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In
economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plant life and a bran ...

economics
, a free market is a
system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by its environment, is described by its boundaries, structure and purp ...
in which the
price A price is the (usually not negative) quantity Quantity is a property that can exist as a multitude or magnitude, which illustrate discontinuity and continuity. Quantities can be compared in terms of "more", "less", or "equal", or by ...

price
s for
goods and services Goods are items that are usually (but not always) tangible, such as pens, salt, apples, and hats. Services are activities provided by other people, who include doctors, lawn care workers, dentists, barbers, waiters, or online servers, a book, a ...
are self-regulated by buyers and sellers negotiating in an
open market The term open market is used generally to refer to an economic situation close to free trade Free trade is a trade policy A commercial policy (also referred to as a trade policy or international trade policy) is a government's policy governin ...

open market
. In a free market, the laws and forces of
supply and demand In microeconomics Microeconomics is a branch of that studies the behavior of individuals and in making decisions regarding the allocation of and the interactions among these individuals and firms. Microeconomics focuses on the study ...

supply and demand
are free from any intervention by a
government A government is the system or group of people governing an organized community, generally a state State may refer to: Arts, entertainment, and media Literature * ''State Magazine'', a monthly magazine published by the U.S. Departmen ...

government
or other authority, and from all forms of economic privilege, monopolies and artificial scarcities. Proponents of the concept of free market contrast it with a
regulated market A regulated market (RM) or controlled market is an idealized system where the government or other organizations oversee the market, control the forces of supply and demand, and to some extent regulate the market actions. This can include tasks suc ...
in which a government intervenes in supply and demand through various methods such as
tariff A tariff is a imposed by a of a country or of a on or of goods. Besides being a source of for the government, import duties can also be a form of regulation of and policy that taxes foreign products to encourage or safeguard domestic indu ...
s used to restrict trade and to protect the local economy. In an idealized
free-market economy A market economy is an economic system in which the decisions regarding investment, Production (economics), production and Distribution (economics), distribution are guided by the price signals created by the forces of supply and demand. The maj ...
, also called a liberal market economy, prices for goods and services are set freely by the forces of supply and demand and are allowed to reach their point of
equilibrium List of types of equilibrium, the condition of a system in which all competing influences are balanced, in a wide variety of contexts. Equilibrium may also refer to: Film and television * Equilibrium (film), ''Equilibrium'' (film), a 2002 scien ...
without intervention by government policy. Scholars contrast the concept of a free market with the concept of a coordinated market in fields of study such as
political economy Political economy is the study of production Production may be: Economics and business * Production (economics) * Production, the act of manufacturing goods * Production, in the outline of industrial organization, the act of making products (g ...
,
new institutional economics New institutional economics (NIE) is an economic perspective that attempts to extend economics by focusing on the institutions (that is to say the sociology, social and legal Norm (sociology), norms and rules) that underlie economic activity and ...
,
economic sociology Economic sociology is the study of the social cause and effect of various economic phenomena. The field can be broadly divided into a classical period and a contemporary one, known as "New economic sociology". The classical period was concerned ...
and
political science Political science is the scientific study of politics Politics (from , ) is the set of activities that are associated with making decisions in groups, or other forms of power relations between individuals, such as the distribution of ...
. All of these fields emphasize the importance in currently existing market systems of rule-making institutions external to the simple forces of supply and demand which create space for those forces to operate to control productive output and distribution. Although free markets are commonly associated with
capitalism Capitalism is an economic system An economic system, or economic order, is a system A system is a group of interacting Interaction is a kind of action that occurs as two or more objects have an effect upon one another. The idea o ...

capitalism
in contemporary usage and
popular culture Popular culture (also called mass culture or pop culture) is generally recognized by members of a society as a set of the cultural practice, practices, beliefs, and cultural objects, objects that are dominant or prevalent in a society at a give ...
, free markets have also been components in some forms of
socialism Socialism is a political Politics (from , ) is the set of activities that are associated with Decision-making, making decisions in Social group, groups, or other forms of Power (social and political), power relations between individuals, ...
. Criticism of the theoretical concept may regard systems with significant
market power In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods a ...
,
inequality of bargaining power Inequality of bargaining power in law Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by its e ...
, or
information asymmetry In contract theory In economics, contract theory studies how economic actors can and do construct contractual arrangements, generally in the presence of information asymmetry. Because of its connections with both agency (law), agency and incentive ...
as less than free, with regulation being necessary to control those imbalances in order to allow markets to function more efficiently as well as produce more desirable social outcomes.


