his economy, by purchasing more goods and services that he feels will maxmize his utility (or promote his brand). The utility of those goods and services will now motivate him to perform more labor, and thus continue the cycle of ever-increasing the gap between input and output. With an unlimited potential income, the individual is motivated be productive as he pleases or believes possible.

For the individual in the communist system, the inputs are fixed. His work exerted is unlikely to lead to a higher income by which he can afford greater goods and services, so there is no motivation to produce. His utility-maximizing instinct will tell him that because his input will never change, the best thing for him to do would be to do as little work as possible or not at all.

I think this model makes it very clear that the proprietist operating in a free-market capitalist system is a completely sovereign, self-owned entity. He is in control of his own productivity, and therefore his utility. He is in control of his brand, his craft, and his reputation. He is only at the mercy of his customers, who are kept in check by market competition.