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Encyclopedia > Free market economy

A free market is an idealized market, where all economic decisions and actions by individuals regarding transfer of money, goods, and services are voluntary, and are therefore devoid of coercion and theft (some definitions of "coercion" are inclusive of "theft"). Colloquially and loosely, a free market economy is an economy where the market is relatively free, as in an economy overseen by a government that practices a laissez-faire, rather than either a mixed or statist economic policy. Within economics the more usual term is simply "the market", or "the market mechanism", to mean the allocation of production through supply and demand.


Free markets are advocated by proponents of economic liberalism.

Contents

Theory

If a government is present, its use of force in the marketplace is ideally limited to protecting the market participants from coercion, including protection of property rights and enforcement of contracts. The essence of a free market can be understood as a game in which the players compete according to a common set of rules that prevent coercion (including theft); the enforcement of these rules may be carried out by a neutral referee (government). Players in this game may have very differing skills, knowledge, and wealth, which tends to conflict with social norms of fairness, so a free market may not accord with what some would consider a fair market. This conception of a market as a pure economic system based on freedom from coercion among market participants as well as from government is in fundamental contrast to a command economy.


The law of supply and demand predominates in the idealized free market, influencing prices toward an equilibrium that balances the demands for the products against the supplies. At these equilibrium prices, the market distributes the products to the purchasers according to each purchaser's use (or utility) for each product and within the relative limits of each buyer's purchasing power. The necessary components for the functioning of an idealized free market include the complete absence of artificial price pressures from taxes, subsidies, tariffs, or government regulation (other than protection from coercion and theft), and no government-granted monopolies (usually classified as coercive monopoly by free market advocates) (the United States Post Office, Amtrak, arguably patents, etc.) or similar arrangements on the part of the actors.


The distribution of purchasing power in an economy depends to a large extent on the labor and financial markets, but also on other factors such as family relationships, inheritance, gifts and so on. Many theories describing the operation of a free market focus primarily on the markets for consumer products, and their description of the labor market or financial markets tends to be more complicated and controversial.


Practice

While the free-market is an idealized abstraction, it is useful in understanding real markets whether artificially created and regulated by governments or non-governmental agencies, or the natural social phenomena such as the black market and the underground economy, which can be remarkably robust in persisting despite attempts to suppress these markets. Taxes and government regulation bias the equilibrium points of every large government-sanctioned economy in existence today, so that these economies are only relatively free or unfree. Monopolistic practices, cartels, and asymmetrically distributed knowledge are often cited as potential problems that may exist in a free-market economy. Knowledge bias can lead to what many may see as evils of such an economy, like insider trading, price fixing, price gouging, adverse selection, moral hazard, and the principal-agent problem which they claim justify government intervention to remedy. Some believe that the notion of a free market is inherently unachievable because they hold that governments create property rights and are fundamentally involved in markets through the enforcement of such rights. Others argue that the concept of property comes from natural law and therefore it is incorrect to see governments as creating markets.


Advocacy

The advocacy of relatively free markets, is a mainstay of ideologies such as minarchism, libertarianism, and 19th century liberalism, as well as the Western understanding of capitalism. It is anathema to communism and some variants of socialism, although modern liberalism and other variants of socialism seek only to mitigate what they see as the problems of an unrestrained free market. Most who say they favor a "free market" are speaking in a relative, rather than an absolute, sense --meaning they wish that coercion be kept to the minimum that is necessary to maximize economic freedom (such necessary coercion would be taxation, for example) and to maximize market efficiency by lowering trade barriers, making the tax system neutral in its influence on important decisions such as how to raise capital, e.g., eliminating the double tax on dividends so that equity financing is not at a disadvantage vis'a'vis debt financing. However, there are some such as anarcho-capitalists who would not even allow for taxation and governments, instead preferring protectors of economic freedom in the form of private contractors.


While some advocate free markets out of an intrinsic moral respect for freedom, others base their support on the belief that decentralized planning by a multitude of individuals making free economic decisions produces better results in regard to a more organized, efficent, and productive economy than does a centrally-planned economy where individual decisions are overridden by a central agency. This process accords with the theory of self-organization that says the internal organization of a system can increase automatically without being guided or managed by an outside source.


Modern trends that promote international market systems are often described by detractors as neoliberalism.


See also

Contrast

External link

  • The Statrix (http://www.thestatrix.com) is a free market blog themed on the movie The Matrix (http://www.thematrix.com)
  • In Defense of the Free Market (http://globalpolitician.com/articles.asp?ID=145)

  Results from FactBites:
 
Free Essay Free Market vs Command Economy - Polandland transition eco (1706 words)
A free market economy is an economy in which the allocation for resources is determined only by their supply and the demand for them.
Thus, economies are graded as being free market economies or planned economies using a tool called the economic spectrum, where the planned economies are placed on the left and the free market economies on the right.
 In a command economy, the distribution of goods and services among the population is planned by the government, based on their assessment of the people¬ís needs; whereas in a free market economy the population may acquire the goods and services as per their specific needs at the price fixed by the seller(s).
FRB: Speech, Greenspan -- The Ascendance of Market Capitalism -- April 2, 1998 (3298 words)
Market economies have succeeded over the centuries by thoroughly weeding out the inefficient and poorly equipped, and by granting rewards to those who could anticipate consumer demand and meet it with minimum use of labor and capital resources.
International competitive pressures are narrowing the choices for economies with broad safety nets: the choice of accepting shortfalls in standards of living, relative to the less burdened economies, or loosening the social safety net and acquiescing in the greater concentrations of income that seem to be associated with our high-tech environment.
Without an effective market clearing mechanism, the consequences of such a paradigm, as one might readily anticipate, were both huge surpluses of goods that were not wanted by the populace, and huge shortages of products that consumers desired, but were not produced in adequate quantities.
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