Economic systems


Capitalism

Capitalism is an
economic system An economic system, or economic order, is a system A system is a group of interacting Interaction is a kind of action that occurs as two or more objects have an effect upon one another. The idea of a two-way effect is essential in the co ...
based on the
private ownership Private property is a legal designation for the ownership of property by non-governmental Legal personality, legal entities. Private property is distinguishable from public property, which is owned by a state entity, and from Collective ownershi ...
of the
means of production The means of production is a concept that encompasses the social use and ownership Ownership is the state or fact of exclusive right In Anglo-Saxon law Anglo-Saxon law (Old English Old English (, ), or Anglo-Saxon, is the earliest record ...
and their operation for
profit Profit may refer to: Business and law * Profit (accounting) Profit, in accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic en ...
. Central characteristics of capitalism include
capital accumulation Capital accumulation (also termed the accumulation of capital) is the dynamic that motivates the , involving the of money or any with the of increasing the initial monetary of said asset as a whether in the form of , , , or . The aim of cap ...
,
competitive market In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...

competitive market
s, a
price system In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods an ...
, private property and the recognition of
property rights The right to property, or the right to own property (cf. ownership Ownership is the state or fact of exclusive rights and control over property, which may be any asset, including an object, land or real estate, intellectual property, or until th ...
,
voluntary exchangeVoluntary exchange is the act of buyer Procurement is the process of finding and agreeing to terms, and acquiring goods, services, or works from an external source, often via a tendering or competitive bidding process. Procurement generally inv ...
and
wage labor A wage is the distribution from an employer Employment is a relationship between two parties, usually based on contract A contract is a legally binding document between at least two parties that defines and governs the rights and duties ...
. In a
capitalist market economy A market economy is an economic system An economic system, or economic order, is a system of Production (economics), production, allocation of resources, resource allocation and Distribution (economics), distribution of goods and services wit ...
, decision-making and investments are determined by every owner of wealth, property or production ability in
capital Capital most commonly refers to: * Capital letter Letter case (or just case) is the distinction between the letters that are in larger uppercase or capitals (or more formally ''majuscule'') and smaller lowercase (or more formally ''minusc ...
and
financial market A financial market is a market Market may refer to: *Market (economics) *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an island shared by Finland and Sweden Art, entertainment, and media Films *Ma ...
s whereas prices and the distribution of goods and services are mainly determined by competition in goods and services markets.
Economist An economist is a professional and practitioner in the social science Social science is the branch The branches and leaves of a tree. A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , pl ...

Economist
s,
historian A historian is a person who studies and writes about the past and is regarded as an authority on it. Historians are concerned with the continuous, methodical narrative and research of past events as relating to the human race; as well as the stu ...
s,
political economist Political economy is the study of Production (economics), production and trade and their relations with law, Custom (law), custom and government; and with the Distribution (economics), distribution of national income and Economic wealth, wealth. ...
s and sociologists have adopted different perspectives in their analyses of capitalism and have recognized various forms of it in practice. These include ''
laissez-faire ''Laissez-faire'' ( ; from french: laissez faire , ) is an economic system An economic system, or economic order, is a system of Production (economics), production, allocation of resources, resource allocation and Distribution (economics), d ...
'' or
free-market capitalism A market economy is an economic system in which the decisions regarding investment, Production (economics), production and Distribution (economics), distribution are guided by the price signals created by the forces of supply and demand. The maj ...
,
state capitalism State capitalism is an in which the undertakes and (i.e. ) economic activity and where the are as (including the processes of , and ). The definition can also include the state dominance of government agencies (agencies organized along ...
and
welfare capitalism#REDIRECT Welfare capitalism Welfare capitalism is capitalism Capitalism is an economic system based on the private ownership of the means of production and their operation for Profit (economics), profit. Central characteristics of capitalism ...
. Different
forms of capitalism Form is the shape, visual appearance, or :wikt:configuration, configuration of an object. In a wider sense, the form is the way something happens. Form also refers to: *Form (document), a document (printed or electronic) with spaces in which to w ...
feature varying degrees of free markets,
public ownership State ownership, also called government ownership and public ownership, is the ownership of an industry Industry may refer to: Economics * Industry (economics) In macroeconomics, an industry is a branch of an economy that produces a clos ...
, obstacles to free competition and state-sanctioned
social policies Social policy is policy A policy is a deliberate system of principles to guide decisions and achieve rational outcomes. A policy is a statement of intent, and is implemented as a procedure or protocol. Policies are generally adopted by a gov ...
. The degree of
competition Competition is a rivalry A rivalry is the state of two people or groups engaging in a lasting competitive relationship. Rivalry is the "against each other" spirit between two competing sides. The relationship itself may also be called "a riv ...
in
markets Market may refer to: *Market (economics) *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an island shared by Finland and Sweden Art, entertainment, and media Films *Market (1965 film), ''Market'' (1965 ...
and the role of intervention and
regulation Regulation is the management of complex systems A complex system is a system composed of many components which may interaction, interact with each other. Examples of complex systems are Earth's global climate, organisms, the human brain, infras ...
as well as the scope of state ownership vary across different models of capitalism.''Macmillan Dictionary of Modern Economics'', 3rd Ed., 1986, p. 54. The extent to which different markets are free and the rules defining private property are matters of politics and policy. Most of the existing capitalist economies are mixed economies that combine elements of free markets with state intervention and in some cases
economic planning Economic planning is a resource allocation In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Co ...
.Stilwell, Frank. "Political Economy: the Contest of Economic Ideas". First Edition. Oxford University Press. Melbourne, Australia. 2002.
Market economies A market economy is an economic system An economic system, or economic order, is a system of Production (economics), production, allocation of resources, resource allocation and Distribution (economics), distribution of goods and services wit ...
have existed under many
forms of government A government is the system or group of people governing an organized community, generally a state. In the case of its broad associative definition, government normally consists of legislature, executive, and judiciary. Government is ...

