Free Market Economy

Free Market Economy, economic situation which exists when, with the exception of certain activities that are generally regarded as the responsibility of the state (such as defence, or what passes for law and order in modern society), all economic activities and transactions are left up to the free choice of individuals. A free market economy is thus one which provides an environment in which individuals are free to pursue their own economic welfare in whatever way they think best, and free of government regulation and restriction. In such an environment, individuals will be free to make decisions concerning their employment, the use of their capital, and the way that they dispose of their resources—for example, as between savings and consumption, and as between alternative patterns of expenditure. But there are various areas of contention concerning the definition and the consequences of a free market economy.

First, there is obviously scope for differences of opinion as to what activities ought to be the responsibility of the state rather than left to the free choice of individuals. For example, most people would argue that since the right to life and liberty and protection from attack by one’s fellow citizens is a basic right it is not tradeable, and one’s protection by the forces of law and order should not depend on one’s ability to pay for it. In addition, up to a point some of the services of law and order constitute a “pure public good” in the sense that if a policeman patrols my street in order to deter potential burglars from entering my neighbour’s house, he will also deter the burglars from entering mine, at no extra cost. Nevertheless, many security services are provided by private enterprise, and private individuals often spend money to improve their own security. The armed guard standing outside a bank and paid by the bank to deter robbers might not help an old lady being mugged in front of him. Hence, no sharp dividing line can be drawn between those activities that are, or should be, provided by the state and those that are, or should be, left to the free market. Similarly, in many countries, it is accepted that basic human rights—for example, to life, and hence to minimum health care—require the state to supplement private health services. Similar considerations apply to education and to the provision of various other activities. In many countries that would be regarded as basically free market economies, the state is largely responsible for other activities, such as rail transport, the postal services, public utilities, and so on. Even in countries where these activities are in the private sector, it is usually accepted that government regulation is desirable to prevent such “natural monopolies“ from making excessive profits.

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Secondly, even the economic activities that are carried out by the private sector are usually constrained by government regulations of one kind or another. Many of these correspond to fundamental political and philosophical views on the need to restrict freedom of individuals to do what they would like when to do so might restrain the freedom of other individuals. This view is sometimes expressed in the proposition that my freedom to swing my fist stops at the end of your nose. Thus, for example, economic freedom is usually constrained by various laws preventing the infringement of other peoples’ property rights, or enforcing laws of contract, and so on. In other words, it is usually accepted that the environment in which the free market economy operates is one that is regulated by such laws.

Government regulation, however, usually goes far beyond this, as there may be some tradeoff between freedom and some other basic human rights. For example, regulations restrict the freedom of firms to employ child labour or slave labour (in defence of certain basic human rights), or to emit poisonous substances into the atmosphere or rivers, or to sell dangerous products (in violation of the assumption that the consumer always knows what is best for himself or herself). Thus, differing views as to the extent to which the state should itself carry out certain activities (defence, law and order, health and education services, public utilities, and so on), and the extent to which the state should regulate those activities carried out by the private sector, mean that there is no unique objective definition of what exactly is, or should be, a “free market economy”. But there is also scope for much disagreement as to the beneficial effects of a free market economy.

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In traditional Western political philosophy, it is usually believed that the good society is one in which individuals accept responsibility for their decisions, and that this means that they should have the greatest possible freedom to make their economic choices. Furthermore, it is believed by many that economic freedom is essential in order to preserve political freedom. There is also a long tradition to the effect that free markets are also more “efficient” in economic terms. Free markets provide incentives to people to allocate their resources (including their labour and capital) amongst the most productive uses, and an incentive to producers to produce goods and services that respond to what the public wants and to use the techniques of production that are most efficient. The experience of the past few decades, notably the collapse of the Soviet bloc and the parlous state of its former members, has amply demonstrated the harmful economic effects of excessive state intervention.

At the same time, many people would object that the particular income distribution that will emerge from the operation of a free market may not conform either to certain notions of “justice”, or even satisfy basic humanitarian concerns to alleviate acute poverty and destitution. It is also possible that it may permit the accumulation of vast wealth and powerful vested interests that may threaten the survival of political freedom. Hence, the existence of a free market economy does not necessarily mean that the pursuit of other basic social values or the preservation of political freedom can be neglected.


Contributed By:
Wilfred Beckerman