Free Market Economy: Definition, Advantages, and Examples

A free market economy is governed solely by the principle of voluntary exchange and the law of supply and demand. Unlike a command economy (for example, the defunct Soviet Union) in which a central body directs market conditions and changes, there’s no government regulation over the exchange of goods and services in a pure free market system. (Economists often refer to this lack of regulation as a laissez-faire approach.) Instead, choices made by private individuals direct market forces—a phenomenon Scottish economist Adam Smith referred to as the invisible hand.

Free market economies tend to be capitalistic, free enterprise institutions, meaning that they believe in private property. There are also no barriers to entry preventing the exchange of that property in the market.

Proponents of free market economies point to several features that make it a superior economic system, including:

• Faster, more responsive markets: The government acts to rectify market failures in a command economy. On the other hand, the market should theoretically self-regulate in a free market economy as consumers and manufacturers make the economic decisions necessary to adjust to new conditions. Since the means of production are diffuse and privately owned, they can more quickly create a new normal.
• Consumer choice: New competitors can enter any market at any time in a free market economy, meaning consumers have the economic freedom (and therefore the market power) to influence what producers sell and at what price.
• Greater economic growth: Since the pursuit of profit motivates actors in a free market, each one is theoretically encouraged to work harder and produce more out of self-interest. Free market advocates argue that this contributes to faster and more sustainable economic growth than other systems can achieve.

Critics of the free market have rebuttals to many of the supposed strengths of the system:

• Destabilization: While the pursuit of profit can lead to growth and innovation, it can encourage actions that make the market less accessible or destabilize the economy at large. For example, without government intervention like price controls, drug manufacturers can raise prices on a medication that’s in high demand. Similarly, speculation can easily lead to recessions without centralized economic policies that govern financial markets.
• Inequality: Many economists have argued that a purely free market makes inequality inevitable—when one person gains, another very likely loses. For example, hoarding property rights can create a system in which the owners continually profit and the consumers never get a piece of the pie. Without oversight in place, there’s nothing to stop the rich from getting richer and the poor from getting poorer.
• Other social priorities: Since self-interest drives free market systems, the market doesn’t consider morality. As a result, public goods, like public health and the environment, can suffer because there’s no incentive to direct resources toward them.

Purely free market economies don’t exist since even the most hands-off governments influence domestic commerce laws and regulations. Instead, most economies exist along a spectrum from command to free market economy. That said, here are some of the world’s more free market–oriented governments:

1. 1. Hong Kong: Hong Kong’s tax rate is very low, meaning the average consumer has more direct control over how they spend their money. (In countries with higher taxation rates, more private property goes toward the public good). Hong Kong also doesn’t impose tariffs, meaning there’s free trade in and out of the country, and imported goods compete more freely with domestic goods.
2. 2. Singapore: Singapore uses preferential trade agreements but is still generally open to foreign investment. Additionally, the government makes a point of strictly enforcing private property rights in its legal system.
3. 3. Switzerland: Switzerland maintains a meager federal income tax rate and very few price controls, though, like many countries, it does subsidize agricultural production. It also has robust financial markets that welcome outside investment, meaning the government has minimal intervention in that sector.

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