forms of government
and in many different times, places and cultures. Modern capitalist societies—marked by a universalization of
money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The main functions of money are distinguished as: a ...

money
-based
social relations In social science Social science is the Branches of science, branch of science devoted to the study of society, societies and the Social relation, relationships among individuals within those societies. The term was formerly used to refer t ...
, a consistently large and system-wide class of workers who must work for wages (the
proletariat The proletariat (; ) is the social class of wage labor, wage-earners, those members of a society whose only possession of significant economic value is their labour power (their capacity to work). A member of such a class is a proletarian. Marx ...

proletariat
) and a
capitalist class Bourgeoisie (; ) is a Polysemy, polysemous French term that can mean: * a sociologically defined social class, especially in contemporary times, referring to people with a certain Cultural capital, cultural and financial capital belonging to ...
which owns the means of production—developed in Western Europe in a process that led to the
Industrial Revolution The Industrial Revolution was the transition to new manufacturing processes in Great Britain, continental Europe Continental Europe or mainland Europe is the contiguous continent A continent is any of several large landmasse ...
. Capitalist systems with varying degrees of direct government intervention have since become dominant in the
Western world The Western world, also known as the West, refers to various regions, nations and state (polity), states, depending on the context, most often consisting of the majority of Europe, Northern America, and Australasia.
and continue to spread. Capitalism has been shown to be strongly correlated with
economic growth Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economics, economy over time. Statisticians conventionally measure such growth as the percent rate of i ...

economic growth
.


Georgism

For classical economists such as
Adam Smith Adam Smith ( 1723 – 17 July 1790) was a Scottish economist, philosopher as well as a moral philosopher Ethics or moral philosophy is a branch of philosophy that "involves systematizing, defending, and recommending concepts of right and ...

Adam Smith
, the term free market does not necessarily refer to a market free from government interference, but rather free from all forms of economic privilege, monopolies and artificial scarcities. This implies that economic rents, i.e. profits generated from a lack of
perfect competition In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
, must be reduced or eliminated as much as possible through free competition. Economic theory suggests the returns to
land Land is the solid surface of Earth that is not permanently submerged in water. Most but not all land is situated at elevations above sea level (variable over geologic time frames) and consists mainly of Earth's crust, crustal components such a ...

land
and other
natural resource Natural resources are resource Resource refers to all the materials available in our environment which help us to satisfy our needs and wants. Resources can broadly be classified upon their availability — they are classified into renewabl ...
s are economic rents that cannot be reduced in such a way because of their perfect inelastic supply. Some economic thinkers emphasize the need to share those rents as an essential requirement for a well functioning market. It is suggested this would both eliminate the need for regular taxes that have a negative effect on trade (see
deadweight loss Image:Deadweight-loss-price-ceiling.svg, 250px, Deadweight loss created by a binding price ceiling. The producer surplus always decreases, but the consumer surplus may or may not increase; however, the decrease in producer surplus must be greater th ...
) as well as release land and resources that are speculated upon or monopolised. Two features that improve the competition and free market mechanisms.
Winston Churchill Sir Winston Leonard Spencer Churchill, (30 November 187424 January 1965) was a British statesman who served as Prime Minister of the United Kingdom from 1940 to 1945, Winston Churchill in the Second World War, during the Second World War, ...

Winston Churchill
supported this view by the following statement: "Land is the mother of all monopoly". The American economist and social philosopher
Henry George Henry George (September 2, 1839 – October 29, 1897) was an American political economist and journalist. His writing was immensely popular in 19th-century America and sparked several reform movements of the Progressive Era. He inspired the econ ...

