In economics, a free market is an economic system in which the prices of goods and services are determined by supply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention of government or any other external authority. Proponents of the free market as a normative ideal contrast it with a regulated market, in which a government intervenes in supply and demand by means of various methods such as taxes or regulations. In an idealized free market economy, prices for goods and services are set solely by the bids and offers of the participants.
Scholars contrast the concept of a free market with the concept of a coordinated market in fields of study such as political economy, new institutional economics, economic sociology, and political science. All of these fields emphasize the importance in currently existing market systems of rule-making institutions external to the simple forces of supply and demand which create space for those forces to control productive output and distribution. Although free markets are commonly associated with capitalism in contemporary usage and popular culture, free markets have also been components in some forms of market socialism.
Historically, free market has also been used synonymously with other economic policies. For instance proponents of laissez-faire capitalism may refer to it as free market capitalism because they claim it achieves the most economic freedom. In practice, governments usually intervene to reduce externalities such as greenhouse gas emissions; although they may use markets to do so, such as carbon emission trading.
Economic systems Capitalism
Capitalism is an economic system based on the private ownership of the means of production and their operation for profit.Chris Jenks. Core Sociological Dichotomies. "Capitalism, as a mode of production, is an economic system of manufacture and exchange which is geared toward the production and sale of commodities within a market for profit, where the manufacture of commodities consists of the use of the formally free labor of workers in exchange for a wage to create commodities in which the manufacturer extracts surplus value from the labor of the workers in terms of the difference between the wages paid to the worker and the value of the commodity produced by him/her to generate that profit." London; Thousand Oaks, CA; New Delhi. Sage. p. 383. Central characteristics of capitalism include capital accumulation, competitive markets, a price system, private property and the recognition of property rights, voluntary exchange, and wage labor.Heilbroner, Robert L. "Capitalism" . Steven N. Durlauf and Lawrence E. Blume, eds. The New Palgrave Dictionary of Economics. 2nd (Palgrave Macmillan, 2008) .Louis Hyman and Edward E. Baptist (2014). American Capitalism: A Reader . Simon & Schuster. . In a capitalist market economy, decision-making and investments are determined by every owner of wealth, property or production ability in capital and financial markets whereas prices and the distribution of goods and services are mainly determined by competition in goods and services markets.
Economists, historians, political economists and sociologists have adopted different perspectives in their analyses of capitalism and have recognized various forms of it in practice. These include laissez-faire or free-market capitalism, state capitalism and welfare capitalism. Different forms of capitalism feature varying degrees of free markets, public ownership, obstacles to free competition and state-sanctioned social policies. The degree of competition in markets and the role of intervention and regulation as well as the scope of state ownership vary across different models of capitalism.Macmillan Dictionary of Modern Economics, 3rd Ed., 1986, p. 54. The extent to which different markets are free and the rules defining private property are matters of politics and policy. Most of the existing capitalist economies are mixed economies that combine elements of free markets with state intervention and in some cases economic planning.Stilwell, Frank. "Political Economy: the Contest of Economic Ideas". First Edition. Oxford University Press. Melbourne, Australia. 2002.
Market economies have existed under many forms of government and in many different times, places and cultures. Modern capitalist societies—marked by a universalization of money-based social relations, a consistently large and system-wide class of workers who must work for wages (the proletariat) and a capitalist class which owns the means of production—developed in Western Europe in a process that led to the Industrial Revolution. Capitalist systems with varying degrees of direct government intervention have since become dominant in the Western world and continue to spread. Capitalism has been shown to be strongly correlated with economic growth.
Classical Economics
For classical economists such as Adam Smith, the term free market refers to a market free from all forms of economic privilege, monopolies and artificial scarcities. They say this implies that economic rents, which they describe as profits generated from a lack of perfect competition, must be reduced or eliminated as much as possible through free competition.
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.Adam Smith, The Wealth of Nations Book V, Chapter 2, Part 2, Article I: Taxes upon the Rent of Houses. 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. Winston Churchill supported this view by the following statement: "Land is the mother of all monopoly".House Of Commons May 4th; King's Theatre, Edinburgh, July 17 The American economist and social philosopher Henry George, the most famous proponent of this thesis, wanted to accomplish this through a high land value tax that replaces all other taxes.Backhaus, "Henry George's Ingenious Tax," pp. 453–458. Followers of his ideas are often called Georgists or geoists and geolibertarians.
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.
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, or government-granted monopolies. In The Pure Theory of Capital, Friedrich Hayek argued that the goal is the preservation of the unique information contained in the price itself.Hayek, Friedrich (1941). The Pure Theory of Capital.
According to Karl Popper, the idea of the free market is paradoxical, as it requires interventions towards the goal of preventing interventions.
Although laissez-faire has been commonly associated with capitalism, there is a similar economic theory associated with socialism called left-wing or socialist laissez-faire, also known as free-market anarchism, free-market anti-capitalism and free-market socialism to distinguish it from laissez-faire capitalism.Chartier, Gary; Johnson, Charles W. (2011). Markets Not Capitalism: Individualist Anarchism Against Bosses, Inequality, Corporate Power, and Structural Poverty. Brooklyn, NY:Minor Compositions/Autonomedia"It introduces an eye-opening approach to radical social thought, rooted equally in libertarian socialism and market anarchism." Chartier, Gary; Johnson, Charles W. (2011). Markets Not Capitalism: Individualist Anarchism Against Bosses, Inequality, Corporate Power, and Structural Poverty. Brooklyn, NY: Minor Compositions/Autonomedia. p. back cover."But there has always been a market-oriented strand of libertarian socialism that emphasizes voluntary cooperation between producers. And markets, properly understood, have always been about cooperation. As a commenter at Reason magazine's Hit&Run blog, remarking on Jesse Walker's link to the Kelly article, put it: "every trade is a cooperative act." In fact, it's a fairly common observation among market anarchists that genuinely free markets have the most legitimate claim to the label "socialism." "Socialism: A Perfectly Good Word Rehabilitated" by Kevin Carson at website of Center for a Stateless Society. Critics of laissez-faire as commonly understood argue that a truly laissez-faire system would be anti-capitalist and socialist.Nick Manley, "Brief Introduction To Left-Wing Laissez Faire Economic Theory: Part One" .Nick Manley, "Brief Introduction To Left-Wing Laissez Faire Economic Theory: Part Two" . American individualist anarchists such as Benjamin Tucker saw themselves as economic free-market socialists and political individualists while arguing that their "anarchistic socialism" or "individual anarchism" was "consistent Manchesterism".Tucker, Benjamin (1926). Individual Liberty: Selections from the Writings of Benjamin R. Tucker. New York: Vanguard Press. pp. 1–19.
Socialism
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 Lange model) where publicly owned enterprises are coordinated by various degrees of economic planning, or where capital good prices are determined through marginal cost pricing.
Advocates of free-market socialism such as Jaroslav Vaněk 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. The stronger incentives to maximize productivity that he conceives as possible in a socialist economy based on cooperative and self-managed enterprises might be accomplished in a free-market economy if employee-owned companies were the norm as envisioned by various thinkers including Louis O. Kelso and James S. Albus."Cooperative Economics: An Interview with Jaroslav Vanek" . Interview by Albert Perkins. Retrieved March 17, 2011.