Free market: Difference between revisions
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{{For|economic systems coordinated by either free markets or regulated markets|Market economy}} |
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{{refimprove|date=February 2012}} |
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{{Capitalism}} |
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A '''free market''' is a market structure in which the distribution and costs of goods and services, [[wage|wage rates]], [[interest|interest rates]] — along with the structure and hierarchy between capital and consumer goods — are coordinated by [[supply and demand]] unhindered by external regulation or control by government or monopolies.<ref>[http://dictionary.reference.com/browse/free%20market]. Dictionary.com</ref> A free market contrasts with a [[controlled market]] or regulated market, in which government policy intervenes in the setting of prices. An economy composed entirely of free markets is referred to as a ''[[free-market economy]]''. |
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Although free markets are commonly associated with [[capitalism]] in contemporary usage and [[popular culture]], markets have been advocated by [[Socialism|socialists]] and have been included in various different proposals for [[market socialism]].<ref>{{cite book |last= Bockman|first= Johanna |title= Markets in the name of Socialism: The Left-Wing origins of Neoliberalism|publisher= Stanford University Press|year= 2011|month= |isbn= 978-0-8047-7566-3.}}</ref> |
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==Economic systems== |
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===Laissez-faire economics=== |
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{{Libertarianism sidebar}} |
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{{Main|Laissez-faire}} |
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The laissez-faire principle expresses a preference for an absence of non-market pressures on prices and wages, such as those from government taxes, subsidies, [[tariff]]s, regulation (other than protection from coercion and theft), or [[government-granted monopoly|government-granted]] or [[coercive monopoly|coercive monopolies]]. [[Friedrich Hayek]] argued in ''The Pure Theory of Capital'' that the goal is the preservation of the unique information contained in the price itself.<ref name="hayek_pure">''The Pure Theory of Capital'', F.A. Hayek, 1941</ref> |
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The exact definition of ''free market'' has been disputed and made complex by collectivist political philosophers and socialist economic ideas.<ref>{{cite book |last= Popper| first= Karl |title=The Open Society and Its Enemies| Publisher= Routledge Classics|year=1994 |ISBN= 978-0-415-61021-6}}</ref> This contention arose from the divergence of [[Classical economics|classical economists]] such as [[Adam Smith]], [[David Ricardo]], [[Thomas Malthus]] and [[Karl Marx]] from the continental economic science developed primarily by the Spanish scholastic and French classical economists, including [[Richard Cantillon]], [[Anne-Robert-Jacques Turgot]], [[Jean-Baptiste Say]] and [[Frédéric Bastiat]]. To illustrate the ambiguity, Smith discarded [[subjective value theory]] and contended that an unregulated market was prone to the rise of monopolies and was therefore not "free" in this sense. Eventually Marx expanded [[Ricardian economics|Ricardian]] cost theory into the [[labour theory of value]] and suggested that the market was [[Business cycle|inherently unstable]], prone to [[Crisis theory|crisis]] and exploitative.<ref>{{cite book |last= Popper| first= Karl |title=The Logic of Scientific Discovery| Publisher= Routledge Classics|year=2002 |ISBN= 10: 0415278449.}}</ref><ref>[http://www.youtube.com/watch?v=cuvl-7abgFs] Classical Economics.</ref><ref>[http://library.mises.org/media/The%20History%20of%20Economic%20Thought%20From%20Marx%20to%20Hayek/Ideology%20and%20Theories%20of%20History%20Murray%20N%20Rothbard.mp3 History of economic thought]</ref> In modern economics, this split is still present both in scientific methodology and political philosophy. Neoclassical [[Keynesian]], [[monetarism|monetarist]] and [[Chicago school of economics|Chicago school economists]] employ logical positivism and promote the socialisation of money, price fixed interest rates, market regulation, as well as public spending programs in order to "free" people from the inherent inequalities of laissez-faire economies. |