Henry George
, the most famous proponent of this thesis, wanted to accomplish this through a high
land value tax A land value tax (LVT) is a levy on the value of land Land is the solid surface of Earth that is not permanently submerged in water. Most but not all land is situated at elevations above sea level (variable over geologic time frames) and co ...
that replaces all other taxes. Followers of his ideas are often called
Georgists Georgism, also called in modern times geoism and known historically as the single tax movement, is an economic ideology holding that, although people should own the value they produce themselves, the economic rent derived from Land (economics), l ...
or geoists and geolibertarians.
Léon Walras Marie-Esprit-Léon Walras (; 16 December 1834 – 5 January 1910) was a French mathematical economics, mathematical economist and Georgist. He formulated the Marginalism, marginal theory of value (independently of William Stanley Jevons and Carl Men ...
, one of the founders of the
neoclassical economics Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are driven by the supply and demand In microeconomics, supply and demand is an economic model In econo ...
who helped formulate the
general equilibrium theory In economics, general equilibrium theory attempts to explain the behavior of supply, demand, and prices in a whole economy with several or many interacting markets, by seeking to prove that the interaction of demand and supply will result in an ove ...
, had a very similar view. He argued that free competition could only be realized under conditions of state ownership of natural resources and land. Additionally, income taxes could be eliminated because the state would receive income to finance public services through owning such resources and enterprises.


''Laissez-faire''

The ''laissez-faire'' principle expresses a preference for an absence of non-market pressures on prices and wages such as those from discriminatory government
tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act accord ...
es,
subsidies A subsidy or government incentive is a form of financial aid or support extended to an economic sector (business, or individual) generally with the aim of promoting economic and social policy. Although commonly extended from the government, the term ...

subsidies
,
tariff A tariff is a imposed by a of a country or of a on or of goods. Besides being a source of for the government, import duties can also be a form of regulation of and policy that taxes foreign products to encourage or safeguard domestic indu ...
s,
regulation Regulation is the management of complex systems A complex system is a system composed of many components which may interaction, interact with each other. Examples of complex systems are Earth's global climate, organisms, the human brain, infras ...

regulation
s of purely private behavior, or government-granted or coercive monopolies. In ''The Pure Theory of Capital'',
Friedrich Hayek Friedrich August von Hayek ( , ; 8 May 189923 March 1992), often referred to by his initials F. A. Hayek, was an Austrian-British economist, and philosopher who is best known for his defence of classical liberalism. Hayek shared the 1974 Nob ...
argued that the goal is the preservation of the unique information contained in the price itself.Hayek, Friedrich (1941). ''The Pure Theory of Capital''. The definition of free market has been disputed and made complex by collectivist political philosophers and socialist economic ideas. This contention arose from the divergence from classical economists such as
Richard Cantillon Richard Cantillon (; 1680s – ) was an Irish-French economist and author of ''Essai Sur La Nature Du Commerce En Général'' (''Essay on the Nature of Trade in General''), a book considered by William Stanley Jevons to be the "cradle of pol ...
,
Adam Smith Adam Smith ( 1723 – 17 July 1790) was a Scottish economist, philosopher as well as a moral philosopher Ethics or moral philosophy is a branch of philosophy that "involves systematizing, defending, and recommending concepts of right and ...

Adam Smith
,
David Ricardo David Ricardo (18 April 1772 – 11 September 1823) was a British political economist, one of the most influential of the classical economists along with Thomas Malthus Thomas Robert Malthus (; 13/14 February 1766 – 23 December 1834) w ...

David Ricardo
and
Thomas Robert Malthus Thomas Robert Malthus (; 13/14 February 1766 – 23 December 1834) was an English cleric, scholar and influential economist in the fields of political economy and demography. In his 1798 book ''An Essay on the Principle of Population The ...

Thomas Robert Malthus
and from the continental
economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plant life and a bran ...

economics
developed primarily by the Spanish scholastic and French classical economists, including
Anne-Robert-Jacques Turgot, Baron de Laune Anne Robert Jacques Turgot, Baron de l'Aulne ( ; ; 10 May 172718 March 1781), commonly known as Turgot, was a French economist and statesman. Originally considered a Physiocracy, physiocrat, he is today best remembered as an early advocate for e ...
,
Jean-Baptiste Say Jean-Baptiste Say (; 5 January 1767 – 15 November 1832) was a liberal French economist and businessman who argued in favor of competition Competition arises whenever two or more parties strive for a common goal A goal is an idea of t ...

