| Revision as of 09:28, 23 November 2009 editJohn Asfukzenski (talk | contribs)277 editsNo edit summary← Previous edit | Revision as of 09:29, 23 November 2009 edit undo172.163.142.128 (talk) ←Blanked the pageTag: blankingNext edit → | ||
| Line 1: | Line 1: | ||
| {{For|free-market economy|Market economy}} | |||
| {{Liberalism sidebar|expand=all}} | |||
| {{Libertarianism sidebar|expanded=all}} | |||
| A '''free market''' describes a ] without ] and ] by government except to regulate against force or fraud. The terminology is used by ]s and in popular culture. A free ] requires protection of property rights, but no regulation, no subsidization, no single ], and no governmental monopolies. It is the opposite of a ], where the government regulates prices or how property is used. | |||
| The theory holds that within the ideal free market, ] are voluntarily exchanged at a price arranged solely by the mutual consent of ] and ]. By definition, buyers and sellers do not ] each other, in the sense that they obtain each other's property rights without the use of physical force, threat of physical force, or fraud, nor are they coerced by a third party (such as by government via ]) <ref> Rothbard, Murray. The Concise Encyclopedia of Economics</ref> and they engage in trade simply because they both consent and believe that what they are getting is worth more than or as much as what they give up. Price is the result of buying and selling decisions en masse as described by the law of ]. | |||
| Free markets contrast sharply with '']s'' or '']s'', in which governments directly or indirectly regulate prices or supplies, which according to free market theory causes markets to be less efficient.<ref>Dictionary of Finance and Investment Terms. Barrons, 1995</ref> Where government intervention exists, the market is a ]. | |||
| In the marketplace the price of a good or service helps communicate consumer demand to producers and thus directs the allocation of resources toward consumer, as well as investor, satisfaction. In a free market, price is a result of a plethora of voluntary transactions, rather than political decree as in a controlled market. Through free competition between vendors for the provision of products and services, prices tend to decrease, and quality tends to increase. A free market is not to be confused with a ] where individuals have ] and there is ]. | |||
| Free market economics is closely associated with '']'' economic philosophy, which advocates approximating this condition in the real world by mostly confining government intervention in economic matters to regulating against force and fraud among market participants. Some free market advocates oppose ] as well, claiming that the market is more efficient at providing all valuable services of which ] and ] are no exception, that such services can be provided without direct taxation and that consent would be the basis of ] making it a morally consistent system. ]s, for example, would substitute ] agencies and ]. | |||
| In ], a ] is a system for ] goods within a society: ] mediated by ] within the market determines who gets what and what is produced, rather than the state. Early proponents of a free-market economy in 18th century Europe contrasted it with the ], ], and ] economies which preceded it. | |||
| ==Supply and demand== | |||
| {{Main|Supply and demand}} | |||
| Supply and demand are always equal as they are the two sides of the same set of transactions, and discussions of "imbalances" are a muddled and indirect way of referring to price.<ref>http://www.donsheelen.org/page14.aspx</ref> However, in an unmeasurable qualitative sense, demand for an item (such as goods or services) refers to the market pressure from people trying to buy it. They will "bid" money for the item, while sellers offer the item for money. When the bid matches the offer, a transaction can easily occur (even automatically, as in a typical ]). In reality, most shops and markets do not resemble the stock market, and there are significant costs and barriers to "shopping around" (comparison shopping). | |||
| When demand exceeds supply, suppliers can raise the price, but when supply exceeds demand, suppliers will have to decrease the price in order to make sales. Consumers who can afford the higher prices may still buy, but others may forgo the purchase altogether, demand a better price, buy a similar item, or shop elsewhere. As the price rises, suppliers may also choose to increase production. Or more suppliers may enter the business. | |||
| ==Gourmet coffee and electronics as examples of market forces in economics== | |||
| For example, the ] business, pioneered in the US by ], revealed a demand for high quality fresh coffee. Further, the Starbucks sales growth showed that consumers would pay significantly more for this type of coffee. Other food service retailers, such as ], ], and ], began offering such coffee to help satisfy the demand. | |||
| Increased supply can indirectly result in lower prices, particularly with ]s and other electronic devices. ] techniques have been steadily reducing prices 20 to 30% per year since the 1960s. {{Citation needed|date=November 2008}} The functions of a multi-million dollar mainframe computer in the 1960s could be performed by a $100 computer in the 2000s. | |||
| ==Spontaneous order or "Invisible hand"== | |||
| {{Main|Invisible hand|Spontaneous order}} | |||
