a free market is a market in which there is no economic intervention and regulation by the state

8/8/2019 A Free Market is a Market in Which There is No Economic Intervention and Regulation by the State

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A free market is a market in which there is no economic intervention and regulation by the

state, except to enforce private contracts and the ownershipof property. It is the opposite of a

controlled market, in which the state directly regulates how goods, services and labor may beused, priced, or distributed, rather than relying on the mechanism of private ownership.

Advocates of a free market traditionally consider the term to imply that the means of production

is under private, not state control as well. This is the contemporary use of the term "free market"by economists and in popular culture; the term has had other uses historically.

A free-market economy is an economy where all markets within it are unregulated by any parties

other than those players in the market. In its purest form the government plays a neutral role in

its administration and legislation of economic activity neither limiting nor actively promoting it(for example neither regulating industries let alone owning economic interests nor offering

subsidies to businesses let alone protecting them from internal/external market pressures). Such

an economy in its most radical form does not exist in developed economies, however effortsmade to liberalise an economy or make it "free-er" attempt to limit the role of government in

such a way.

The theory holds that within an ideal free market,property rights are voluntarily exchanged at a

price arranged solely by the mutual consent ofsellers andbuyers. By definition, buyers andsellers do not coerceeach other, in the sense that they obtain each other's property rights without

the use of physical force, threat of physical force, or fraud, nor are they coerced by a third party

(such as by government via transfer payments)[1] and they engage in trade simply because theyboth consent and believe that what they are getting is worth more than or as much as what they

give up. Price is the result of buying and selling decisions en masse as described by the theory of

supply and demand.

Free markets contrast sharply with controlled marketsorregulated markets, in which

governments directly or indirectly regulate prices or supplies, which according to free-markettheory causes markets to be less efficient.[2] Where government intervention exists, the market is

amixed economy.

In the marketplace, the price of a good or service helps communicate consumer demand toproducers and thus directs the allocation of resources toward consumer, as well as investor,

satisfaction. In a free market, price is a result of a plethora of voluntary transactions, rather than

political decree as in a controlled market. Through free competition between vendors for theprovision of products and services, prices tend to decrease, and quality tends to increase. A free

market is not to be confused with aperfect market where individuals haveperfect information

and there isperfect competition.

Free-market economics is closely associated withlaissez-faireeconomic philosophy, whichadvocates approximating this condition in the real world by mostly confining government

intervention in economic matters to regulating against force and fraud among market

participants. Some free-market advocates opposetaxationas well, claiming that the market is

more efficient at providing all valuable services of whichdefenseandlaw are no exception, thatsuch services can be provided without direct taxation and that consent would be the basis of
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political legitimacy making it a morally consistent system.Anarcho-capitalists, for example,

would substitute arbitration agencies andprivate defense agencies.

In social philosophy, a free-market economy is a system forallocating goods within a society:purchasing powermediated by supply and demand within the market determines who gets what

and what is produced, rather than the state. A free market may refer narrowly to nationaleconomies, or internationally; specific reference to international markets is referred to as free

trade (for goods) or lack ofcapital controls(for money). Early proponents of a free-marketeconomy in 18th century Europe contrasted it with the medieval,early modern, and mercantilist

economies which preceded it.

Contents

[hide]

1 Supply and demand

2 Spontaneous order or "invisible hand" 3 Economic equilibrium

4 Distribution of wealth

5 Laissez-faire economics

o 5.1 Deregulation

o 5.2 Low barriers to entry

6 Legal tender and taxes

7 Index of economic freedom

8 History and ideology

o 8.1 Classical economics

o 8.2 Marxism

o 8.3 Liberalism 9 Criticism

o 9.1 Externalities

o 9.2 Differing ideas

o 9.3 Simulation of biological laws

o 9.4 Martin J. Whitman

10 See also

11 Notes

12 References

13 External links

[edit] Supply and demand

Main article: Supply and demand

Supply and demand are always equal as they are the two sides of the same set of transactions,

and discussions of "imbalances" are a muddled and indirect way of referring to price.[3] However,
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in an unmeasurable qualitative sense, demand for an item (such as goods or services) refers to

the market pressure from people trying to buy it. They will "bid" money for the item, while in

return sellers offer the item for money. When the bid matches the offer, a transaction can easilyoccur (even automatically, as in a typical stock market). In reality, most shops and markets do

not resemble the stock market, and there are significant costs and barriers to "shopping around"

(comparison shopping).

The model is commonly applied to wages, in the market for labor. The typical roles of supplierand consumer are reversed. The suppliers are individuals, who try to sell (supply) their labor for

the highest price. The consumers of labors are businesses, which try to buy (demand) the type of

labor they need at the lowest price. As populations increase wages fall for any given unskilled orskilled labor supply. Conversly, wages tend to go up with a decrease in population.

