Free Market

Free market is a widely used expression that at its core describes a system of decentralized trade involving the voluntary exchange of property rights. Individually considered, a free market is simply one where the price results from the unhampered interaction of supply and demand in a competitive environment. In a more aggregate and broader sense, the free market is an economic system that relies on the price system (rather than government commands) for both the production and distribution of goods and services.

In its purest ideal form, a free market would rest entirely on private ownership of the means of production and all prices (including wages and interest rates) would be set exclusively by the interplay of supply and demand. Government would only use its power to enact and preserve the institutional framework necessary for the smooth operation of [Page 263]the market—namely clearly defined and enforced property rights, the rule of law, and protection from domestic and foreign aggression. In a complex economy, effective coordination through the price system is only possible with monetary economic calculation. The existence of a reliable monetary system is therefore an additional institutional requirement of the free market.

In a free market economy, the profit and loss opportunities provided by the price system act as signals guiding the allocation of resources to their most efficient uses and simultaneously ensure a tendency for specific markets to clear. The coordination of individual activities that takes place through the price system can be seen as an invisible hand process. In this sense, the free market is a dynamic process of permanent adjustment that allows mutual decentralized economic cooperation in complex societies. It also makes possible the articulation of the vast amounts of decentralized information and knowledge that are dispersed throughout the economy.

Some critical arguments' views of the free market concentrate on efficiency and point out a wide range of instances where market failure is apparent (such as externalities, the existence of monopoly, monopsony, or other issues of market power). Others focus on the need to use government power to address the inequality of market outcomes, care for those who come out worst off in a market economy, or protect other relevant national or social values. A third, more radical, criticism views the operation of the free market as inherently unjust because it commodifies labor and points out that no voluntary exchange can occur when workers are forced to sell their labor to survive. According to this view, gross asymmetries of power are deeply embedded in the operation of markets and permeate all trade.

In reality, command economies (the polar opposite of free markets) are increasingly rare, but all existing systems rely on significant forms of political regulation of markets. Market freedom is therefore a matter of degree with different mixes of government action and varying institutional frameworks determining the extent to which free markets operate.