We explain what a free market is, its origin and main characteristics. In addition, we explore liberal and Marxist theories, and more.
What is a free market?
A free market, or liberal market, is a physical or virtual space in which buyers and sellers exchange products and services for money. The free market is considered liberal because sellers can choose what to sell and at what price, and consumers can choose what to buy from among various competitors or sellers.
The opposite of a free market economy is a coordinated economy, regulated and controlled by the state, which also owns the means of production, decides what is produced and fixes the prices that may be charged. Today, the free market is typical of capitalist economies, while to a lesser extent, there is some government control that impacts prices, raw materials, imports and exports.
- The free market is an economic system in which prices are regulated by the forces of supply and demand.
- It is a type of market in which there are multiple sellers for a product or service, and free competition among producers allows buyers to choose the price and quality they want.
- It is the opposite of a monopoly, an economic system in which there is a single seller or producer for a specific good or service.
- See also: Capital market
Origin of the term "free market"
The term "free market" comes from the old economic theories such as the one expounded by Scottish economist and philosopher Adam Smith (1723-1790), considered the greatest exponent of capitalism, who promoted economic freedom without state intervention.
Smith's theory held that:
- The market can be self-regulated. Smith used the phrase "the invisible hand of the market" as a metaphor to refer to the fact that free competition and the free market can be regulated by the law of supply and demand to maintain price equilibrium, both to generate profits for producers and to ensure that consumers could pay without there being a decrease in demand.
- Individual benefit in society. The fact that individuals pursue their own economic interest contributes to generating an indirect but positive impact on society as a whole. Social welfare is considered the total sum of individual economic welfare.
Criticism of Adam Smith's theory
In practice, the free market economy has failed to guarantee the moral and equitable order of resources in society. Even with partial state intervention, through market regulations and controls, it has failed to maintain price equilibrium and attain social justice. The main cause is political corruption, among other institutional-related issues.
At the end of the 19th century Marxism emerged, a new ideology contrary to the liberal ideas put forward by Adam Smith, which aimed to put an end to the struggle between classes for the control of the means of production.
German economist and politician Karl Marx (1818-1883) in The Communist Manifesto advanced his theory on social conflict as a consequence of the economy and class relationships.
Marx argued that the means of production should be state-owned to avoid class struggle conflicts over private property; that is, he promoted total state intervention in the means of production and the market. However, total intervention can lead to an authoritarian and absolutist system with power abuse, as occurs in countries ruled by dictatorships.
Characteristics of a free market
Among the main characteristics of a free market are:
- Trade between individuals takes place spontaneously and freely, with few state constraints and controls.
- The degree of state intervention can vary among the different capitalist economies in the world, though the theory proposes that government control over the market should be minimal.
- The role of the state is to guarantee the rights of workers and employers and should not intervene in laws regarding the market, with the exception of human rights violations.
- Perfect competition is an ideal situation in which suppliers and demanders coexist in equilibrium to set products' market price. In a free market, there are many competitors and consumers, and therefore a single seller cannot influence product pricing. In contrast, in a monopoly or an oligopoly, a single or few suppliers fix prices, however excessive these may be, as there are no competitors who offer the same product.
- The means of production are privately owned and may voluntarily produce on the basis of individual interests to satisfy consumer demand.
- The price of goods and services is set by the law of supply and demand, which allows for an equilibrium between the quantity demanded and the quantity produced or offered.
- The law of supply and demand is governed by the free interaction between suppliers and demanders, which means that suppliers can choose what to sell and at what price, while demanders can choose among several options or competitors of the same product.
- The large number of competitors or suppliers for the same product contributes to price diversity, thus benefiting buyers.
- Vulnerable populations without access to capital are often marginalized from the groups of consumers and entrepreneurs.
- Situations of unfair competition or monopoly often occur and, in most cases, state intervention is necessary to penalize these offenses.
- The negative impact on the environment as a result of the production and consumption system has rarely been mentioned in classic market theories, and even today it is only partially addressed.
Problems of free market application
The liberal market theory has positive grounds; however, when put into practice, it cannot be fully implemented due to multiple factors. Among the main ones are:
- Unfair competition. There may be illegal or unfair practices by sellers intended to deceive consumers for profit. For example: a counterfeit product that is identical to the original branded product, and is sold at the same price with the intention of deceiving the buyer into buying a product they think is original.
- Political corruption. Any situation involving state officials that violates moral principles or democratic laws in exchange for economic benefits or personal advantages is considered an act of corruption and a crime. There are cases where the owners of means of production are part of influential and powerful groups holding public office positions or having ties with state officials to exert influence over state regulations in order to favor certain businesses over others.
- Environmental pollution. The economic system promotes massive consumption that generates multiple harmful impacts on the planet, such as the overexploitation of non-renewable natural resources, animal abuse in the livestock industry, indiscriminate deforestation and soil deterioration due to monoculture agriculture, large amount of waste generated during production processes and the excessive amount of garbage produced, among many other direct and indirect impacts that affect biodiversity and the environment.
- Exploitation of labor. Economic liberalism has quite often led to situations of overexploitation of labor and violation of human rights, which has allowed the owners of means of production to obtain more profit. This context has exacerbated socialist ideologies and the need for an entity acting as an intermediary to protect people's rights.
- Inequality between social classes. In practice, the free market has deepened social class inequality by maintaining the rich and making them richer, while the most vulnerable sectors have been excluded from the production system and have become poorer. In turn, it is the middle class, the lower-middle working class and the labor class who sustain the economic and tax system that enriches states and the most powerful classes, rather than enriching the general population that the state represents.
- Economic crises. Economies in developing countries are more unstable and often have inflation, which means a constant rise in prices and the loss of value and backing of the local currency. This situation results in lower job-creation and productivity projects, leading to an impoverishment of the population and the country as a whole.
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