When demand exceeds supply, suppliers can raise the price, but when supply exceeds demand,

suppliers will have to decrease the price in order to make sales. Consumers who can afford the

higher prices may still buy, but others may forgo the purchase altogether, demand a better price,

buy a similar item, or shop elsewhere. As the price rises, suppliers may also choose to increaseproduction. Or more suppliers may enter the business.

[edit] Spontaneous order or "invisible hand"

Main articles: Invisible hand and Spontaneous order

Friedrich Hayekargues for the classical liberal view that market economies allow spontaneous

order; that is, "a more efficient allocation of societal resources than any design could achieve." [4]

According to this view, in market economies sophisticated business networks are formed which

produce and distribute goods and services throughout the economy. This network was not

designed, but emergedas a result of decentralized individual economic decisions. Supporters ofthe idea of spontaneous order trace their views to the concept of theinvisible handproposed by

Adam Smith in The Wealth of Nations who said that the individual who:

"intends only his own gain is led by an invisible handto 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 [an individual] 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 tradefor the [common] good." (Wealth of Nations)

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 theirlabour.

"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."[5]
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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 anyattempt to implement central planning will result in more disorder, or a less efficient production

and distribution of goods and services.

[edit] Economic equilibrium

Main article: Economic equilibrium

General equilibrium theory has demonstrated, with varying degrees of mathematical rigor over

time, that under certain conditions ofcompetition, the law ofSupply and Demand predominates

in this ideal free and competitive market, influencing prices toward an equilibrium that balances

the demands for the products against the supplies.[6][7] At these equilibrium prices, the marketdistributes the products to the purchasers according to each purchaser's preference (or utility) for

each product and within the relative limits of each buyer'spurchasing power. This result is

described as market efficiency, or more specifically aPareto optimum.

This equilibrating behavior of free markets requires certain assumptions about their agents,

collectively known as Perfect Competition, which therefore cannot be results of the market that

they create. Among these assumptions are complete information, interchangeable goods and

services, and lack of market power, that obviously cannot be fully achieved. The question then iswhat approximations of these conditions guarantee approximations of market efficiency, and

which failures in competition generate overall market failures. Several Nobel Prizes in

Economics have been awarded for analyses of market failures due to asymmetric information.

Some models ineconophysics[8] have shown that when agents are allowed to interact locally in a

free market (i.e. their decisions depend not only on utility and purchasing power, but also ontheir peers' decisions), prices can become unstable and diverge from the equilibrium, often in an

abrupt manner.The behavior of the free market is thus said to be non-linear (a pair of agentsbargaining for a purchase will agree on a different price than 100 identical pairs of agents doing

the identical purchase).Speculation bubbles and the type ofherd behavior often observed in

stock markets are quoted as real life examples of non-equilibrium price trends. Some laissez-faire free-market advocates, like Chicago school economists, often dismiss this endogenous

theory, and blame external influences, such as weather, commodity prices, technological

developments, and government meddling for non-equilibrium prices.

[edit] Distribution of wealthMain article: Distribution of wealth

The distribution of purchasing power in an economy depends to a large extent on the nature of

government intervention, social class,laborandfinancial markets, but also on other, lesser

factors such as family relationships, inheritance,gifts and so on. Many theories describing theoperation of a free market focus primarily on the markets for consumer products, and their
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description of the labor market or financial markets tends to be more complicated and

controversial. The free market can be seen as facilitating a form of decision-making through

what is known as dollar voting, where a purchase of a product is tantamount to casting a vote fora producer to continue producing that product.

The effect ofeconomic freedom on society's and individuals' wealthremains a subject ofcontroversy. Kenneth Arrow and Gerard Debreu have shown that under certain idealized

conditions, a system of free trade leads to Pareto efficiency, but the traditional Arrow-Debreuparadigm within economics is now being challenged by the new Greenwald-Stiglitz paradigm

(1986).[9] Many advocates of free markets, most notablyMilton Friedman, have also argued that

there is a direct relationship between economic growth and economic freedom, though thisassertion is much harder to prove empirically, as the continuous debates among scholars on

methodological issues in empirical studies of the connection between economic freedom and

economic growth clearly indicate:[10][11][12] "there were a few attempts to study relationshipbetween growth and economic freedom prior to the very recent availability of the Fraser data.