Jean-Baptiste Say
and
Frédéric Bastiat Claude-Frédéric Bastiat (; ; 30 June 1801 – 24 December 1850) was a French economist, writer and a prominent member of the French Liberal School. A Freemason Freemasonry or Masonry consists of fraternal organisations that trace th ...
. During the marginal revolution, subjective value theory was rediscovered. Although ''laissez-faire'' has been commonly associated with
capitalism Capitalism is an economic system An economic system, or economic order, is a system A system is a group of interacting Interaction is a kind of action that occurs as two or more objects have an effect upon one another. The idea o ...

capitalism
, there is a similar economic theory associated with
socialism Socialism is a political Politics (from , ) is the set of activities that are associated with Decision-making, making decisions in Social group, groups, or other forms of Power (social and political), power relations between individuals, ...
called left-wing or socialist ''laissez-faire'', also known as
free-market anarchism Free-market anarchism, or market anarchism, also known as free-market anti-capitalism and free-market socialism, is the branch of anarchism that advocates a free-market economic system based on voluntary interactions without the involvement o ...
, free-market anti-capitalism and
free-market socialism Market socialism is a type of economic system involving the public In public relations and communication science, publics are groups of individual people, and the public (a.k.a. the general public) is the totality of such groupings. This ...
to distinguish it from ''laissez-faire'' capitalism. Critics of ''laissez-faire'' as commonly understood argue that a truly ''laissez-faire'' system would be
anti-capitalist Anti-capitalism is a political ideology An ideology () is a set of belief A belief is an Attitude (psychology), attitude that something is the case, or that some proposition about the world is truth, true. In epistemology, philosophers use t ...
and
socialist Socialism is a political Politics (from , ) is the set of activities that are associated with making decisions In psychology, decision-making (also spelled decision making and decisionmaking) is regarded as the Cognition, cognitive pr ...
. American
individualist anarchists Individualist anarchism is the branch of anarchism that emphasizes the individual and their Will (philosophy), will over external determinants such as groups, society, traditions and ideological systems."What do I mean by individualism? I mean b ...
such as
Benjamin Tucker Benjamin Ricketson Tucker (; April 17, 1854 – June 22, 1939) was an American anarchist Anarchism is a political philosophy and Political movement, movement that is sceptical of authority and rejects all involuntary, coercive forms of hie ...

Benjamin Tucker
saw themselves as economic free-market socialists and political individualists while arguing that their "anarchistic socialism" or "individual anarchism" was "consistent Manchesterism".


Socialism

Various forms of
socialism Socialism is a political Politics (from , ) is the set of activities that are associated with Decision-making, making decisions in Social group, groups, or other forms of Power (social and political), power relations between individuals, ...
based on free markets have existed since the 19th century. Early notable socialist proponents of free markets include Pierre-Joseph Proudhon,
Benjamin Tucker Benjamin Ricketson Tucker (; April 17, 1854 – June 22, 1939) was an American anarchist Anarchism is a political philosophy and Political movement, movement that is sceptical of authority and rejects all involuntary, coercive forms of hie ...

Benjamin Tucker
and the Ricardian socialists. These economists believed that genuinely free markets and
voluntary exchangeVoluntary exchange is the act of buyer Procurement is the process of finding and agreeing to terms, and acquiring goods, services, or works from an external source, often via a tendering or competitive bidding process. Procurement generally inv ...
could not exist within the Exploitation (Marxism), exploitative conditions of Capitalist mode of production (Marxist theory), capitalism. These proposals ranged from various forms of worker cooperatives operating in a free-market economy such as the Mutualism (economic theory), mutualist system proposed by Proudhon, to state-owned enterprises operating in unregulated and open markets. These models of socialism are not to be confused with other forms of market socialism (e.g. the Lange model) where publicly owned enterprises are coordinated by various degrees of
economic planning Economic planning is a resource allocation In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Co ...
, or where capital good prices are determined through marginal cost pricing. Advocates of free-market socialism such as Jaroslav Vanek argue that genuinely free markets are not possible under conditions of private ownership of productive property. Instead, he contends that the class differences and inequalities in income and power that result from private ownership enable the interests of the dominant class to skew the market to their favor, either in the form of monopoly and market power, or by utilizing their wealth and resources to legislate government policies that benefit their specific business interests. Additionally, Vanek states that workers in a socialist economy based on cooperative and self-managed enterprises have stronger incentives to maximize productivity because they would receive a share of the profits (based on the overall performance of their enterprise) in addition to receiving their fixed wage or salary. The stronger incentives to maximize productivity that he conceives as possible in a socialist economy based on cooperative and self-managed enterprises might be accomplished in a free-market economy if employee-owned companies were the norm as envisioned by various thinkers including Louis O. Kelso and James S. Albus. Socialists also assert that
free-market capitalism A market economy is an economic system in which the decisions regarding investment, Production (economics), production and Distribution (economics), distribution are guided by the price signals created by the forces of supply and demand. The maj ...
leads to an excessively skewed distributions of income and economic instabilities which in turn leads to social instability. Corrective measures in the form of social welfare, re-distributive taxation and regulatory measures and their associated administrative costs which are required create agency costs for society. These costs would not be required in a self-managed socialist economy.''The Political Economy of Socialism'', by Horvat, Branko (1982), pp. 197–98.


