Adam Smith pointed out many important features of pure market economies. One of the more interesting is the problem of economic crisis.
Smith observed that the crises tend to come fairly regularly. After periods of growth and great demand (where the stock market buy stock), the manufacturers make too much/too many of a product. The supply suddenly exceeds the demand, and the growth comes to an end. This happens when the economy is at the top.
After a while, the companies do not generate enough profit. The stock market grows weary. Shares of stock are sold. When more people want to sell stock than there are people who want to buy, the stock price plummets. After a while, businesses go bankrupt.
When enough businesses are bankrupt, two things happen:
- Unemployment makes workers work for less money
- The lack of manufacturers creates skyrocketing demands
Both these things increase profitability. And then the growth starts again...
Smith describes this as a law of nature. A pure market economy will vary between deep crisis and great growth. Because of this, only the most profitable companies survive.
The implications this has for the workers are just as harsh.
Every kind of mixed economy try to soften the effects of this law of nature. After all, human beings have always tried to avoid weather, volcanoes and death (also laws of nature), so why should we accept this one?