Free Market Economy

Introduction of Free Market Economy

Free market economy means an ecosystem (i.e. forces of production and labor) of a country controlled purely by the demand and supply forces with minimal or no government intervention and which encourages entrepreneurialism by allowing voluntary activities performed by private players unless it is controlled by governmental authorities such as minimum wages and antitrust laws.

Explanation

• As the name suggests, a free market economy means an economy that is not restricted by governmental laws, and everything is moved by the forces of demand and supply.
• In a simple language let’s imagine an economy wherein that the goods are trading in the market at the highest prices at which the consumers are ready to buy it; the services are provided as per the satisfaction level of the recipient, and laborers are paid the highest wages the businesses are able to pay purely on the basis of their performance. Sounds great! This is what we can a “free market economy”.
• However, an economy wherein the government imposes a law on companies to pay minimum wages to their laborers irrespective of actual performance, degrades the quality of labor. Such laws are not introduced in the free market economy.
• Also, in an economy controlled by the government, the prices of the means of production and the manner of distribution of wealth are organized by the government.
• So free-market economy allows the employer to pay for the services as per requirement and the skill of the laborer. On the other hand, it allows employees to charge as per their skill, competitiveness, and demand in the economy.

Features of Free Market Economy

• Freedom is provided for people within the country to make their choice for goods to be consumed and services to be enjoyed.
• Governmental intervention is almost NIL or negligible.
• Such an economy increases competition in the market.
• With the increased competition, perks such as lowering prices, increasing the quality of output with the best possible efficiency, distribution of wealth to deserving people, etc. are achieved.
• The labor receives the highest wages for their quality services and the consumers pay the highest prices for the quality of goods or services.
• The ownership of almost everything moves from government to private players.
• Reduction in monopolies market of government entities and private players are allowed to compete.

How Does It Work?

• The base of the free market economy is at the thought process of an individual in the country who is making efforts to satisfy his needs on the basis of his competitiveness, quality of work, and knowledge. He does not want the government to force on the prices, either favorably or unfavorably.
• A free-market economy is also known as a “Laissez-Faire Economy” which means to let the people do what they wish for. It allows the employer to quote bidding (i.e. higher prices) for the best quality of labor. On the other hand, the labor grabs the opportunity as per their competitive spirit.
• Now the simple question arises is “what role does the government have in a free economy?” or “whether the free market economy does not need a government?” Well, a country without a government is like a journey without milestones. The government in a free market economy provides the rules for the path.

Example of Free Market Economy

Few believe that an absolutely free market economy is a myth and does not exist, rather they believe that the market is required to follow some or other sort of policies made by the government. The United States of America is said to be one of such free-market economies.

Now the obvious question arises in a layman is that who decides the ranking of economies as per the freedom enjoyed? “The Index of Economic Freedom” created by “The Heritage Foundation” way back in 1995 ranks the degree of economic freedom of various countries around the globe. We have chosen the united states of america to present the freedom:

• The American continent:

Source: https://www.heritage.org/index/heatmap

• The United States overall score of freedom:

Source: https://www.heritage.org/index/heatmap

• The economy of the American continent is treated as moderately free in the last few decades as depicted by the following chart. However, the USA is said to be a free-market economy. The grey color refers to the USA and the pink color refers to the world economy.

Source: https://www.heritage.org/index/visualize

• The financial freedom of USA is depicted as below:

Source: https://www.heritage.org/index/visualize

• The business freedom of USA is depicted as below:

Source: https://www.heritage.org/index/visualize

• The labour freedom of USA is depicted as below:

Source: https://www.heritage.org/index/visualize

• The monetary freedom of the USA is depicted as below:

Source: https://www.heritage.org/index/visualize

• The trade freedom of USA is depicted as below:

• The investment freedom of USA is depicted as below:

Source: https://www.heritage.org/index/visualize

• Now the countries that ranks the highest economic freedom as per 2020 are:

Source: https://www.heritage.org/index/ranking

Source: https://www.heritage.org/index/ranking

Source: https://www.heritage.org/index/ranking

Impact of Free Market Economy

• Such an economy leads to growth in all segments such as judicial effectiveness, tax burden, freedom of business, monetary freedom, financial freedom, the integrity of government, government spending, fiscal health, labor freedom, etc.
• The output of such an economy is the prosperity and well-being of people in the economy.
• However, governmental intervention is necessary for a few players who are driving the forces according to their wish rather than market forces.
• Government acts likes parents and the free market economy acts like children. Parents give freedom to their children to fulfill their dreams until the intentions are not harming others in society.

Importance of Free Market Economy

• As a consumer of goods, we need quality of goods irrespective of the prices. As a consumer of services, we aspect for the better quality of output. As a worker, we expect to get paid rightfully as per the quality of services provided to the employer. So, efficiency drives the economy in the case of the free market economy.
• Overall free-market economy leads the gross domestic product of the country.
• It lets the employer pay incentives for better output and reduces the pay for non-performance.
• The prices of goods and services depict the availability of supply in the market. The business entities who have control over their costs can perform well, in a free market economy.
• The prices are less driven by the policies made by the government.

Advantages

 Some of the advantages are given below:

• It increases competition amongst the best players in the economy.
• Consumers get better quality of goods and services.
• The prices of commodities are not hiked by an unrequired tax which the government normally imposes.
• Consumers are sane enough to choose what they need.
• Price innovation & product innovation gets a boost.
• Businesses grow with the manifold of profits.
• Essential resources get allocated on the basis of efficiency.
• Investment by the business sectors, increase in the long term.
• Reduction in the monopoly market & economy strives towards the perfect competition or monopolistic competition.

Disadvantages

 Some of the disadvantages are given below:

• It may lead to an increase in the gap of the wealth of the citizens & may not serve the purpose of equal distribution of wealth.
• It may also lead to an increase in inflation in long term.
• Unskilled laborers may remain unpaid or lower paid, striving for survival.
• Non-public goods may get traded.
• Monopoly markets may increase for business with the best quality of products and it may shut down the business of other companies that are pocket-friendly for a certain set of individuals.
• The growth may become unsustainable in the long term.
• Increase in instability in the financial markets.

Conclusion

A free-market economy allows the consumers and producers/suppliers of goods and services to lead the way for prices, without any restriction by the government. Governments’ job is limited to proving the pathway or rules of the road, to lead the economy. Government majorly plays the role of a policymaker. The world has been experiencing variants of the free market economy.

Recommended Articles

This is a guide to Free Market Economy. Here we also discuss the introduction and how does free-market economy work along with its advantages and disadvantages. You may also have a look at the following articles to learn more –

1. What is Command Economy?
2. Command Economy Examples
3. Commodity Market
4. Investing in Currency