| ] argues for the classical liberal view that market economies allow ]; that is, "a more efficient allocation of societal resources than any design could achieve."<ref>Hayek cited. Petsoulas, Christian. ''Hayek's Liberalism and Its Origins: His Idea of Spontaneous Order and the Scottish Enlightenment''. Routledge. 2001. p. 2</ref> According to this view, in market economies sophisticated business networks are formed which produce and distribute goods and services throughout the economy. This network was not designed, but ''emerged'' as a result of decentralized individual economic decisions. Supporters of the idea of spontaneous order trace their views to the concept of the ] proposed by ] in '']'' who said that the individual who: | |||
| <blockquote>"intends only his own gain is led by an ''invisible hand'' to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of it. By pursuing his own interest frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the good." ('']'')</blockquote> | |||
| Smith pointed out that one does not get one's dinner by appealing to the brother-love of the butcher, the farmer or the baker. Rather one appeals to their self interest, and pays them for their labour. | |||
| {{cquote|It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages."<ref>{{cite book |last=Smith |first=Adam |title=] |origyear=1776 |url=http://www.econlib.org/LIBRARY/Smith/smWN.html |accessdate=2007-12-08 |chapter=2 |chapterurl=http://www.econlib.org/LIBRARY/Smith/smWN1.html#B.I%2C%20Ch.2%2C%20Of%20the%20Principle%20which%20gives%20Occasion%20to%20the%20Division%20of%20Labour%2C%20benevolence | |||
| }}</ref>}} | |||
| Supporters of this view claim that spontaneous order is superior to any order that does not allow individuals to make their own choices of what to produce, what to buy, what to sell, and at what prices, due to the number and complexity of the factors involved. They further believe that any attempt to implement central planning will result in more disorder, or a less efficient production and distribution of goods and services. | |||
| ==Economic equilibrium== | |||
| {{Main|Economic equilibrium}} | |||
| ] has demonstrated, with varying degrees of mathematical rigor over time, that under certain conditions of ], the law of ] predominates in this ideal free and competitive market, influencing prices toward an ] that balances the demands for the products against the supplies.<ref>, by ]</ref><ref>''Theory of Value'', by ]</ref> At these equilibrium prices, the market distributes the products to the purchasers according to each purchaser's preference (or utility) for each product and within the relative limits of each buyer's ]. This result is described as market efficiency, or more specifically a ]. | |||
| This equilibrating behavior of free markets requires certain assumptions about their agents, collectively known as Perfect Competition, which therefore cannot be results of the market that they create. Among these assumptions are complete information, interchangeable goods and services, and lack of market power, that obviously cannot be fully achieved. The question then is what approximations of these conditions guarantee approximations of market efficiency, and which failures in competition generate overall market failures. Several Nobel Prizes in Economics have been awarded for analyses of market failures due to ]. | |||
| Some models in ]<ref name="ball"/> have shown that when agents are allowed to interact locally in a free market (ie. their decisions depend not only on utility and purchasing power, but also on their peers' decisions), prices can become unstable and diverge from the equilibrium, often in an abrupt manner.The behavior of the free market is thus said to be non-linear (a pair of agents bargaining for a purchase will agree on a different price than 100 identical pairs of agents doing the identical purchase). ] and the type of ] behavior often observed in stock markets are quoted as real life examples of non-equilibrium price trends. Laissez-faire free-market advocates, especially ] followers, often dismiss this endogenous theory, and blame external influences, such as weather, commodity prices, technological developments, and government meddling for non-equilibrium prices. | |||
| ==Distribution of wealth== | |||
| {{Main|Distribution of wealth}} | |||
| The distribution of purchasing power in an economy depends to a large extent on the nature of government intervention, ], ] and ], but also on other, lesser factors such as family relationships, ], ]s 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. The free market can be seen as facilitating a form of decision-making through what is known as ], where a purchase of a product is tantamount to casting a vote for a producer to continue producing that product. | |||
| The effect of ] on society's and individuals' ] remains a subject of controversy. ] and ] have shown that under certain idealized conditions, a system of free trade leads to ], but the traditional ] paradigm within economics is now being challenged by the new Greenwald-] paradigm (1986)<ref name=GREENWALD>GREENWALD, Bruce and STIGLITZ, Joseph E. 1986 Externalities in Economies with Imperfect Information and Incomplete Markets, Quarterly Journal of Economics, no. 90.</ref>. Many advocates of free markets, most notably ], have also argued that there is a direct relationship between economic growth and economic freedom, though this assertion is much harder to prove empirically, as the continuous debates among scholars on methodological issues in empirical studies of the connection between economic freedom and economic growth clearly indicate:<ref name=COLE> Econ Journal Watch, | |||
| Volume 4, Number 1, January 2007, pp 71–78. </ref><ref name=HAAN> Econ Journal Watch, Volume 3, Number 3, September 2006, pp 407–411. </ref><ref name=SECOND> Econ Journal Watch, | |||