These were useful but had to use incomplete and subjective variables".[13]Joshua Epstein and

Robert Axtell have attempted to predict the properties of free markets empirically in the agent-based computer simulation "Sugarscape". They came to the conclusion that, again underidealized conditions, free markets lead to aPareto distribution of wealth.[8]

On the other hand more recent research, especially the one led by Joseph Stiglitzseems to

contradict Friedman's conclusions. According to Boettke:

Once incomplete and imperfect information are introduced,Chicago-school defenders ofthe market system cannot sustain descriptive claims of the Pareto efficiency of the real

world. Thus, Stiglitz's use of rational-expectations equilibrium assumptions to achieve a

more realistic understanding of capitalism than is usual among rational-expectations

theorists leads, paradoxically, to the conclusion that capitalism deviates from the modelin a way that justifies state actionsocialismas a remedy.[14]

[edit] Laissez-faire economics

Main article: Laissez-faire economics

The necessary components for the functioning of an idealized free market include the completeabsence of artificial price pressures from taxes, subsidies, tariffs, or government regulation (other

than protection from coercion and theft, and nogovernment-granted monopolies (usually

classified as coercive monopoly by free-market advocates) like theUnited States Post Office,

Amtrak, arguablypatents, etc.

[edit] Deregulation

Main article: Deregulation

In an absolutelyfree-market economy, all capital, goods, services, and money flow transfers are

unregulated by the government except to stop collusion or fraud that may take place among
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market participants.[citation needed] As this protection must be funded, such a government taxes only

to the extent necessary to perform this function, if at all. This state of affairs is also known aslaissez-faire. Internationally, free markets are advocated by proponents ofeconomic liberalism;in Europe this is usually simply called liberalism. In theUnited States, support for free market is

associated most with libertarianism. Since the 1970s, promotion of a global free-market

economy, deregulation andprivatization, is often described as neoliberalism. The termfree-market economy is sometimes used to describe some economies that exist today (such asHong

Kong), but pro-market groups would only accept that description if the government practiceslaissez-faire policies, rather than state intervention in the economy.[specify] An economy thatcontains significant economic interventionism by government, while still retaining some

characteristics found in a free market is often called a mixed economy.

[edit] Low barriers to entry

A free market does not require the existence of competition, however it does require that there

are no barriers to new market entrants. Hence, in the lack of coercive barriers it is generally

understood that competition flourishes in a free-market environment. It often suggests thepresence of theprofit 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

andbusinesses. Typically, a modern free market economy would include other features, such asastock exchange and a financial servicessector, but they do not define it.

[edit] Legal tender and taxes

In a truly free-market economy, money would not be monopolized by legal tenderlaws or by a

central bank, in order to receivetaxesfrom the transactions or to be able to issueloans.[citation needed]

Minarchists (advocates of minimal government) contend that the so called "coercion" of taxes is

essential for the market's survival, and a market free from taxes may lead to no market at all. Bydefinition, there is no market without private property, and private property can only exist whilethere is an entity that defines and defends it. Traditionally, the State defends private property and

defines it by issuing ownership titles, and also nominates the central authority to print or mint

currency. "Free-market anarchists" disagree with the above assessment they maintain that

private property and free markets can be protected by voluntarily-funded services under theconcept ofindividualist anarchism and anarcho-capitalism.[15][16] A free market could be defined

alternatively as a tax-free market, independent of any central authority, which uses as medium of

exchange such as money, even in the absence of the State. It is disputed, however, whether thishypothetical stateless market could function.

[edit] Index of economic freedom

The Heritage Foundation, a conservativethink tank, tried to identify the key factors which allow

to measure the degree of freedom of economy of a particular country. In 1986 they introducedIndex of Economic Freedom, which is based on some fifty variables. This and other similar

indices do not define a free market, but measure the degree to which a modern economy is free,
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meaning in most cases free of state intervention. The variables are divided into the following

major groups:

Trade policy,

Fiscal burden of government,

Government intervention in the economy, Monetary policy,

Capital flows and foreign investment, Banking and finance,

Wages and prices,

Property rights,

Regulation, and

Informal market activity.

Each group is assigned a numerical value between 1 and 5; IEF is the arithmetical mean of the

values, rounded to the hundredth. Initially, countries which were traditionally considered

capitalistic received high ratings, but the method improved over time. Some economists, likeMilton Friedman and otherLaissez-faire economists have argued that there is a direct

relationship between economic growth and economic freedom, but this assertion has not beenproven yet, both theoretically and empirically. Continuous debates among scholars on

methodological issues in empirical studies of the connection between economic freedom and

economic growth still try to find out what is the relationship, if any.[10][11][12][13]

"In recent years a significant amount of work has been devoted to the investigation of apossible connection between the political system and economic growth. For a variety of

reasons there is no consensus about that relationship, especially not about the direction of

causality, if any." (AYAL & KARRAS, 1998, p.2)[13]

