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Free market

From Academic Kids

A free market is an economic term for an idealized market system, where all economic decisions and actions by individuals regarding transfer of money, goods, and services are voluntary, and are therefore devoid of coercion and theft (some definitions of "coercion" are inclusive of "theft"). Colloquially and loosely, a free market economy is an economy where the market is relatively free, as in an economy overseen by a government that practices a laissez-faire, rather than either a mixed or statist economic policy. Within economics the more usual term is simply "the market", or "the market mechanism", to mean the allocation of production through supply and demand.

Free markets are advocated by proponents of economic liberalism.

Contents

Theory

If a government is present, its use of force in the marketplace is ideally limited to protecting the market participants from coercion, including protection of property rights and enforcement of contracts. The essence of a free market can be understood as a game in which the players compete according to a common set of rules that prevent coercion (including theft); the enforcement of these rules may be carried out by a neutral referee (government). Players in this game may have very different skills, knowledge, and wealth, which tends to conflict with social norms of fairness, so a free market may not accord with what some would consider a fair market. This conception of a market as a pure economic system based on freedom from coercion among market participants as well as from government is in fundamental contrast to a command economy.

The law of supply and demand predominates in the idealized free market, influencing prices toward an equilibrium that balances the demands for the products against the supplies. At these equilibrium prices, the market distributes the products to the purchasers according to each purchaser's use (or utility) for each product and within the relative limits of each buyer's purchasing power. The necessary components for the functioning of an idealized free market include the complete absence of artificial price pressures from taxes, subsidies, tariffs, or government regulation (other than protection from coercion and theft), and no government-granted monopolies (usually classified as coercive monopoly by free market advocates) like the United States Post Office, Amtrak, arguably patents, etc.

The distribution of purchasing power in an economy depends to a large extent on the labor and financial markets, but also on other factors such as family relationships, inheritance, gifts and so on. Many theories describing the operation of a free market focus primarily on the markets for consumer products, and their description of the labor market or financial markets tends to be more complicated and controversial.

The free market can be seen as facilitating a form of decision-making through what is known as dollar voting, where a purchase of a product is tantamount to casting a vote for a producer to continue producing that product.

Practice

While the free-market is an idealized abstraction, it is useful in understanding real markets whether artificially created and regulated by governments or non-governmental agencies, or the natural social phenomena such as the black market and the underground economy, which can be remarkably robust in persisting despite attempts to suppress these markets. Taxes and government regulation bias the equilibrium points of every large government-sanctioned economy in existence today, so that these economies are only relatively free or unfree. Monopolistic practices, cartels, externalities (like pollution), and asymmetrically distributed information are often cited as potential problems that may exist in a free-market economy. Knowledge bias can lead to what many may see as evils of such an economy, like insider trading, price fixing, price gouging, adverse selection, moral hazard, and the principal-agent problem which they claim justify government intervention to remedy. Some believe that the notion of a free market is inherently unachievable because they hold that governments create property rights and are fundamentally involved in markets through the enforcement of such rights. Others argue that the concept of property comes from natural law and therefore it is incorrect to see governments as creating markets.

Definition

The Heritage Foundation, a neoliberal think tank, tried to identify the key factors which allow to measure the degree of freedom of economy of a particular country. In 1986 they introduced Index of Economic Freedom, which is based on some fifty variables. The variables are divided into the following major groups:

  • Trade policy,
  • Fiscal burden of government,
  • Government intervention in the economy,
  • Monetary policy,
  • Capital flows and foreign investment,
  • Banking and finance,
  • Wages and prices,
  • Property rights,
  • Regulation, and
  • Informal market activity.

Each group is assigned a numerical value between 1 and 5; IEF is the arithmetical mean of the values, rounded to the hundredth.

Initially, countries which were traditionally considered capitalistic received high ratings, but the method improved over time. Today one can see a vivid correlation between EOF value and country's GDP. [[1] (http://www.heritage.org/research/features/index/downloads/economicFreedomandPerCapita.gif)]

Advocacy

The advocacy of relatively free markets is a mainstay of ideologies such as minarchism, libertarianism, and 19th century liberalism, as well as the Western understanding of capitalism. It is anathema to communism and some variants of socialism, although modern liberalism and other variants of socialism seek only to mitigate what they see as the problems of an unrestrained free market. Most who say they favor a "free market" are speaking in a relative, rather than an absolute, sense --meaning they wish that coercion be kept to the minimum that is necessary to maximize economic freedom (such necessary coercion would be taxation, for example) and to maximize market efficiency by lowering trade barriers, making the tax system neutral in its influence on important decisions such as how to raise capital, e.g., eliminating the double tax on dividends so that equity financing is not at a disadvantage vis'a'vis debt financing. However, there are some such as anarcho-capitalists who would not even allow for taxation and governments, instead preferring protectors of economic freedom in the form of private contractors.

While some advocate free markets out of an intrinsic moral respect for freedom, others base their support on the belief that decentralized planning by a multitude of individuals making free economic decisions produces better results in regard to a more organized, efficient, and productive economy than does a centrally-planned economy where individual decisions are overridden by a central agency. This process accords with the theory of self-organization that says the internal organization of a system can increase automatically without being guided or managed by an outside source.

Modern trends that promote international free-market systems are often described as neoliberalism.

See also

Contrast

External link

id:Pasar bebas he:כלכלת שוק nl:Vrije markt pl:Wolny rynek pt:Economia de mercado th:ตลาดเสรี

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