Free market

In economics, a free market is a system in which the prices for goods and services are determined by the open market and by consumers. In a free market, the laws and forces of supply and demand are free from any intervention by a government or other authority and from all forms of economic privilege, monopolies and artificial scarcities.[1] Proponents of the concept of free market contrast it with a regulated market in which a government intervenes in supply and demand through various methods such as tariffs used to restrict trade and to protect the local economy. In an idealized free-market 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.

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 operate to control productive output and distribution. 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 anarchists, socialists and some proponents of cooperatives and advocates of profit sharing.[2] Criticism of the theoretical concept may regard systems with significant market power, inequality of bargaining power, or information asymmetry as less than free, with regulation being necessary to control those imbalances in order to allow markets to function more efficiently as well as produce more desirable social outcomes.

Economic systems

Laissez-faire economics

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. In The Pure Theory of Capital, Friedrich Hayek argued that the goal is the preservation of the unique information contained in the price itself.[3]

The definition of free market has been disputed and made complex by collectivist political philosophers and socialist economic ideas.[1] This contention arose from the divergence from classical economists such as Richard Cantillon, Adam Smith, David Ricardo and Thomas Robert Malthus and from the continental economic science developed primarily by the Spanish scholastic and French classical economists, including Anne-Robert-Jacques Turgot, Baron de Laune, Jean-Baptiste Say and Frédéric Bastiat. During the marginal revolution, subjective value theory was rediscovered.[4]

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, or free-market anarchism, also known as free-market anti-capitalism and free-market socialism to distinguish it from laissez-faire capitalism.[5][6][7] Critics of laissez-faire as commonly understood argue that a truly laissez-faire system would be anti-capitalist and socialist.[8][9]

Socialist economics

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 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.[10] 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 assert that free-market capitalism leads to an excessively skewed distribution of income which in turn leads to social instability. As a result, corrective measures in the form of social welfare, re-distributive taxation and administrative costs are required, but they end up being paid into workers hands who spend and help the economy to run. They claim corporate monopolies run rampant in free markets, with endless agency over the consumer. Thus, free-market socialism desires government regulation of markets to prevent social instability, although at the cost of taxpayer dollars.[11]

Georgist economics

For classical economists such as Adam Smith, the term free market does not necessarily refer to a market free from government interference, but rather free from all forms of economic privilege, monopolies and artificial scarcities.[1] This implies that economic rents, i.e. 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.[12] 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".[13] 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.[14] 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.[15]

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.

Other Languages
Afrikaans: Vrye mark
العربية: سوق حر
asturianu: Mercáu llibre
azərbaycanca: Sərbəst bazar
български: Свободен пазар
català: Mercat lliure
čeština: Volný trh
Cymraeg: Marchnad rydd
Ελληνικά: Ελεύθερη αγορά
español: Mercado libre
euskara: Merkatu libre
français: Libre marché
한국어: 자유시장
Bahasa Indonesia: Pasar bebas
italiano: Libero mercato
עברית: כלכלת שוק
Kiswahili: Soko huria
lietuvių: Laisvoji rinka
lumbaart: Liber mercaa
македонски: Слободен пазар
Bahasa Melayu: Pasaran bebas
Nederlands: Vrije markt
日本語: 自由市場
oʻzbekcha/ўзбекча: Erkin bozor
polski: Wolny rynek
português: Mercado livre
română: Piața liberă
Simple English: Free market
slovenčina: Voľný trh
srpskohrvatski / српскохрватски: Slobodno tržište
svenska: Fri marknad
Türkçe: Serbest piyasa
українська: Вільний ринок
Tiếng Việt: Thị trường tự do
中文: 自由市場