Concepts


Economic equilibrium

With varying degrees of mathematical rigor over time, the
general equilibrium theory In economics, general equilibrium theory attempts to explain the behavior of supply, demand, and prices in a whole economy with several or many interacting markets, by seeking to prove that the interaction of demand and supply will result in an ove ...
has demonstrated that under certain conditions of Perfect Competition, competition the law of
supply and demand In microeconomics Microeconomics is a branch of that studies the behavior of individuals and in making decisions regarding the allocation of and the interactions among these individuals and firms. Microeconomics focuses on the study ...

supply and demand
predominates in this ideal free and competitive market, influencing prices toward an
equilibrium List of types of equilibrium, the condition of a system in which all competing influences are balanced, in a wide variety of contexts. Equilibrium may also refer to: Film and television * Equilibrium (film), ''Equilibrium'' (film), a 2002 scien ...
that balances the demands for the products against the supplies. At these equilibrium prices, the market distributes the products to the purchasers according to each purchaser's preference or utility for each product and within the relative limits of each buyer's purchasing power. This result is described as market efficiency, or more specifically a Pareto optimum. This equilibrating behavior of free markets requires certain assumptions about their agents—collectively known as
perfect competition In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
—which therefore cannot be results of the market that they create. Among these assumptions are several which are impossible to fully achieve in a real market, such as complete information, interchangeable goods and services and lack of market power. The question then is what approximations of these conditions guarantee approximations of market efficiency and which failures in competition generate overall market failures. Several Nobel Memorial Prize in Economic Sciences, Nobel Prizes in Economics have been awarded for analyses of market failures due to asymmetric information.


Low barriers to entry

A free market does not require the existence of competition, however, it does require a framework that allows new market entrants. Hence, in the lack of coercive barriers, for example, paid licensing certification for certain services and businesses, competition between businesses flourishes all through the demands of consumers, or buyers. It often suggests the presence of the profit motive, although neither a profit motive or profit itself are necessary for a free market. All modern free markets are understood to include entrepreneurs, both individuals and businesses. Typically, a modern free-market economy would include other features such as a stock exchange and a financial services sector, but they do not define it.


Perfect competition and market failure

Conditions that must exist for unregulated markets to behave as free markets are summarized at
perfect competition In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
. An absence of any of these perfect competition ideal conditions is a market failure. Most schools of economics allow that regulatory intervention may provide a substitute force to counter a market failure. Under this thinking, this form of market regulation may be better than an unregulated market at providing a free market.


Spontaneous order

Friedrich Hayek Friedrich August von Hayek ( , ; 8 May 189923 March 1992), often referred to by his initials F. A. Hayek, was an Austrian-British economist, and philosopher who is best known for his defence of classical liberalism. Hayek shared the 1974 Nob ...
popularized the view that market economies promote spontaneous order which results in a better "allocation of societal resources than any design could achieve". According to this view, market economies are characterized by the formation of complex transactional networks that produce and distribute goods and services throughout the economy. These networks are not designed, but they nevertheless emerge as a result of decentralized individual economic decisions. The idea of spontaneous order is an elaboration on the invisible hand proposed by
Adam Smith Adam Smith ( 1723 – 17 July 1790) was a Scottish economist, philosopher as well as a moral philosopher Ethics or moral philosophy is a branch of philosophy that "involves systematizing, defending, and recommending concepts of right and ...

Adam Smith
in ''The Wealth of Nations''. About the individual, Smith wrote:
By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.
Smith pointed out that one does not get one's dinner by appealing to the brother-love of the butcher, the farmer or the baker. Rather, one appeals to their self-interest and pays them for their labor, arguing:
It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.
Supporters of this view claim that spontaneous order is superior to any order that does not allow individuals to make their own choices of what to produce, what to buy, what to sell and at what prices due to the number and complexity of the factors involved. They further believe that any attempt to implement central planning will result in more disorder, or a less efficient production and distribution of goods and services. Critics such as political economist Karl Polanyi question whether a spontaneously ordered market can exist, completely free of distortions of political policy, claiming that even the ostensibly freest markets require a state to exercise coercive power in some areas, namely to enforce contracts, govern the formation of labor unions, spell out the rights and obligations of corporations, shape who has standing to bring legal actions and define what constitutes an unacceptable conflict of interest.


