Free Market Economy

A free market economy is an economic system based on supply and demand for goods and services, with little to no government control involved in its operation. It represents the sum total of all voluntary exchanges taking place, with no forced or coerced transactions.

Individuals are allowed to make consensual and mutually beneficial exchanges in a free market economy. No completely free market economy exists in any country, as all have government constraints to varying degrees.

Various indexes exist to measure and rate the degree of freedom in any given economy, with economists having shown that the higher the degree of freedom, the higher the level of economic well-being.

Foundations of free market economy

Laissez-faire capitalism is another term often used in relation to free market economics. Free markets usually encompass the principles of private property, capitalism, and individual rights. Political systems which do not favor regulation of the markets, are also more likely to avoid regulating individual behaviors. Free markets thrive where property rights are protected, since this incentivizes ownership and investment.

Economic growth, particularly in Europe and North America, has been significantly more rapid in the time since the Age of Enlightenment, in the 18th century, than during any other period in history. This is unequivocally related to the ideology of free market capitalism, which correspondingly gained traction throughout the era. 

Similarly, following the fall of communism in Eastern Europe, those countries which most readily adopted free market principles, became those who eventually gained the most, in terms of growth and prosperity.

Free markets are efficient partly due to their inherent ability to incentivize through the profit motive. Making a profit is the primary reason for the existence of a company, and also the reason for individuals to go to work. 

Competition is encouraged in a free market, meaning that costs are also driven down for consumers, since companies attempt to sell a quality product at a lower price, but at a higher volume than their competitors,    

Threats to the free market economy

Government regulation and interventions form the greatest threat to free markets. Constraints can be implicit or explicit, but always involve the enforcement of sanctions or consequences. 

Specific exchanges can be prohibited, for example drugs, prostitution, guns, or alcohol, depending on the jurisdiction. Taxation plays an important inhibitory role, in particular, tax on transactions, transfer tax, property taxes, carbon taxes, and value added tax (VAT)..

Government regulations can also curtail the free market, such as those regarding health and safety, quality standards, and working practices, at the same time placing a costly administrative burden on companies. Likewise, licensing can cause issues in industries such as transport, hospitality, and services.

Fixed exchange rates, price controls, tariffs, and competition from publicly subsidized goods or services can all threaten free trade. Government quotas are another means of controlling the market, and can be applied to production, purchasing or even employment practices. 

Reasons provided by the government for the necessity of their interference, would normally include the need to uphold consumer rights and safety; to promote fairness for disadvantaged groups in society; to protect the environment; or to provide public goods. 

Interested parties will lobby the government to try to influence their interference in a favorable direction, to suit the particular circumstances of their company or group. This is called rent-seeking. 

Trading occurs in compliance with the government regulatory framework, and trading which violates this framework is often called the ‘black market,’ arguably known as an underground free market economy. 

Despite these threats and curtailments, the market survives, though one could only imagine how much better off we might be with a truly free market. 

Why a free market economy is important to SFL

At Students For Liberty, we believe that a free market economy is the system most conducive to economic development, innovation, greater prosperity, consumer choice, and ultimately a freer society. Overwhelming evidence highlights the significantly better results of economies with greater economic freedom, compared to economies with a higher degree of central planning.