[edit] History and ideology

The meaning of "free" market has varied over time and between economists, the ambiguous term

"free" facilitating reuse. To illustrate the ambiguity: classical economistssuch as Adam Smith

believed that an economy should be free of monopoly rents, while proponents of laissez fairebelieve that people should be free to form monopolies. In this article "free market" is largely

identified with laissez faire, though alternative senses are discussed in this section and in

criticism. The identification of the "free market" with "laissez faire" was notably used in the1962 Capitalism and Freedom, by economist Milton Friedman, which is credited with

popularizing this usage.[17]

Some theorists might argue that a free market is a natural form of social organization, and that a

free market will arise in any society where it is not obstructed (i.e. Ludwig von Mises, Hayek).The consensus among economic historiansis that the free market economy is a specific historic

phenomenon, and that it emerged in late medieval and early-modern Europe.[citation needed] Other

economic historians see elements of the free market in the economic systems ofClassical

Antiquity,[citation needed] and in some non-western societies.[citation needed] By the 19th century the marketcertainly had organized political support, in the form oflaissez-faire liberalism. However, it is
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To most libertarians, there is simply no free market yet, given the degree of state intervention in

even the most 'capitalist' of countries. From their perspective, those who say they favor a "free

market" are speaking in a relative, rather than an absolute, sense meaning (in libertarianterms) they wish that coercionbe kept to the minimum that is necessary to maximize economic

freedom (such necessary coercion would be taxation, for example) and to maximize market

efficiency by lowering trade barriers, making the tax system neutral in its influence on importantdecisions such as how to raise capital, e.g., eliminating the double taxon dividends so that equity

financing is not at a disadvantage vis-a-vis debt financing. However, there are some such as

anarcho-capitalists who would not even allow for taxation and governments, instead preferringprotectors of economic freedom in the form of private contractors.

[edit] Criticism

This article's Criticism orControversy section(s) may mean the article does not presentaneutral point of view of the subject. It may be better to integrate the material in thosesections into the article as a whole. (September 2010)

Critics dispute the claim that in practice free markets createperfect competition, or even increase

market competition over the long run. Whether the marketplaceshould be oris free is disputed;

many assert that government intervention is necessary to remedy market failure that is held to bean inevitable result of absolute adherence to free market principles. These failures range from

military services to roads, and some would argue, to health care. This is the central argument of

those who argue for a mixed market, free at the base, but with government oversight to control

social problems.

Another criticism is definitional, in that far-ranging governmental actions such as the creation of

corporate personhood or more broadly, the governmental actions behind the very creation of

artificial legal entities called corporations, are not considered "intervention" within mainstreameconomic schools. This inherent definitional bias allows many to advocate strong governmentalactions that promote corporate power, while advocating against government actions limiting it,

while putting these dual positions under the umbrella of "pro free markets" or "anti-

intervention."

Two prominent Canadian authors (both very hostile to the "Chicago School" philosophy) argue

that government at times has to intervene to ensure competition in large and important industries.

Naomi Kleinillustrates this roughly in her workThe Shock DoctrineandJohn Ralston Saulmore

humorously illustrates this through various examples in The Collapse of Globalism and the

Reinvention of the World.[22] 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 marketin its purest form may result in the opposite. According to Klein and Ralston, the merging ofcompanies into giant corporations or the privatization of government-run industry and national

assets often result in monopolies (or oligopolies) requiring government intervention to force

competition and reasonable prices.[22]

Critics of laissez-faire sinceAdam Smith[23] variously see the unregulated market as animpractical ideal or as arhetorical device that puts the concepts of freedom and anti-
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protectionism at the service of vested wealthy interests, allowing them to attacklabor laws and

other protections of the working classes.[24]

Because no national economy in existence fully manifests the ideal of a free market as theorizedby economists, some critics of the concept consider it to be a fantasy - outside of the bounds of

reality in a complex system with opposing interests and different distributions of wealth.

These critics range from those who reject markets entirely, in favour of aplanned economy or a

communal economy, such as that advocated by Marxism, to those who merely wish to seemarket failuresregulated to various degrees or supplemented by certain government

interventions. For example, Keynesiansrecognize a role for government in providing corrective

measures, such as use of fiscal policy for economy stimulus, when decisions in the private sector

lead to suboptimal economic outcomes, such as depression orrecession, which manifest inwidespread hardship. Business cycle theory is used by Keynes to explain 'liquidity traps' by

which underconsumption occurs, in order to argue for government intervention with central

banking. Free market economists consider this credit-expansion as the cause of the business

cycle in refutation of this Keynesian criticism.

