What Is a Free Market?

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The concept of a free market can often be confused with capitalism, since capitalism strives to be “free.” In a truly free market economy, though, the economic system is based solely on supply and demand, with little to no government control. But as much as idealists prize this economy, some form of regulation is necessary in any economy. The question then becomes just how much government should intervene in the production and sale of goods.

What Is a Free Market?

In a free market, goods and services are traded with little to no government intervention. This includes a lack of taxes and tariffs. Often people confuse a free market with “Laissez Faire capitalism,” which stipulates that there is a separation between economy and state. They are similar in concept, with Laissez Faire capitalism stating a preference for businesses to operate without the pressure that taxes and tariffs place on a business. Government coercion can exist in a free market economy, however, as long as a voluntary contract is put in place first. The U.S. economy has many elements of a free market economy, but there is some government intervention in the form of regulations and taxes.

Free Market Pros and Cons

Proponents of a free market economy say that the setup encourages entrepreneurs to innovate, especially if there’s plenty of competition for what they’re doing. Instead of waiting for the government to inform businesses what products and services are in demand, businesses can monitor customer demand and strive to meet it. Customers benefit from having a wide range of options. However, opponents feel that when profit is the motivator, companies may sacrifice employee safety and ethical behavior. It also can lead to economic disasters like recessions and market crashes. The drive to be the best can also lead societies to neglect taking care of the economically disadvantaged and elderly among their populations.

What Is a Free Market Analysis?

A capitalist economy can strive to be free market but miss the mark. The degree to which businesses and governments manage that separation can be regulated, however. For economists, it isn’t so much about analyzing whether a free market economy has been accomplished as identifying whether things can be improved. Less government intervention in the manufacturing process, for instance, could mean that worker safety is compromised. It can also prevent businesses from following guidelines that prioritize customer safety over making money. This ongoing analysis is an ongoing part of economic study in America and other capitalist countries.

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About the Author

Stephanie Faris is a novelist and business writer whose work has appeared on numerous small business blogs, including Zappos, GoDaddy, 99Designs, and the Intuit Small Business Blog. She worked for the State of Tennessee for 19 years, the latter six of which were spent as a supervisor. She has written about business for entrepreneurs and marketing firms since 2011.