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Some countries adopt a mixed economic system between a free market economy and a command economy. Some countries, such as Singapore, New Zealand, Australia, and Switzerland, are more inclined to free markets, according to the results of the 2020 Economic Freedom Index.
Definition of a free market economy
The free market economy is an economic system in which supply-demand forces take a role in economic activities without government interference. Businesses and individuals can sell and buy freely and avoid government intervention, such as taxes.
In a free market, the power of supply and demand determines prices and output. The market is entirely unregulated. Pricing acts to distribute goods and resources throughout the economy and as a signal for producers and consumers to adjust supply and demand.
The laissez-faire principle forms the basis of a free-market economy and capitalism. In this principle, non-market pressures (such as taxes, subsidies, and tariffs) should not exist because they make the market mechanism not work.
Free market economy features
- Private control of property and economic resources, in contrast to the command economy.
- Profit is the central motive of all businesses, allowing individuals to make money by setting up a business
- The legal system only focuses on protecting property rights
- The free mobility of capital and labor between regions or countries, towards its most efficient use
- The private sector dominates economic activity and the supply of goods and services
- Market mechanisms, changes in the supply and demand, determine prices and allocation of economic resources
- Market dictate what to produce, how much to produce, and for whom to produce.
Pros and cons
Supporters claim that this system has advantages, including its contribution to:
Economic growth. A free-market economy allows consumers to have diverse choices because businesses will compete to meet their needs. The competition will lead to innovation, contributing to increasing the number and variation of products and services.
Maximizing profits. The absence of government intervention allows businesses to maximize profits. No tax reduces their profits.
Efficient use of resources. Because profit is the sole motive, companies strive to produce goods and services at lower and more efficient ways.
Consumer sovereignty. The market economy allocates scarce resources according to the wants of consumers. The consumer is king. Business exists because it wants to meet the needs and desires of consumers.
Political and civil liberties. Everyone’s rights are respected and have the same right to control and maintain life, freedom, and property. The government ensures equal justice under the law.
Ensuring a competitive market. Often, some producers get support from the government, such as through subsidies or tax breaks. In a free market, that doesn’t happen.
In the other side, critics are of the view that the economic system contains several weaknesses, such as:
Economic inequality. Those who win will rule the economy. And, those who are uncompetitive will be poor and unable to access essential products.
Unemployment. Businesses prefer to use profitable factors of production, including replacing labor with machines.
Scarcity of public goods. Because the company is profit-oriented, they certainly do not want to provide public goods because unprofitable.
Monopolistic and collusive practices. When unregulated, competition will lead to one winner. They will behave anti-competitive and force competitors out of the industry. When a few companies remain, the market is vulnerable to monopolies, price-fixing, or cartels.
Environmental degradation. Companies are interested in sustaining their profits. They will tend to exploit natural resources on a large scale. Because there are no rules, they could ignore the awareness of product safety and the environment.