| Volume 4, Number 1, January 2007, pp 79–82.</ref>. "there were a few attempts to study relationship between growth and economic freedom | |||
| prior to the very recent availability of the Fraser data. These were useful but had to use incomplete and subjective variables"<ref name=CHICAGO> Journal of Developing Areas, Vol.32, No.3, Spring 1998, 327-338. Publisher: Western Illinois University. </ref>. ] and Robert Axtell have attempted to predict the properties of free markets empirically in the agent-based computer simulation "]". They came to the conclusion that, again under idealized conditions, free markets lead to a ] of wealth<ref name="ball">''Critical Mass'' - ], ISBN 0-09-945786-5</ref> . | |||
| On the other hand more recent research, specially the one led by ] seems to contradict Friedman's conclusions. According to Boettke: | |||
| ::Once incomplete and imperfect information are introduced, ] defenders of the market system cannot sustain descriptive claims of the ] of the real world. Thus, ]'s use of rational-expectations equilibrium assumptions to achieve a more realistic understanding of capitalism than is usual among rational-expectations theorists leads, paradoxically, to the conclusion that capitalism deviates from the model in a way that justifies state action--]--as a remedy.<ref name=BOETTKE></ref> | |||
| ==Laissez-faire economics== | |||
| {{Main|Laissez-faire economics}} | |||
| The necessary components for the functioning of an idealized free market include the complete absence of artificial price pressures from taxes, subsidies, ]s, or government regulation (other than protection from coercion and theft, and no ] (usually classified as ] by free market advocates) like the ], ], arguably ]s, etc. | |||
| ===Deregulation=== | |||
| {{Main|Deregulation}} | |||
| In an absolutely ''free-market economy'', all capital, goods, services, and money flow transfers are unregulated by the government except to stop collusion or fraud that may take place among market participants. {{Citation needed|date=July 2009}} As this protection must be funded, such a government taxes only to the extent necessary to perform this function, if at all. This state of affairs is also known as '']''. | |||
| Internationally, free markets are advocated by proponents of ]; in Europe this is usually simply called ''liberalism''. In the ], support for free market is associated most with ]. Since the 1970s, promotion of a global free-market economy, ] and ], is often described as ]. | |||
| The term ''free market economy'' is sometimes used to describe some economies that exist today (such as ]), but pro-market groups would only accept that description if the government practices ''laissez-faire'' policies, rather than state intervention in the economy.{{Specify|date=January 2007}} An economy that contains significant economic interventionism by government, while still retaining some characteristics found in a free market is often called a '']''. | |||
| ===Low barriers to entry=== | |||
| A free market does not require the existence of competition, however it does require that there are no barriers to new market entrants. Hence, in the lack of coercive barriers it is generally understood that competition flourishes in a free market environment. It often suggests the presence of the ], although neither a profit motive or profit itself are necessary for a free market. All modern free markets are understood to include ]s, both individuals and ]es. Typically, a modern free market economy would include other features, such as a ] and a ] sector, but they do not define it. | |||
| ==Legal tender and taxes== | |||
| In a truly free market economy, money would not be monopolized by ] laws or by a central bank, in order to receive ] from the transactions or to be able to issue ]s. {{Citation needed|date=January 2007}} ] (advocates of minimal government) contend that the so called "coercion" of taxes is essential for the market's survival, and a market free from taxes may lead to no market at all. By definition, there is no market without private property, and private property can only exist while there is an entity that defines and defends it. Traditionally, the State defends private property and defines it by issuing ownership titles, and also nominates the central authority to print or mint currency. "Free market anarchists" disagree with the above assessment{{ndash}} they maintain that private property and free markets can be protected by voluntarily-funded services under the concept of ] and ]<ref></ref><ref></ref>. A free market could be defined alternatively as a tax-free market, independent of any central authority, which uses as medium of exchange such as money, even in the absence of the State. It is disputed, however, whether this hypothetical stateless market could function. | |||
| ==Ethical justification== | |||
| The ethical ] of free markets takes two forms. One appeals to the intrinsic moral superiority of autonomy and freedom (in the market), see ]. The other is a form of ]—a belief that decentralised planning by a multitude of individuals making free economic decisions produces ''better results'' in regard to a more organized, efficient, and productive economy, than does a centrally-planned economy where a central agency decides what is produced, and allocates goods by non-price mechanisms. An older version of this argument is the ] of the ], familiar from the work of ]. | |||
