One view is that a FREE MARKET is a system in which the prices for goods and services are determined by the open market and consumers , in which the laws and forces of supply and demand are free from any intervention by a government , price-setting monopoly, or other authority. Another view considers systems with significant market power , inequality of bargaining power , or information asymmetry to be less than free.
It is a result of recognizing a need, followed by the need being met. Some believe a free market contrasts with a regulated market , in which a government intervenes in supply and demand through various methods such as tariffs used to restrict trade and protect the economy. Prices for goods and services are set freely by the forces of supply and demand and are allowed to reach their point of equilibrium without intervention by government policy. Others believe regulation might be part of a free market if the regulation is necessary to control significant market power , inequality of bargaining power, or information asymmetry. The latter view implies a free market is not necessarily deregulated, although some of those with the former belief speak of free markets and deregulated markets as similar.
Although free markets are commonly associated with capitalism within a market economy in contemporary usage and popular culture , free markets have also been advocated by free-market anarchists , market socialists , and some proponents of cooperatives and advocates of profit sharing .
* 1 Economic systems
* 2 Concepts
* 3 Criticisms * 4 See also * 5 Notes * 6 Further reading * 7 External links
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Main article: Laissez-faire
The laissez-faire principle expresses a preference for an absence of non-market pressures on prices and wages, such as those from discriminatory government taxes, subsidies, tariffs , regulations of purely private behavior, or government-granted or coercive monopolies . Friedrich Hayek argued in The Pure Theory of Capital that the goal is the preservation of the unique information contained in the price itself.
The definition of free market has been disputed and made complex by
collectivist political philosophers and socialist economic ideas.
This contention arose from the divergence from classical economists
Richard Cantillon ,
During the marginal revolution , subjective value theory was rediscovered.
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Various forms of socialism based on free markets have existed since the 19th century. Early notable socialist proponents of free markets include Pierre-Joseph Proudhon , Benjamin Tucker , and the Ricardian socialists . These economists believed that genuinely free markets and voluntary exchange could not exist within the exploitative conditions of capitalism .
These proposals ranged from various forms of worker cooperatives
operating in a free market economy, such as the Mutualist system
proposed by Proudhon, to state-owned enterprises operating in
unregulated and open markets. These models of socialism are not to be
confused with other forms of market socialism (e.g. the
Advocates of free-market socialism such as Jaroslav Vanek argue that genuinely free markets are not possible under conditions of private ownership of productive property. Instead, he contends that the class differences and inequalities in income and power that result from private ownership enable the interests of the dominant class to skew the market to their favor, either in the form of monopoly and market power, or by utilizing their wealth and resources to legislate government policies that benefit their specific business interests. Additionally, Vanek states that workers in a socialist economy based on cooperative and self-managed enterprises have stronger incentives to maximize productivity because they would receive a share of the profits (based on the overall performance of their enterprise) in addition to receiving their fixed wage or salary.
Socialists also point out that free market capitalism leads to excessive disparities in the distribution of income, which leads to social instability. As a result, corrective measures in the form of social welfare , re-distributive taxation, and administrative costs are required, which end up being paid into workers hands who spend and help the economy to run. Corporate monopolies run rampant in free markets, with endless agency over the consumer. Thus, free market capitalism desires government regulation of markets to prevent social instability, although at the cost of taxpayer dollars.
As explained above, for classical economists such as
Economic theory suggests the returns to land and other natural
resources are economic rents that cannot be reduced in such a way
because of their perfect inelastic supply. Some economic thinkers
emphasize the need to share those rents as an essential requirement
for a well functioning market. It is suggested this would both
eliminate the need for regular taxes that have a negative effect on
trade (see deadweight loss ) as well as release land and resources
that are speculated upon or monopolised. Two features that improve the
competition and free market mechanisms.
The American economist and social philosopher
Léon Walras , one of the founders of the neoclassical economics who helped formulate the general equilibrium theory , had a very similar view. He argued that free competition could only be realized under conditions of state ownership of natural resources and land. Additionally, income taxes could be eliminated because the state would receive income to finance public services through owning such resources and enterprises.
NON-LAISSEZ-FAIRE CAPITALIST SYSTEMS
The stronger incentives to maximize productivity that Vanek conceives as possible in a socialist economy based on cooperative and self-managed enterprises might be accomplished in a capitalistic free market if employee-owned companies were the norm, as envisioned by various thinkers including Louis O. Kelso and James S. Albus .