Supply and demand

Demand for an item (such as goods or services) refers to the economic market pressure from people trying to buy it. Buyers have a maximum price they are willing to pay for an item, and sellers have a minimum price at which they are willing to offer their product. The point at which the supply and demand curves meet is the equilibrium price of the good and quantity demanded. Sellers willing to offer their goods at a lower price than the equilibrium price receive the difference as producer surplus. Buyers willing to pay for goods at a higher price than the equilibrium price receive the difference as consumer surplus. The model is commonly applied to wages in the market for labor. The typical roles of supplier and consumer are reversed. The suppliers are individuals, who try to sell (supply) their labor for the highest price. The consumers are businesses, which try to buy (demand) the type of labor they need at the lowest price. As more people offer their labor in that market, the equilibrium wage decreases and the equilibrium level of employment increases as the supply curve shifts to the right. The opposite happens if fewer people offer their wages in the market as the supply curve shifts to the left. In a free market, individuals and firms taking part in these transactions have the liberty to enter, leave and participate in the market as they so choose. Prices and quantities are allowed to adjust according to economic conditions in order to reach equilibrium and allocate resources. However, in many countries around the world governments seek to intervene in the free market in order to achieve certain social or political agendas. Governments may attempt to create social equality or equality of outcome by intervening in the market through actions such as imposing a minimum wage (price floor) or erecting price controls (price ceiling). Other lesser-known goals are also pursued, such as in the United States, where the federal government subsidizes owners of fertile land to not grow crops in order to prevent the supply curve from further shifting to the right and decreasing the equilibrium price. This is done under the justification of maintaining farmers' profits; due to the relative Elasticity (economics), inelasticity of demand for crops, increased supply would lower the price but not significantly increase quantity demanded, thus placing pressure on farmers to exit the market. Those interventions are often done in the name of maintaining basic assumptions of free markets such as the idea that the costs of production must be included in the price of goods. Pollution and depletion costs are sometimes not included in the cost of production (a manufacturer that withdraws water at one location then discharges it polluted downstream, avoiding the cost of treating the water), therefore governments may opt to impose regulations in an attempt to try to internalize all of the cost of production and ultimately include them in the price of the goods. Advocates of the free market contend that government intervention hampers economic growth by disrupting the efficient allocation of resources according to supply and demand while critics of the free market contend that government intervention is sometimes necessary to protect a country's economy from better-developed and more influential economies, while providing the stability necessary for wise long-term investment. Milton Friedman argued against central planning, price controls and Government-owned corporation, state-owned corporations, particularly as practiced in the Economy of the Soviet Union, Soviet Union and Economy of China, China while Ha-Joon Chang cites the examples of post-war Japan and the growth of South Korea's steel industry as positive examples of government intervention.


Criticism

Critics of the free market have argued that in real world situations it has proven to be susceptible to the development of price fixing monopolies. Such reasoning has led to government intervention, e.g. the United States antitrust law. Two prominent Canadian authors argue that government at times has to intervene to ensure competition in large and important industries. Naomi Klein illustrates this roughly in her work ''The Shock Doctrine'' and John Ralston Saul more humorously illustrates this through various examples in ''The Collapse of Globalism and the Reinvention of the World''.Saul, John ''The End of Globalism''. While its supporters argue that only a free market can create healthy competition and therefore more business and reasonable prices, opponents say that a free market in its purest form may result in the opposite. According to Klein and Ralston, the merging of companies into giant corporations or the privatization of government-run industry and national assets often result in monopolies or oligopolies requiring government intervention to Competition law, force competition and reasonable prices. Another form of market failure is speculation, where transactions are made to profit from short term fluctuation, rather from the intrinsic value (finance), intrinsic value of the companies or products. This criticism has been challenged by historians such as Lawrence Reed, who argued that monopolies have historically failed to form even in the absence of antitrust law. This is because monopolies are inherently difficult to maintain as a company that tries to maintain its monopoly by buying out new competitors, for instance, is incentivizing newcomers to enter the market in hope of a buy-out. Furthermore, according to writer Walter Lippman and economist Milton Friedman, historical analysis of the formation of monopolies reveals that, contrary to popular belief, these were the result not of unfettered market forces, but of legal privileges granted by government. American philosopher and author Cornel West has derisively termed what he perceives as dogmatic arguments for ''laissez-faire'' economic policies as market fundamentalism, free-market fundamentalism. West has contended that such mentality "trivializes the concern for public interest" and "makes money-driven, poll-obsessed elected officials deferential to corporate goals of profit – often at the cost of the common good". American political philosopher Michael J. Sandel contends that in the last thirty years the United States has moved beyond just having a market economy and has become a market society where literally everything is for sale, including aspects of social and civic life such as education, access to justice and political influence. The economic historian Karl Polanyi was highly critical of the idea of the market-based society in his book ''The Great Transformation (book), The Great Transformation'', noting that any attempt at its creation would undermine human society and the common good. Critics of free market economics range from those who reject markets entirely in favour of a planned economy as advocated by various Marxism, Marxists to those who wish to see market failures regulated to various degrees or supplemented by government interventions. Keynesian economics, Keynesians support market roles for government such as using fiscal policy for economic stimulus when actions in the private sector lead to sub-optimal economic outcomes of depression (economics), depressions or recessions. Business cycle is used by Keynesians to explain liquidity traps, by which underconsumption occurs, to argue for government intervention with fiscal policy. David McNally (professor), David McNally of the University of Houston argues in the Marxist tradition that the logic of the market inherently produces inequitable outcomes and leads to unequal exchanges, arguing that
Adam Smith Adam Smith ( 1723 – 17 July 1790) was a Scottish economist, philosopher as well as a moral philosopher Ethics or moral philosophy is a branch of philosophy that "involves systematizing, defending, and recommending concepts of right and ...

