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Revision as of 05:17, 27 December 2004 by RJII (talk | contribs) (→Theory: free market doesn't require universal availabity of all goods to all people)(diff) ← Previous revision | Latest revision (diff) | Newer revision → (diff)A free market is an idealized market where all economic decisions by participants are free of coercive influence. If a government is present, its use of force in the marketplace is 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; the enforcement of these rules may be carried out by a neutral referee (government). Players in this game may have very differing skills and endowments, 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.
Theory
In the ideal free market (formalised in economics as perfect competition), the law of supply and demand predominates, 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. In this mathematical ideal market, the distribution of products is Pareto optimal, meaning that no purchaser could have his or her purchasing limits filled in a way more useful to them without reducing the usefulness of some other purchaser's bundle of products. Optimality in this sense refers only to the distribution of products given the pre-existing purchasing power of the participants; it does not have anything to say about the equity of the allocation of purchasing power itself. The necessary components for the functioning of a simple, mathematically pure free market include the complete absence of artificial price pressures from taxes, subsidies, tariffs, or government regulation, and no artificial monopolies (the United States Post Office, Amtrak, arguably patents, etc.) or similar arrangements on the part of the actors.
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. However, in financial economics, a liquid stock market is considered the closest approximation in the real world to a "free market".
Practice
While the free-market is an idealized mathmatical 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, and asymmetrically distributed knowledge 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, adverse selection, moral hazard, and the principal-agent problem. 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.
Modern trends that promote international market systems are often described by detractors as neoliberalism.
See also
- Adam Smith
- Austrian School
- Capitalism
- Free Information Infrastructure
- Friedrich Hayek
- Game theory
- Heritage Foundation
- LIEO
- Milton Friedman
- Negative liberty
- Nash equilibrium
- School of Salamanca
Contrast
- Communism
- Libertarian socialism
- Mixed economy
- Participatory economy
- Planned economy
- Socialism
- Statism