SUPPLY AND DEMAND
Main article: Supply and demand
Demand for an item (such as goods or services) refers to the market pressure from people trying to buy it. Buyers have a maximum price they are willing to pay and sellers have a minimum price they are willing to offer their product. The point at which the supply and demand curves meet is the equilibrium price of the good and quantity demanded. Sellers willing to offer their goods at a lower price than the equilibrium price receive the difference as producer surplus . Buyers willing to pay for goods at a higher price than the equilibrium price receive the difference as consumer surplus .
The model is commonly applied to wages in the market for labor. The typical roles of supplier and consumer are reversed. The suppliers are individuals, who try to sell (supply) their labor for the highest price. The consumers are businesses, which try to buy (demand) the type of labor they need at the lowest price. As more people offer their labor in that market, the equilibrium wage decreases and the equilibrium level of employment increases as the supply curve shifts to the right. The opposite happens if fewer people offer their wages in the market as the supply curve shifts to the left.
In a free market, individuals and firms taking part in these transactions have the liberty to enter, leave and participate in the market as they so choose. Prices and quantities are allowed to adjust according to economic conditions in order to reach equilibrium and properly allocate resources. However, in many countries around the world, governments seek to intervene in the free market in order to achieve certain social or political agendas. Governments may attempt to create social equality or equality of outcome by intervening in the market through actions such as imposing a minimum wage (price floor) or erecting price controls (price ceiling). Other lesser-known goals are also pursued, such as in the United States, where the federal government subsidizes owners of fertile land to not grow crops in order to prevent the supply curve from further shifting to the right and decreasing the equilibrium price. This is done under the justification of maintaining farmers' profits; due to the relative inelasticity of demand for crops, increased supply would lower the price but not significantly increase quantity demanded, thus placing pressure on farmers to exit the market.
Advocates of the free market contend that government intervention
hampers economic growth by disrupting the natural allocation of
resources according to supply and demand, while critics of the free
market contend that government intervention is sometimes necessary to
protect a country's economy from better-developed and more influential
economies, while providing the stability necessary for wise long-term
Main article: Economic equilibrium
General equilibrium theory has demonstrated, with varying degrees of
mathematical rigor over time, that under certain conditions of
competition , the law of supply and demand predominates in this ideal
free and competitive 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 preference (or utility) for
each product and within the relative limits of each buyer's purchasing
power . This result is described as market efficiency, or more
This equilibrating behavior of free markets requires certain assumptions about their agents, collectively known as perfect competition , which therefore cannot be results of the market that they create. Among these assumptions are several which are impossible to fully achieve in a real market, such as complete information, interchangeable goods and services, and lack of market power. The question then is what approximations of these conditions guarantee approximations of market efficiency, and which failures in competition generate overall market failures. Several Nobel Prizes in Economics have been awarded for analyses of market failures due to asymmetric information .
LOW BARRIERS TO ENTRY
Main article: Barriers to entry
A free market does not require the existence of competition, however it does require a framework that allows new market entrants. Hence, in the lack of coercive barriers, and in markets with low entry cost it is generally understood that competition flourishes in a free-market environment. It often suggests the presence of the profit motive , although neither a profit motive or profit itself are necessary for a free market. All modern free markets are understood to include entrepreneurs , both individuals and businesses . Typically, a modern free market economy would include other features, such as a stock exchange and a financial services sector, but they do not define it.
Friedrich Hayek popularized the view that market economies promote
spontaneous order which results in a better "allocation of societal
resources than any design could achieve." According to this view, in
market economies are characterized by the formation of complex
transactional networks which produce and distribute goods and services
throughout the economy. These networks are not designed, but
nevertheless emerge as a result of decentralized individual economic
decisions. The idea of spontaneous order is an elaboration on the
invisible hand proposed by
By preferring the support of domestic to that of foreign industry, he
intends only his own security; and by directing that industry in such
a manner as its produce may be of the greatest value, he intends only
his own gain, and he is in this, as in many other cases, led by an
invisible hand to promote an end which was no part of his intention.
Nor is it always the worse for society that it was no part of it. By
pursuing his own interest frequently promotes that of the society
more effectually than when he really intends to promote it. I have
never known much good done by those who affected to trade for the
good. — Adam Smith,
Wealth of Nations
Smith pointed out that one does not get one's dinner by appealing to the brother-love of the butcher, the farmer or the baker. Rather one appeals to their self-interest, and pays them for their labor.
