| A free market is an idealized market, where all economic decisions and
actions by individuals regarding transfer of money, goods, and services are voluntary, and are therefore devoid of
coercion and theft (some definitions of
"coercion" are inclusive of "theft"). Colloquially and loosely, a free market economy is an economy where the market is
relatively free, as in an economy overseen by a government that practices a laissez-faire, rather than either a mixed
or statist economic policy. Within economics the more usual term is simply
"the market", or "the market mechanism", to mean the allocation of production through supply and demand.
Free markets are advocated by proponents of economic
liberalism.
Theory
If a government is present, its use of force in the marketplace is ideally limited to protecting the market participants from
coercion, including protection of property rights and enforcement of contracts. The essence of a free market can be understood as
a game in which the players compete according to a common set of rules that
prevent coercion (including theft); the enforcement of these rules may be carried out by a neutral referee (government). Players
in this game may have very different skills, knowledge, and wealth, which tends to conflict with social norms of fairness, so a free market may not accord
with what some would consider a fair market. This conception of a market as a pure economic system based on freedom from coercion among market
participants as well as from government is in fundamental contrast to a command economy.
The law of supply and demand predominates in the idealized
free market, influencing prices toward an equilibrium 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 use (or utility) for each product and within the relative limits of each buyer's purchasing power. The necessary components for the functioning of an
idealized free market include the complete absence of artificial price pressures from taxes, subsidies, tariffs, or government regulation (other than protection from coercion and theft), and no government-granted monopolies (usually classified as
coercive monopoly by free market advocates) like the United States Post Office, Amtrak, arguably patents, etc.
The distribution of purchasing power in an economy depends to a large extent on the labor and financial markets, but also on other
factors such as family relationships, inheritance, gifts and so on. Many theories describing the operation of a free market focus primarily on the markets for
consumer products, and their description of the labor market or financial markets tends to be more complicated and
controversial.
Practice
While the free-market is an idealized abstraction, it is useful in understanding real markets whether artificially created and
regulated by governments or non-governmental agencies, or the natural social phenomena such as the black market and the underground
economy, which can be remarkably robust in persisting despite attempts to suppress these markets. Taxes and government
regulation bias the equilibrium points of every large government-sanctioned economy in existence today, so that these economies
are only relatively free or unfree. Monopolistic practices, cartels, externalities (like pollution), and asymmetrically distributed information are often cited as potential
problems that may exist in a free-market economy. Knowledge bias can lead to what many may see as evils of such an economy, like
insider trading, price fixing, price gouging, adverse selection, moral hazard, and the principal-agent
problem which they claim justify government intervention to remedy. Some believe that the notion of a free market is
inherently unachievable because they hold that governments create property rights and are fundamentally involved in markets through the enforcement of such
rights. Others argue that the concept of property comes from natural law and
therefore it is incorrect to see governments as creating markets.
Advocacy
The advocacy of relatively free markets, is a mainstay of ideologies such as minarchism, libertarianism, and 19th century liberalism, as well
as the Western understanding of capitalism. It is anathema to communism and some variants of
socialism, although modern
liberalism and other variants of socialism seek only to mitigate what they
see as the problems of an unrestrained free market. Most who say they favor a "free market" are speaking in a relative, rather
than an absolute, sense --meaning they wish that coercion be 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 important decisions such as how to raise
capital, e.g., eliminating the double tax on 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 preferring
protectors of economic freedom in the form of private contractors.
While some advocate free markets out of an intrinsic moral respect for freedom, others base their support on the belief that
decentralized planning by a multitude of individuals making free economic decisions produces better results in regard to a more
organized, efficent, and productive economy than does a centrally-planned economy where individual decisions are overridden by a
central agency. This process accords with the theory of self-organization that says the internal organization of a system can increase automatically without
being guided or managed by an outside source.
Modern trends that promote international free-market systems are often described as neoliberalism.
Contrast
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