[edit] Externalities

One practical objection is the claim that markets do not take into accountexternalities (effects of

transactions that affect third parties), such as the negative effects of pollution or the positive

effects of education. What exactly constitutes an externality may be up for debate, including theextent to which it changes based upon the political climate.

Some proponents of market economies believe that governments should not diminish market

freedom because they disagree on what is a market externality and what are government-created

externalities, and disagree over what the appropriate level of intervention is necessary to solvemarket-created externalities. Others believe that government should intervene to preventmarket

failurewhile preserving the general character of a market economy. In the model of a social

market economythe state intervenes where the market does not meet political demands. JohnRawls was a prominent proponent of this idea.

[edit] Differing ideas

Some advocates of free market ideologies have criticized mainstream conceptions of the freemarket, arguing that a truly free market would not resemble the modern-day capitalist economy.

For example, contemporary mutualistKevin Carson argues in favor of "free market anti-

capitalism." Carson has stated that "From Smith to Ricardo and Mill, classical liberalism was arevolutionary doctrine that attacked the privileges of the great landlords and the mercantile

interests. Today, we see vulgar libertarians perverting "free market" rhetoric to defend the

contemporary institution that most closely resembles, in terms of power and privilege, the landed

oligarchies and mercantilists of the Old Regime: the giant corporation."[25]

Carson believes that a true free market society would be "[a] world in which... land and property

[is] widely distributed, capital [is] freely available to laborers through mutual banks, productive
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technology [is] freely available in every country without patents, and every people [is] free to

develop locally without colonial robbery..."[26]

[edit] Simulation of biological laws

See also: Social Darwinism

The Red-billed Oxpeckerfeed on ticks off the impala's coat. Suchbiological interaction is not

competitive in nature.

The free market is believed to self-regulate in the most efficient and just way. Adam Smith

described this behavior with the metaphor of an invisible hand urging society towards prosperity.

Charles Darwin's theory ofevolution was very appealing to economists, sociologists and political

scientists (most notably Walter Bagehot and William Graham Sumner) who adapted and

rationalized the invisible hand by incorporating the popular idea of thesurvival of the fittest.[27]

They proposed - among others - that in a fully competitive economic environment (as theythought was the case ofecosystems) the most potent individuals would thrive and in turn society

would prosper (in analogy to the observedbiodiversity and abundance of life on earth). Such

arguments lead to the consolidation ofneoliberalism and laissez-faire.

[edit] Martin J. Whitman

Not all advocates ofcapitalism consider free markets to be practical. For example, Martin J.

Whitman has written, in a discussion ofKeynes,Friedmanand Hayek, that these "greateconomistsmissed a lot of details that are part and parcel of every value investor's daily life."

While calling Hayek "100% right" in his critique of the pure command economy, he writes

"However, in no way does it follow, as many Hayek disciples seem to believe, that governmentisper se bad and unproductive while the private sector is,per se good and productive. In well-

run industrial economies, there is a marriage between government and the private sector, each

benefiting from the other." As illustrations of this, he points at "Japan afterWorld War II,Singapore and the otherAsian Tigers, Sweden and China. The notable exception isHong Kong

which found prosperity on an extremely austere free market concept.
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He argues, in particular, for the value of government-provided credit and of carefully crafted tax

laws.[28] Further, Whitman argues (explicitly against Hayek) that "a free market situation is

probably also doomed to failure if there exist control persons who are not subject to externaldisciplines imposed by various forces over and above competition." The lack of these disciplines,

says Whitman, lead to "1. Very exorbitant levels ofexecutive compensation 2. Poorly

financed businesses with strong prospects for money defaults on credit instruments 3.Speculativebubbles 4. Tendency for industry competition to evolve into monopoliesand

oligopolies 5. Corruption." For all of these he provides recent examples from the U.S.

economy, which he considers to be in some respects under-regulated,[28] although in otherrespects over-regulated (he is generally opposed to Sarbanes-Oxley).[29]

He believes that an apparently "free" relationshipthat between a corporation and its investors

and creditorsis actually a blend of "voluntary exchanges" and "coercion". For example, there

are "voluntary activities, where each individual makes his or her own decision whether to buy,sell, or hold" but there are also what he defines as "[c]oercive activities, where each individual

security holder is forced to go alongprovided that a requisite majority of other security holders

so vote" His examples of the latter includeproxy voting, most merger and acquisitiontransactions, certain cash tender offers, and reorganization or liquidation inbankruptcy.[30]

Whitman also states that "Corporate America would not work at all unless many activities

continued to be coercive."[31]

"I am one with Professor Friedman that, other things being equal, it is far preferable to conducteconomic activities through voluntary exchange relying on free markets rather than through

coercion. But Corporate America would not work at all unless many activities continued to be

coercive."[32]
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. Free market is a summary term for an array of exchanges that take place insociety. Each exchange is undertaken as a voluntary agreement between two people or between

groups of people represented by agents. These two individuals (or agents) exchange twoeconomic goods, either tangible commodities or nontangible services. Thus, when I buy a

newspaper from a newsdealer for fifty cents, the newsdealer and I exchange two commodities: I

give up fifty cents, and the newsdealer gives up the newspaper. Or if I work for a corporation, I

exchange my labor services, in a mutually agreed way, for a monetary salary; here the

corporation is represented by a manager (an agent) with the authority to hire.

