The free market is an economic system based on supply and demand with little or no government control. It is a summary description of all voluntary exchanges that take place in a given economic environment. Free markets are characterized by a spontaneous and decentralized order of arrangements through which individuals make economic decisions.
• A free market is one where voluntary exchange and the laws of supply and demand provide the sole basis for the economic system, without government intervention.
• A key feature of free markets is the absence of coerced (forced) transactions or conditions on transactions.
• While no pure free market economies actually exist, and all markets are in some ways constrained, economists who measure the degree of freedom in markets have found a generally positive relationship between free markets and measures of economic well being.
What are Free Market Economies?
Understanding Free Market
The term “free market” is sometimes used as a synonym for laissez-faire capitalism. When most people discuss the “free market,” they mean an economy with unobstructed competition and only private transactions between buyers and sellers. However, a more inclusive definition should include any voluntary economic activity so long as it is not controlled by coercive central authorities.
The Free Market’s Connection With Capitalism and Individual Liberty
No modern country operates with completely uninhibited free markets. That said, the most free markets tend to coincide with countries that value private property, capitalism, and individual rights.
Free Markets and Financial Markets
In free markets, a financial market can develop to facilitate financing needs for those who cannot or do not want to self-finance. For example, some individuals or businesses specialize in acquiring savings by consistently not consuming all of their present wealth. Others specialize in deploying savings in pursuit of entrepreneurial activity, such as starting or expanding a business.
For example, savers can purchase bonds and trade their present savings to entrepreneurs for the promise of future savings plus remuneration, or interest. With stocks, savings are traded for an ownership claim on future earnings. There are no modern examples of purely free financial markets.
Common Constraints on the Free Market
All constraints on the free market use implicit or explicit threats of force. Common examples include: prohibition of specific exchanges, taxation, regulations, mandates on specific terms within an exchange.
Common justifications for politically imposed constraints on free markets include consumer safety, fairness between various advantaged or disadvantaged groups in society, and the provision of public goods
Whatever the outward justification, business firms and other interest groups within society often lobby to shape these constraints in their own favor in a phenomenon known as “rent seeking”
When free market behavior is regulated, the scope of the free market is curtailed but usually not eliminated entirely, and voluntary exchanges may still take place within the framework of government regulations.
Some exchanges may also take place in violation of government rules and regulations on non legal markets which may be in some ways considered an underground version of the free market. However, market exchange is still heavily constrained because, on an illegal market, competition often takes the form of violent conflict between rival groups of producers or consumers as opposed to free market competition or rent-seeking competition via the political system.
Measuring Economic Freedom
In order to study the effects of free markets on the economy, economists have devised several well know indexes of economic freedom
These include the Index of Economic Freedom published by the Heritage Foundation,4 and the Economic Freedom of the World and Economic Freedom of North America indexes published by the Fraser Institute. These indexes include items such as the security of property rights, the burden of regulation, and openness of financial markets, among many other items.