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What Is a Free Market Economy?

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Last editedJul 20213 min read

Many capitalist economies, including the US, are often referred to as free market economies. Business and consumer demand are considered to be the main drivers of these countries’ economic systems. Recently, however, questions have been asked as to whether their systems hold true to the exact definition and characteristics of a free market economy. This guide will examine the free market advantages and disadvantages, their qualities and how they impact on the businesses within them, starting with a free market economy definition.

Free market economy definition

In both planned and command economies, governments have a high level of control over how wealth is produced and distributed. They create legislation around the prices of goods and services, set out employee wages and oversee how much each corporation or business can own and produce.

By contrast, in free market economies, the way businesses operate and the methods used to produce goods and run services is driven by consumer demand rather than a central government. Commodities are sold at the highest possible price and individual corporations and businesses set their employee’s wages and levels of supply. The free market economy definition is also known as the truest form of capitalism, as profit is what drives all production, supply, and demand which forces businesses to be as efficient as possible. 

What are the characteristics of a free market economy?

Considered to be the economic system closest to ‘true’ capitalism, a free market economy is driven by private ownership and consumer supply and demand. There are many other characteristics that distinguish free market economies from other types of systems, including:

  • No government intervention in the economic system, including no legislative control over employment, production or pricing. Instead, businesses and organizational groups such as Chambers of Commerce are given full legislative control.

  • Supply and demand drives production, the use of resources and sets prices.

  • All goods and services are produced in the private sector.

  • All properties are privately owned by individuals or businesses.

  • Any goods or services are exchanged voluntarily by buyers and sellers, with sellers setting any price they consider to be appropriate.

  • Complete freedom for financial institutions and individuals.

This complete economic freedom is the key feature of this system. It's also one of the main reasons why there are few true free market economy examples globally. 

What are the advantages of a free market economy?

So, who benefits from the free market economy and what are the benefits for individuals, businesses and governments? Here are some of the main advantages of free market economy:

  • Consumers drive the products and services that succeed in free market economies and help to set their price.

  • In order to compete effectively on the market, businesses need to operate efficiently and keep their goods or services innovative. On the free market economy, they also have more freedom to do this, with little government restriction or legislation.

  • Entrepreneurship and new technologies are rewarded as they help the economy to meet the needs of consumers more effectively.

  • Profits drive profits. If a business is successful, other companies will invest in it, driving greater success and growth. 

What are the disadvantages of a free market economy?

Although free market economies hold many benefits for businesses, there are some disadvantages for smaller organizations and individuals too:

  • This economic system depends on competition within the private sector in order to function. This means there is very little support for businesses that aren’t performing efficiently or individuals that are vulnerable, such as the elderly, children, or those with disabilities.

  • Individuals who are left to care for those who are most vulnerable can’t make full economic or innovative contributions. For example, a young person who has to care for their disabled sibling has to get a low-paying flexible job to support them and can’t invent the next big technology product.

  • Success supports success. Rather than providing for those that are vulnerable, individuals and companies that are successful in the free market economy are focused on driving their own profits. There are many ethical questions as to who benefits from the free market economy and it has to be a conscious decision to care for society’s most vulnerable in a free market economy.

Free market economy examples

Of the free market economy examples across the world, the US is often considered to be the largest. Dependent on the laws of capitalism and the drive of supply and demand, American democracy and society also champions entrepreneurial spirit and success. Pricing and the distribution of wealth are driven by consumer demand, with financial institutions holding considerable control within US society.

However, this isn’t the full story of the US economic system. Although banks, corporations, individual consumers, and businesses hold considerable control within the US economy and society, the US Constitution enables the government to use centralized control to enhance the country’s growth, including in defense and transportation. More recently, there has been more government control over financial institutions and fiscal support for individuals to help the US system through economic crises.

This intervention means that the US is now considered to be a mixed economy, alongside many of the primarily capitalist countries across the world, including those in Europe. So, when it comes to the question ‘what is a free market economy’, it’s clear that there are no other true examples within the global system. However there are some command economies that sit under communist control and are the polar opposite of the free market.

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