Ineconomics, afree market is an economicsystem in which the prices of goods and services are determined bysupply and demand expressed by sellers and buyers. Such markets, as modeled, operate without the intervention ofgovernment or any other external authority. Proponents of the free market as a normative ideal contrast it with aregulated market, in which a government intervenes in supply and demand by means of various methods such astaxes orregulations. In an idealizedfree 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 acoordinated market in fields of study such aspolitical economy,new institutional economics,economic sociology, andpolitical 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 withcapitalism in contemporary usage andpopular culture, free markets have also been components in some forms ofmarket socialism.[1]
Historically, free market has also been used synonymously with other economic policies. For instance proponents oflaissez-faire capitalism may refer to it as free market capitalism because they claim it achieves the most economic freedom.[2] In practice, governments usually intervene to reduceexternalities such asgreenhouse gas emissions; although they may use markets to do so, such ascarbon emission trading.[3]
Market economies have existed under manyforms of government and in many different times, places and cultures. Modern capitalist societies—marked by a universalization ofmoney-basedsocial relations, a consistently large and system-wideclass of workers who must work for wages (theproletariat) and acapitalist class which owns the means of production—developed in Western Europe in a process that led to theIndustrial Revolution. Capitalist systems with varying degrees of direct government intervention have since become dominant in theWestern world and continue to spread. Capitalism has been shown to be strongly correlated witheconomic growth.[15]
For classical economists such asAdam Smith, the term free market refers to a market free from all forms of economic privilege, monopolies and artificial scarcities.[2] They say this implies thateconomic rents, which they describe as profits generated from a lack ofperfect competition, must be reduced or eliminated as much as possible through free competition.
Economic theory suggests the returns toland and othernatural resources are economic rents that cannot be reduced in such a way because of their perfect inelastic supply.[16] 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 (seedeadweight 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".[17] The American economist and social philosopherHenry George, the most famous proponent of this thesis, wanted to accomplish this through a highland value tax that replaces all other taxes.[18] Followers of his ideas are often calledGeorgists or geoists andgeolibertarians.
Léon Walras, one of the founders of theneoclassical economics who helped formulate thegeneral 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.[19]
Thelaissez-faire principle expresses a preference for an absence of non-market pressures on prices and wages such as those from discriminatory governmenttaxes,subsidies,tariffs,regulations, orgovernment-granted monopolies. InThe Pure Theory of Capital,Friedrich Hayek argued that the goal is the preservation of the unique information contained in the price itself.[20]
According to Karl Popper, the idea of the free market is paradoxical, as it requires interventions towards the goal of preventing interventions.[2]
Various forms ofsocialism based on free markets have existed since the 19th century. Early notable socialist proponents of free markets includePierre-Joseph Proudhon,Benjamin Tucker and theRicardian socialists. These economists believed that genuinely free markets andvoluntary exchange could not exist within theexploitative conditions ofcapitalism. These proposals ranged from various forms ofworker cooperatives operating in a free-market economy such as themutualist 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. theLange model) where publicly owned enterprises are coordinated by various degrees ofeconomic planning, or where capital good prices are determined through marginal cost pricing.
Advocates of free-market socialism such asJaroslav 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. 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 ifemployee-owned companies were the norm as envisioned by various thinkers includingLouis O. Kelso andJames S. Albus.[27]
Socialists also assert thatfree-market capitalism leads to an excessively skewed distributions of income and economic instabilities which in turn leads to social instability. Corrective measures in the form ofsocial welfare, re-distributive taxation and regulatory measures and their associated administrative costs which are required create agency costs for society. These costs would not be required in a self-managed socialist economy.[28]
Criticism of market socialism comes from two major directions. EconomistsFriedrich Hayek andGeorge Stigler argued that socialism as a theory is not conducive to democratic systems[29] and even the most benevolent state would face serious implementation problems.[30]
More modern criticism of socialism andmarket socialism implies that even in a democratic system, socialism cannot reach the desired efficient outcome. This argument holds that democratic majority rule becomes detrimental to enterprises and industries, and that the formation ofinterest groups distorts the optimal market outcome.[31]
Thegeneral equilibrium theory has demonstrated that, under certain theoretical conditions ofperfect competition, the law ofsupply and demand influences prices toward anequilibrium that balances the demands for the products against the supplies.[32][full citation needed] At these equilibrium prices, the market distributes the products to the purchasers according to each purchaser's preference orutility for each product and within the relative limits of each buyer'spurchasing power. This result is described as market efficiency, or more specifically aPareto optimum.