It is not from the benevolence of the butcher, the brewer or the
baker, that we expect our dinner, but from their regard to their own
self-interest. We address ourselves, not to their humanity but to
their self-love, and never talk to them of our own necessities but of
their advantages. —
Supporters of this view claim that spontaneous order is superior to any order that does not allow individuals to make their own choices of what to produce, what to buy, what to sell, and at what prices, due to the number and complexity of the factors involved. They further believe that any attempt to implement central planning will result in more disorder, or a less efficient production and distribution of goods and services.
Critics, such as political economist Karl Polanyi , question whether a spontaneously ordered market can exist, completely free of "distortions" of political policy; claiming that even the ostensibly freest markets require a state to exercise coercive power in some areas – to enforce contracts , to govern the formation of labor unions , to spell out the rights and obligations of corporations , to shape who has standing to bring legal actions, to define what constitutes an unacceptable conflict of interest , etc.
The Heritage Foundation , a right-wing think tank , tried to identify the key factors necessary to measure the degree of freedom of economy of a particular country. In 1986 they introduced the Index of Economic Freedom , which is based on some fifty variables. This and other similar indices do not define a free market, but measure the degree to which a modern economy is free, meaning in most cases, free of state intervention. The variables are divided into the following major groups:
* Trade policy,
Fiscal burden of government ,
* Government intervention in the economy,
* Monetary policy,
* Capital flows and foreign investment,
* Banking and finance,
* Wages and prices,
These free market principles are what helped America transition to a
free market economy. International free trade improved the country and
in order for Americans to prosper from a strong economy they had no
choice but to embrace it. Each group is assigned a numerical value
between 1 and 5; IEF is the arithmetical mean of the values, rounded
to the nearest hundredth. Initially, countries which were
traditionally considered capitalistic received high ratings, but the
method improved over time. Some economists, like
The principles of a free market are defined as:
* Individual Rights: "We are each created with equal individual
rights to control and to defend our life, liberty and property and to
voluntary contractual exchange."
* Limited Government: "Governments are instituted only to secure
individual rights, deriving their just powers from the consent of the
* Equal Justice Under Law: "Government must treat everyone equally;
neither rewarding failure nor punishing success."
* Subsidiarity: "Government authority must reside at the lowest
* Spontaneous Order: "When individual rights are respected,
unregulated competition will maximize economic benefit for society by
providing the most goods and services possible at the lowest cost."
See also: Criticism of capitalism
Critics of the free market have argued that, in real world situations, it has proven to be susceptible to the development of price fixing monopolies. Such reasoning has led to government intervention, e.g. the United States antitrust law .
Two prominent Canadian authors argue that government at times has to
intervene to ensure competition in large and important industries.
Naomi Klein illustrates this roughly in her work The Shock Doctrine
John Ralston Saul
This criticism has been challenged by historians such as Lawrence Reed , who argued that monopolies have historically failed to form even in the absence of anti-trust law. This is because monopolies are inherently difficult to maintain: a company that tries to maintain its monopoly by buying out new competitors, for instance, is incentivizing newcomers to enter the market in hope of a buy-out.
American philosopher and author
Critics of free market economics range from those who reject markets
entirely in favour of a planned economy as advocated by various
Marxists , to those who wish to see market failures regulated to
various degrees or supplemented by government interventions.
Keynesians support market roles for government, such as using fiscal
policy for economic stimulus when actions in the private sector lead
to sub-optimal economic outcomes of depressions or recessions .
Furthermore only one known example of a true free market exists, and
that is the
Black Market . The
Black Market is under constant threat
* ^ Bockman, Johanna (2011). Markets in the name of Socialism: The
Left-Wing origins of Neoliberalism. Stanford University Press. ISBN
* ^ The Pure Theory of Capital, F.A. Hayek, 1941
* ^ A B Popper, Karl (1994). The Open Society and Its Enemies.
Routledge Classics. ISBN 978-0-415-61021-6 .
* ^ Popper, Karl (2002). The Poverty of Historicism. Routledge
Classics. ISBN 0415278465 .
* ^ "
* Block, Fred and Somers, Margaret R (2014). The Power of Market
Fundamentalism: Karl Polanyi\'s Critique.
Harvard University Press
* Free Enterprise: The