Both parties undertake the exchange because each expects to gain from it. Also, each will repeatthe exchange next time (or refuse to) because his expectation has proved correct (or incorrect) in

the recent past. Trade, or exchange, is engaged in precisely because both parties benefit; if they

did not expect to gain, they would not agree to the exchange.

This simple reasoning refutes the argument againstFREETRADE typical of the mercantilist period

of sixteenth- to eighteenth-century Europe and classically expounded by the famed sixteenth-

century French essayist Montaigne. The mercantilists argued that in any trade, one party can

benefit only at the expense of the otherthat in every transaction there is a winner and a loser,an exploiter and an exploited. We can immediately see the fallacy in this still-popular

viewpoint: the willingness and even eagerness to trade means that both parties benefit. In modern

game-theory jargon, trade is a win-win situation, a positive-sum rather than a zero-sum ornegative-sum game.

How can both parties benefit from an exchange? Each one values the two goods or servicesdifferently, and these differences set the scene for an exchange. I, for example, am walking along

with money in my pocket but no newspaper; the newsdealer, on the other hand, has plenty ofnewspapers but is anxious to acquire money. And so, finding each other, we strike a deal.

Two factors determine the terms of any agreement: how much each participant values each good

in question, and each participants bargaining skills. How many cents will exchange for one

newspaper, or how many Mickey Mantle baseball cards will swap for a Babe Ruth, depends onall the participants in the newspaper market or the baseball card marketon how much each one

values the cards as compared with the other goods he could buy. These terms of exchange, called

prices (of newspapers in terms of money, or of Babe Ruth cards in terms of Mickey Mantles),are ultimately determined by how many newspapers, or baseball cards, are available on the

market in relation to how favorably buyers evaluate these goodsin shorthand, by the

interaction of theirSUPPLY with the DEMAND for them.

Given the supply of a good, an increase in its value in the minds of the buyers will raise thedemand for the good, more money will be bid for it, and its price will rise. The reverse occurs if

the value, and therefore the demand, for the good falls. On the other hand, given the buyers

evaluation, or demand, for a good, if the supply increases, each unit of supplyeach baseball
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card or loaf of breadwill fall in value, and therefore the price of the good will fall. The reverse

occurs if the supply of the good decreases.

The market, then, is not simply an array; it is a highly complex, interacting latticework ofexchanges. In primitive societies, exchanges are all barter or direct exchange. Two people trade

two directly useful goods, such as horses for cows or Mickey Mantles for Babe Ruths. But as asociety develops, a step-by-step process of mutual benefit creates a situation in which one or two

broadly useful and valuable commodities are chosen on the market as a medium of indirectexchange. This money-commodity, generally but not always gold or silver, is then demanded not

only for its own sake, but even more to facilitate a reexchange for another desired commodity. It

is much easier to pay steelworkers not in steel bars but in money, with which the workers canthen buy whatever they desire. They are willing to accept money because they know from

experience and insight that everyone else in the society will also accept that money in payment.

The modern, almost infinite latticework of exchanges, the market, is made possible by the use of

money. Each person engages in specialization, or a division of labor, producing what he or she is

best at. Production begins with NATURALRESOURCES, and then various forms of machines andcapital goods, until finally, goods are sold to the consumer. At each stage of production from

natural resource to consumer good, money is voluntarily exchanged for capital goods, laborservices, and land resources. At each step of the way, terms of exchanges, or prices, are

determined by the voluntary interactions of suppliers and demanders. This market is free

because choices, at each step, are made freely and voluntarily.

The free market and the free price system make goods from around the world available toconsumers. The free market also gives the largest possible scope to entrepreneurs, who risk

capital to allocate resources so as to satisfy the future desires of the mass of consumers as

efficiently as possible. SAVING and INVESTMENT can then develop capital goods and increase thePRODUCTIVITY

and wages of workers, thereby increasing their standard of living. The freecompetitive market also rewards and stimulates technological INNOVATION that allows the

innovator to get a head start in satisfying consumer wants in new and creative ways.