A free market does not directly require the existence of competition; however, it does require a framework that freely allows new market entrants. Hence, competition in a free market is a consequence of the conditions of a free market, including that market participants not be obstructed from following theirprofit motive.
An absence of any of the conditions of perfect competition is considered amarket failure. Regulatory intervention may provide a substitute force to counter a market failure, which leads some economists to believe that some forms of market regulation may be better than an unregulated market at providing a free market.[2]
Friedrich Hayek popularized the view that market economies promotespontaneous order which results in a better "allocation of societal resources than any design could achieve".[33] According to this view, market economies are characterized by the formation of complex transactional networks that produce and distribute goods and services throughout the economy. These networks are not designed, but they nevertheless emerge as a result of decentralized individual economic decisions.[34] The idea of spontaneous order is an elaboration on theinvisible hand proposed byAdam Smith inThe Wealth of Nations. About the individual, Smith wrote:
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, he 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 public good.[35]
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, arguing:
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.[36]
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 economistKarl 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, namely to enforcecontracts, govern the formation oflabor unions, spell out the rights and obligations ofcorporations, shape who has standing to bring legal actions and define what constitutes an unacceptableconflict of interest.[37]
Demand for an item (such as a good or service) refers to the economic market pressure from people trying to buy it. Buyers have a maximum price they are willing to pay for an item, and sellers have a minimum price at which 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 asproducer surplus. Buyers willing to pay for goods at a higher price than the equilibrium price receive the difference asconsumer surplus.[38]
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.[38]
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 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.[39] Governments may attempt to createsocial equality orequality of outcome by intervening in the market through actions such as imposing aminimum wage (price floor) or erectingprice 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 relativeinelasticity 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.[40] Those interventions are often done in the name of maintaining basic assumptions of free markets such as the idea that the costs of production must be included in the price of goods. Pollution and depletion costs are sometimes not included in the cost of production (a manufacturer that withdraws water at one location then discharges it polluted downstream, avoiding the cost of treating the water), therefore governments may opt to impose regulations in an attempt to try to internalize all of the cost of production and ultimately include them in the price of the goods.
Advocates of the free market contend that government intervention hampers economic growth by disrupting the efficient 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 investment.Milton Friedman argued againstcentral planning,price controls andstate-owned corporations, particularly as practiced in theSoviet Union andChina[41] whileHa-Joon Chang cites the examples of post-war Japan and the growth of South Korea's steel industry as positive examples of government intervention.[42]
Critics of alaissez-faire free market have argued that in real world situations it has proven to be susceptible to the development ofprice fixing monopolies.[43] Such reasoning has led to government intervention, e.g. theUnited States antitrust law. Critics of the free market also argue that it results in significantmarket dominance,inequality of bargaining power, orinformation asymmetry, in order to allow markets to function more freely.
Critics of a free market often argue that some market failures require government intervention.[44] EconomistsRonald Coase,Milton Friedman,Ludwig von Mises, andFriedrich Hayek have responded by arguing that markets can internalize or adjust to supposed market failures.[44]
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 workThe Shock Doctrine andJohn Ralston Saul more humorously illustrates this through various examples inThe Collapse of Globalism and the Reinvention of the World.[45] While its supporters argue that only a free market can create healthy competition and therefore more business and reasonable prices, opponents say that a free market in its purest form may result in the opposite. According to Klein and Ralston, the merging of companies into giant corporations or the privatization of government-run industry and national assets often result in monopolies or oligopolies requiring government intervention toforce competition and reasonable prices.[45]
Another form of market failure isspeculation, where transactions are made to profit from short term fluctuation, rather from theintrinsic value of the companies or products. This criticism has been challenged by historians such asLawrence Reed, who argued that monopolies have historically failed to form even in the absence of antitrust law.[46][unreliable source?] This is because monopolies are inherently difficult to maintain as 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. Furthermore, according to writer Walter Lippman and economist Milton Friedman, historical analysis of the formation of monopolies reveals that, contrary to popular belief, these were the result not of unfettered market forces, but of legal privileges granted by government.[47][unreliable source?]
