Free Market

The free market represents an unregulated system of economic exchange. Unregulated in this context means that taxes, governmental quality controls, quotas, tariffs, and other forms of centralized economic interventions by government either do not exist or are at least minimal. From this definition, it is clear that the free market represents an ideal type that does not actually exist. In reality, modern societies can only approach or approximate this ideal of efficient resource allocation. In other words, real markets can be described along a spectrum ranging from low to high amounts of regulation. Many economists (such as [Page 946]Adam Smith, the father of economics) consider resource allocation in a free market to be efficient. According to Vilfredo Pareto, who elaborated on this concept of market efficiency, a free market is efficient if no one can be made better off without making anyone else worse off. Moreover, according to this theory, through the invisible-hand mechanism, society benefits by having self-interested actors make free (but also virtuous) economic decisions that benefit them. Some ethicists have argued that the efficiency of free markets depends on several moral parameters as scope conditions, such as fair play, prudence (or self-restraint), competition among equal parties, and cooperation.

Critics of the free market system tend to argue that certain market failures require government intervention. First, prices may not fully reflect the costs or benefits of certain goods or services. Because of these externalities, public goods are underinvested or exploited to the detriment of others or future generations, unless such exploitation is prohibited through government regulation. Second, a free market may tempt competitors to collude, which makes antitrust legislation necessary. Antitrust and similar regulations are especially necessary in cases where certain market actors (for example, companies) have acquired enormous market power. Third, transaction costs may mean that some exchanges are best performed in a hierarchy rather than spot markets. Most important, Paretooptimal resource allocation in a free market may violate principles of distributive justice and fairness, which again may necessitate some government action, according to the critics of the free market concept.

In reply to, or preempting, several of these critiques, Ronald Coase, Milton Friedman, Tibor Machan, Ludwig von Mises, Friedrich Hayek, and many others have argued for the robustness of markets because they can adjust to or internalize supposed market failures in many situations. For instance, many goods that have traditionally been conceptualized as public goods and, thus, have been presumed to require government provision have been shown to be open to free market contracting as well, ranging from lighthouses to beekeeping. Today, libertarians are strong defenders of the idea that a system of free markets provides the best economic system.