Not only is investment encouraged, but perhaps more important, the price system, and the profit-and-loss incentives of the market, guide capital investment and production into the proper paths.

The intricate latticework can mesh and clear all markets so that there are no sudden,

unforeseen, and inexplicable shortages and surpluses anywhere in the production system.

But exchanges are not necessarily free. Many are coerced. If a robber threatens you with, Yourmoney or your life, your payment to him is coerced and not voluntary, and he benefits at your

expense. It is robbery, not free markets, that actually follows the mercantilist model: the robber

benefits at the expense of the coerced. Exploitation occurs not in the free market, but where thecoercer exploits his victim. In the long run, coercion is a negative-sum game that leads to

reduced production, saving, and investment; a depleted stock of capital; and reduced productivity

and living standards for all, perhaps even for the coercers themselves.

Government, in every society, is the only lawful system of coercion. TAXATION is a coercedexchange, and the heavier the burden of taxation on production, the more likely it is that
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ECONOMICGROWTH will falter and decline. Other forms of government coercion (e.g., PRICECONTROLS

or restrictions that prevent new competitors from entering a market) hamper and cripple market

exchanges, while others (prohibitions on deceptive practices, enforcement of contracts) canfacilitate voluntary exchanges.

The ultimate in government coercion is SOCIALISM. Under socialist central planning the socialistplanning board lacks a price system for land or capital goods. As even socialists like Robert

Heilbroner now admit (see SOCIALISM), the socialist planning board therefore has no way tocalculate prices or costs or to invest capital so that the latticework of production meshes and

clears. The experience of the former Soviet Union, where a bumper wheat harvest somehow

could not find its way to retail stores, is an instructive example of the impossibility of operating acomplex, modern economy in the absence of a free market. There was neither incentive nor

means of calculating prices and costs for hopper cars to get to the wheat, for the flour mills to

receive and process it, and so on down through the large number of stages needed to reach theultimate consumer in Moscow or Sverdlovsk. The investment in wheat was almost totally

wasted.

Market socialism is, in fact, a contradiction in terms. The fashionable discussion of market

socialism often overlooks one crucial aspect of the market: When two goods are exchanged,what is really exchanged is the property titles in those goods. When I buy a newspaper for fifty

cents, the seller and I are exchanging property titles: I yield the ownership of the fifty cents and

grant it to the newsdealer, and he yields the ownership of the newspaper to me. The exact sameprocess occurs as in buying a house, except that in the case of the newspaper, matters are much

more informal and we can avoid the intricate process of deeds, notarized contracts, agents,

attorneys, mortgage brokers, and so on. But the economic nature of the two transactions remains

the same.

This means that the key to the existence and flourishing of the free market is a society in whichthe rights and titles of private property are respected, defended, and kept secure. The key to

socialism, on the other hand, is government ownership of the means of production, land, and

capital goods. Under socialism, therefore, there can be no market in land or capital goods worthyof the name.

Some critics of the free market argue that PROPERTYRIGHTS are in conflict with human rights. But

the critics fail to realize that in a free-market system, every person has a property right over hisown person and his own labor and can make free contracts for those services. Slavery violates

the basic property right of the slave over his own body and person, a right that is the groundwork

for any persons property rights over nonhuman material objects. What is more, all rights are

human rights, whether it is everyones right to free speech or one individuals property rights inhis own home.

A common charge against the free-market society is that it institutes the law of the jungle, of

dog eat dog, that it spurns human cooperation forCOMPETITION and exalts material success as

opposed to spiritual values, philosophy, or leisure activities. On the contrary, the jungle isprecisely a society of coercion, theft, and parasitism, a society that demolishes lives and living

standards. The peaceful market competition of producers and suppliers is a profoundly
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cooperative process in which everyone benefits and where everyones living standard flourishes

(compared with what it would be in an unfree society). And the undoubted material success of

free societies provides the general affluence that permits us to enjoy an enormous amount ofleisure as compared with other societies, and to pursue matters of the spirit. It is the coercive

countries with little or no market activitythe notable examples in the last half of the twentieth

century were the communist countrieswhere the grind of daily existence not only impoverishespeople materially but also deadens their spirit


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.What Does Free MarketMean?

A market economy based on supply and demand with little or no government

control. A completely free market is an idealized form of a market economy where

buyers and sells are allowed to transact freely (i.e. buy/sell/trade) based on

a mutual agreement on price without state intervention in the form of taxes,

subsidies or regulation.

In financial markets, free market stocks are securities that are widely traded and

whose prices are not affected by availability.