American philosopher and authorCornel West has derisively termed what he perceives asdogmatic arguments forlaissez-faire economic policies asfree-market fundamentalism. West has contended that such mentality "trivializes the concern for public interest" and "makes money-driven, poll-obsessed elected officials deferential to corporate goals of profit – often at the cost of the common good".[48] American political philosopherMichael J. Sandel contends that in the last thirty years the United States has moved beyond just having a market economy and has become a market society where literally everything is for sale, including aspects of social and civic life such as education, access to justice and political influence.[49] The economic historianKarl Polanyi was highly critical of the idea of the market-based society in his bookThe Great Transformation, stating that any attempt at its creation would undermine human society and the common good:[50] "Ultimately...the control of the economic system by the market is of overwhelming consequence to the whole organization of society; it means no less than the running of society as an adjunct to the market. Instead of economy being embedded in social relations, social relations are embedded in the economic system."[51]
David McNally of the University of Houston argues in the Marxist tradition that the logic of the market inherently produces inequitable outcomes and leads to unequal exchanges, arguing thatAdam Smith's moral intent and moral philosophy espousing equal exchange was undermined by the practice of the free market he championed. According to McNally, the development of themarket economy involved coercion, exploitation and violence that Smith's moral philosophy could not countenance. McNally also criticizes market socialists for believing in the possibility of fair markets based on equal exchanges to be achieved by purging parasitical elements from the market economy such asprivate ownership of themeans of production, arguing thatmarket socialism is an oxymoron whensocialism is defined as an end towage labour.[52]
^Zimbalist, Andrew S.; Sherman, Howard J.; Brown, Stuart (1988).Comparing Economic Systems: A Political-Economic Approach. Harcourt College Pub. pp. 6–7.ISBN978-0155124035.Pure capitalism is defined as a system wherein all of the means of production (physical capital) are privately owned and run by the capitalist class for a profit, while most other people are workers who work for a salary or wage (and who do not own the capital or the product).
^Rosser, Mariana V.; Rosser, J Barkley (2003).Comparative Economics in a Transforming World Economy. MIT Press. p. 7.ISBN978-0262182348.In capitalist economies, land and produced means of production (the capital stock) are owned by private individuals or groups of private individuals organized as firms.
^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.
^Gilpin, Robert (2018).The Challenge of Global Capitalism : The World Economy in the 21st Century. Princeton University Press.ISBN978-0691186474.OCLC1076397003.
^Gregory, Paul; Stuart, Robert (2013).The Global Economy and its Economic Systems. South-Western College Pub. p. 41.ISBN978-1285-05535-0.Capitalism is characterized by private ownership of the factors of production. Decision making is decentralized and rests with the owners of the factors of production. Their decision making is coordinated by the market, which provides the necessary information. Material incentives are used to motivate participants.
^Gregory and Stuart, Paul and Robert (2013).The Global Economy and its Economic Systems. South-Western College Pub. p. 107.ISBN978-1285-05535-0.Real-world capitalist systems are mixed, some having higher shares of public ownership than others. The mix changes when privatization or nationalization occurs. Privatization is when property that had been state-owned is transferred to private owners.Nationalization occurs when privately owned property becomes publicly owned.
^Macmillan Dictionary of Modern Economics, 3rd Ed., 1986, p. 54.
^House Of Commons May 4th; King's Theatre, Edinburgh, July 17
^Backhaus, "Henry George's Ingenious Tax," pp. 453–458.
^Bockman, Johanna (2011).Markets in the name of Socialism: The Left-Wing origins of Neoliberalism. Stanford University Press. p. 21.ISBN978-0804775663.For Walras, socialism would provide the necessary institutions for free competition and social justice. Socialism, in Walras's view, entailed state ownership of land and natural resources and the abolition of income taxes. As owner of land and natural resources, the state could then lease these resources to many individuals and groups which would eliminate monopolies and thus enable free competition. The leasing of land and natural resources would also provide enough state revenue to make income taxes unnecessary, allowing a worker to invest his savings and become 'an owner or capitalist at the same time that he remains a worker.
^Hayek, Friedrich (1941).The Pure Theory of Capital.
^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 onJesse 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"Archived 2016-03-10 at theWayback Machine byKevin Carson at website of Center for a Stateless Society.
^Hayek cited. Petsoulas, Christina.Hayek's Liberalism and Its Origins: His Idea of Spontaneous Order and the Scottish Enlightenment. Routledge. 2001. p. 2.
^Smith, Adam (1776). "2".The Wealth of Nations. Vol. 1. London: W. Strahan and T. Cadell.
^Hacker, Jacob S.;Pierson, Paul (2010).Winner-Take-All Politics: How Washington Made the Rich Richer – and Turned Its Back on the Middle Class. Simon & Schuster. p. 55.
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