| Modern theories of ] say the internal organization of a system can increase automatically without being guided or managed by an outside source. When applied to the market, as an ethical justification, these theories appeal to its ] as a self-organising entity. Other philosophies such as some forms of ] (especially that of that 19th century) and ] anarchism believe that in a free market competition would cause prices of goods and services to align with the labor embodied in those things. This goes against the contemporary mainstream view, which is held by most contemporary individualist anarchists, that prices would accord to the ] of these things irrespective of the labor embodied in them. | |||
| ==Index of economic freedom== | |||
| The ], a ] ], tried to identify the key factors which allow to measure the degree of freedom of economy of a particular country. In 1986 they introduced ], which is based on some fifty variables. This and other similar indices do not ''define'' a free market, but measure the ''degree'' to which a modern economy is free, meaning in most cases free of state intervention. The variables are divided into the following major groups: | |||
| *Trade policy, | |||
| *Fiscal burden of government, | |||
| *Government intervention in the economy, | |||
| *Monetary policy, | |||
| *Capital flows and foreign investment, | |||
| *Banking and finance, | |||
| *Wages and prices, | |||
| *Property rights, | |||
| *Regulation, and | |||
| *Informal market activity. | |||
| Each group is assigned a numerical value between 1 and 5; IEF is the arithmetical mean of the values, rounded to the hundredth. Initially, countries which were traditionally considered capitalistic received high ratings, but the method improved over time. Some economists, like ] and other ] have argued that there is a direct relationship between economic growth and economic freedom, but this assertion has not been proven yet, both theoretically and empirically. Continuous debates among scholars on methodological issues in empirical studies of the connection between economic freedom and economic growth still try to find out what is the relationship, if any.<ref name="COLE"/><ref name="HAAN"/><ref name="SECOND"/>.<ref name="CHICAGO"/>. | |||
| ::"In recent years a significant amount of work has been devoted to the investigation of a possible connection between the political system and economic growth. For a variety of reasons there is no consensus about that relationship, especially not about the direction of causality, if any." <small>(AYAL & KARRAS, 1998, p.2)</small><ref name="CHICAGO"/> | |||
| == History and ideology == | |||
| Some theorists might argue that a free market is a natural form of social organization, and that a free market will arise in any society where it is not obstructed (ie ], ]). The consensus among ] is that the free market economy is a specific historic phenomenon, and that it emerged in late medieval and early-modern Europe. Other economic historians see elements of the free market in the economic systems of ], and in some non-western societies. By the 19th century the market certainly had organized political support, in the form of ]. However, it is not clear if the support preceded the emergence of the market or followed it. Some historians see it as the result of the success of early liberal ], combined with the specific interests of the ]. | |||
| === Liberalism === | |||
| Support for the free market as an ordering principle of society is above all associated with ], especially during the 19th century. (In Europe, the term 'liberalism' retains its ] as the ideology of the free market, but in American and Canadian usage it came to be associated with government intervention, and acquired a ] meaning for supporters of the free market.) Later ideological developments, such as ], ] and ] also support the free market, and insist on its pure form. Although the ] shares a generally similar form of economy, usage in the United States and Canada is to refer to this as ], while in Europe 'free market' is the preferred neutral term. ] (American and Canadian usage), and in Europe ], seek only to mitigate the problems of an unrestrained free market, and accept its existence as such. | |||
| To most ]s, there is simply no free market yet, given the degree of state intervention in even the most 'capitalist' of countries. From their own perspective, those who say they favor a "free market" are speaking in a relative, rather than an absolute, sense—meaning (in libertarian terms) they wish that ] 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 ] on dividends so that equity financing is not at a disadvantage vis-a-vis debt financing. However, there are some such as ] who would not even allow for taxation and governments, instead preferring protectors of economic freedom in the form of private contractors. | |||
| == See also == | |||
| *] | |||
| *] | |||
| *'']'' | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| === Contrast === | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| *] | |||
| == Footnotes == | |||
| {{reflist}} | |||
| ==References== | |||
| * Journal of Developing Areas, Vol.32, No.3, Spring 1998, 327-338. Publisher: Western Illinois University. | |||
| * | |||
| * Stiglitz, Joseph. 1994. Whither Socialism? Cambridge, Mass.: MIT Press. | |||
| == External links == | |||
| * by ] | |||
| * is the official website of the ] for ] and ] | |||
| * one of the oldest organizations promoting classical liberalism and free markets | |||
| * Looks at how communication, coordination and cooperation interact to make free markets work | |||
| * by ] | |||
| * by ] | |||
| *, | |||
| * by Ambrose Evans-Pritchard, ''Daily Telegraph'', July 16 2009 | |||
| {{Age of Enlightenment}} | |||
| {{DEFAULTSORT:Free Market}} | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||
| ] | |||