In foreign-exchange markets, it is a market where exchange rates are not pegged

(by government) and thus rise and fall freely though supply and demand for

currency


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..A market economy based on supply and demand with little or nogovernment control. A completely free market is an idealized form of a market economy wherebuyers and sells are allowed to transact freely (i.e. buy/sell/trade) based on a mutual agreement

on price without state intervention in the form of taxes, subsidies or regulation.

In financial markets, free market stocks are securities that are widely traded and whose prices are

not affected by availability.

In foreign-exchange markets, it is a market where exchange rates are not pegged (by

government) and thus rise and fall freely though supply and demand for currency.

Investopedia Says:In simple terms, a free market is a summary term for an array of exchanges that take place insociety. Each exchange is a voluntary agreement between two parties who trade in the form of

goods and services. In reality, this is the extent to which a free market exists since there will

always be government intervention in the form of taxes, price controls and restrictions that

prevent new competitors from entering a market. Just like supply-side economics, free market isa term used to describe a political or ideological viewpoint on policy and is not a field within

economics.

Related Links:Learn economics principles such as the relationship of supply and demand, elasticity, utility, and

more! Economics BasicsThis free thinker promoted free trade at a time when governments controlled most commercial

interests. Adam Smith: The Father Of EconomicsSome argue that when the free market fails to protect consumers, government regulation is

required. Free Markets: What's The Cost?

There are many reasons why economists can be given the same data and come up with entirelydifferent conclusions. Why Can't Economists Agree?

Learn about the tools the Fed uses to influence interest rates and general economic conditions.
http://www.answers.com/main/Record2?a=NR&url=http://www.investopedia.com/university/economics/?partner=answershttp://www.answers.com/main/Record2?a=NR&url=http://www.investopedia.com/articles/economics/08/adam-smith-economics.asp?partner=answershttp://www.answers.com/main/Record2?a=NR&url=http://www.investopedia.com/articles/economics/08/free-market-regulation.asp?partner=answershttp://www.answers.com/main/Record2?a=NR&url=http://www.investopedia.com/articles/economics/09/why-economists-do-not-agree.asp?partner=answershttp://www.answers.com/main/Record2?a=NR&url=http://www.investopedia.com/university/economics/?partner=answershttp://www.answers.com/main/Record2?a=NR&url=http://www.investopedia.com/articles/economics/08/adam-smith-economics.asp?partner=answershttp://www.answers.com/main/Record2?a=NR&url=http://www.investopedia.com/articles/economics/08/free-market-regulation.asp?partner=answershttp://www.answers.com/main/Record2?a=NR&url=http://www.investopedia.com/articles/economics/09/why-economists-do-not-agree.asp?partner=answers


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Free markets contrast sharply with controlled marketsorregulated markets, in which

governments directly or indirectly regulate prices or supplies, which according to free-market

theory causes markets to be less efficient.[2] Where government intervention exists, the market isamixed economy.

In the marketplace, the price of a good or service helps communicate consumer demand toproducers and thus directs the allocation of resources toward consumer, as well as investor,

satisfaction. In a free market, price is a result of a plethora of voluntary transactions, rather thanpolitical decree as in a controlled market. Through free competition between vendors for the

provision of products and services, prices tend to decrease, and quality tends to increase. A free

market is not to be confused with aperfect market where individuals haveperfect informationand there isperfect competition.

Free-market economics is closely associated withlaissez-faireeconomic philosophy, which

advocates approximating this condition in the real world by mostly confining government

intervention in economic matters to regulating against force and fraud among market

participants. Some free-market advocates opposetaxationas well, claiming that the market ismore efficient at providing all valuable services of whichdefenseandlaw are no exception, that

such services can be provided without direct taxation and that consent would be the basis ofpolitical legitimacy making it a morally consistent system.Anarcho-capitalists, for example,

would substitute arbitration agencies andprivate defense agencies.

In social philosophy, a free-market economy is a system forallocating goods within a society:

purchasing powermediated by supply and demand within the market determines who gets whatand what is produced, rather than the state. A free market may refer narrowly to national

economies, or internationally; specific reference to international markets is referred to as free

trade (for goods) or lack ofcapital controls(for money). Early proponents of a free-market

economy in 18th century Europe contrasted it with the medieval,early modern, and mercantilisteconomies which preceded it.

Contents [hide]

1 Supply and demand

2 Spontaneous order or "invisible hand"

3 Economic equilibrium

4 Distribution of wealth

5 Laissez-faire economicso 5.1 Deregulation

o

5.2 Low barriers to entry 6 Legal tender and taxes 7 Index of economic freedom

8 History and ideology

o 8.1 Classical economics

o 8.2 Marxism

o 8.3 Liberalism

9 Criticism
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a free market is a market in which there is no economic intervention and regulation by the state

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