Adam Smith
's moral intent and moral philosophy espousing equal exchange was undermined by the practice of the free market he championed. According to McNally, the development of the market economy involved coercion, exploitation and violence that Smith's moral philosophy could not countenance. McNally also criticizes market socialists for believing in the possibility of fair markets based on equal exchanges to be achieved by purging parasitical elements from the market economy such as
private ownership Private property is a legal designation for the ownership of property by non-governmental Legal personality, legal entities. Private property is distinguishable from public property, which is owned by a state entity, and from Collective ownershi ...
of the
means of production The means of production is a concept that encompasses the social use and ownership Ownership is the state or fact of exclusive right In Anglo-Saxon law Anglo-Saxon law (Old English Old English (, ), or Anglo-Saxon, is the earliest record ...
, arguing that market socialism is an oxymoron when
socialism Socialism is a political Politics (from , ) is the set of activities that are associated with Decision-making, making decisions in Social group, groups, or other forms of Power (social and political), power relations between individuals, ...
is defined as an end to wage labour. Some would argue that only one known example of a true free market exists, namely the black market. The black market is under constant threat by the police, but under no circumstances do the police regulate the substances that are being created. The black market produces wholly unregulated goods and are purchased and consumed unregulated. That is to say, anyone can produce anything at any time and anyone can purchase anything available at any time. The alternative view is that the black market is not a free market at all since high prices and natural monopolies are often enforced through murder, theft and destruction. Black markets can only exist peripheral to regulated markets where laws are being regularly enforced.


See also

* Binary economics * Crony capitalism * Economic liberalism * Freedom of choice * Free price system * Grey market * Left-wing market anarchism * Market economy * Neoliberalism * Participatory economics * Quasi-market * Self-managed economy * Transparency (market)


Notes


Further reading

* Fred L. Block, Block, Fred and Somers, Margaret R (2014).
The Power of Market Fundamentalism: Karl Polanyi's Critique
'' Harvard University Press. .
Boettke, Peter J. "What Went Wrong with Economics?", ''Critical Review'' Vol. 11, No. 1, pp. 35, 58
* Bernard Harcourt, Harcourt, Bernard (2012).
The Illusion of Free Markets: Punishment and the Myth of Natural Order
'' Harvard University Press. . * Cox, Harvey (2016).
The Market as God
'' Harvard University Press. . * Friedrich Hayek, Hayek, Friedrich A. (1948). ''Individualism and Economic Order''. Chicago: University of Chicago Press. vii, 271, [1]. * Palda, Filip (2011) ''Pareto's Republic and the New Science of Peace'' 201

chapters online. Published by Cooper-Wolfling. . * Michael J. Sandel, Sandel, Michael J. (2013). ''What Money Can't Buy: The Moral Limits of Markets.'' Farrar, Straus and Giroux. . * Joseph Stiglitz, Stiglitz, Joseph. (1994). ''Whither Socialism?'' Cambridge, Massachusetts: MIT Press. * Paul Verhaeghe, Verhaeghe, Paul (2014). ''What About Me? The Struggle for Identity in a Market-Based Society.'' Scribe Publications. . * Robert Kuttner, "The Man from Red Vienna" (review of Gareth Dale, ''Karl Polanyi: A Life on the Left'', Columbia University Press, 381 pp.), ''The New York Review of Books'', vol. LXIV, no. 20 (21 December 2017), pp. 55–57. "In sum, Polanyi got some details wrong, but he got the big picture right. Democracy cannot survive an excessively free market; and containing the market is the task of politics. To ignore that is to court fascism." (Robert Kuttner, p. 57).


External links


"Free market"
at ''Encyclopædia Britannica''
"Free Enterprise: The Economics of Cooperation"
looks at how communication, coordination and cooperation interact to make free markets work {{DEFAULTSORT:Free market Free market, Anarchism, Free-market anarchism Capitalism Classical liberalism Economic ideologies Economic liberalism Economic systems Georgism Libertarianism Libertarian theory Market (economics) Market socialism Socialism, Market socialism