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During the [[Marginal utility#The Marginal Revolution|marginal revolution]], subjective value theory was rediscovered, which prompted the restoration of [[praxeology|praxeological]] methodology previously employed.<ref>{{cite book |last= Popper| first= Karl |title=The Poverty of Historicism| Publisher= Routledge Classics|year=2002 |isbn= 0415278465}}</ref> In contrast with other schools of economic thought, [[Austrian economists]] reject positivistic and panphysicalistic distortions of determinism, the doctrines of materialism, positivism, behaviorism, historicism, relativism, and other methodologies developed in physics and biology from the study of human action in general, economics, and catallactics.<ref>[http://mises.org/daily/3910/What-We-Can-Know-About-the-World] Theory and History. </ref> Praxeological developments in economic theory such as [[methodological individualism]] in turn restored [[classical liberalism|classical liberal]] [[individualism|individualist]] policy. Modern [[Austrian economics|Austro-libertarians]] and neo-classsical liberals advocate laissez-faire as the only alternative to bureaucracy and authoritarianism.<ref>{{cite book |last= Böhm-Bawerk| first= Eugen von |title= Control or Economic Law| Publisher= Terra Libertas Limited|year=2011 |isbn= 1908089164.}}</ref> In contrast to Smith, the individualist-anarchist [[Benjamin Tucker]] saw the market as the only alternative to state monopoly. |
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===Socialist economics=== |
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{{Socialism sidebar}} |
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Various forms of socialism based on, or which advocate, free markets have existed since the 19th century. Early notable socialist proponents of free-markets include [[Pierre-Joseph Proudhon]], [[Benjamin Tucker]] and the [[Ricardian socialist]]s, who believed that genuinely free markets and [[voluntary exchange]] cannot exist within the [[Exploitation (Marxism)|exploitative]] conditions of [[capitalism]]. |
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These proposals ranged from various forms of [[worker cooperative]]s coordinated by free markets such as [[Mutualism (economic theory)]], to state-owned enterprises competing with each other in open and unregulated markets. These models of socialism are not to be confused with other forms of market socialism (e.g. the [[Lange model]]) where publicly owned enterprises are coordinated by a degree of [[economic planning]] in setting prices for capital goods. |
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[[Léon Walras]], one of the founders of the [[Neoclassical economics|neoclassical school of economics]] who helped formulate the [[general equilibrium theory]], argued that free competition could only be realized under conditions of state ownership of natural resources and land. Additionally, income taxes could be eliminated because the state would receive income to finance public services through owning such resources and enterprises.<ref>{{cite book |last= Bockman|first= Johanna |title= Markets in the name of Socialism: The Left-Wing origins of Neoliberalism|publisher= Stanford University Press|year= 2011|month= |isbn= 978-0-8047-7566-3|page = 21|quote= For Walras, socialism would provide the necessary institutions for free competition and social justice. Socialism, in Walras's view, entailed state ownership of land and natural resources and the abolition of income taxes. As owner of land and natural resources, the state could then lease these resources to many individuals and groups, which would eliminate monopolies and thus enable free competition. The leasing of land and natural resources would also provide enough state revenue to make income taxes unnecessary, allowing a worker to invest his savings and become 'an owner or capitalist at the same time that he remains a worker.}}</ref> |
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Advocates of free-market socialism, such as [[Jaroslav Vanek]], argue that genuine free markets are not possible under conditions of private ownership over productive property because the class differences and inequalities in income and power that ensue from this arrangement enable interests of the dominant class to skew the market to their favor, either in the form of monopoly and market power, or by utilizing their wealth and resources to pass government regulations and policies that benefit their specific business interests.<ref>"Cooperative Economics: An Interview with Jaroslav Vanek", interview by Albert Perkins. Retrieved March 17, 2011: http://www.ru.org/51cooper.html</ref> Additionally, Vanek states that workers in a socialist economy based on cooperative and self-managed enterprises would have stronger incentives to maximize productivity because they would receive a share of the profits (based on the overall performance of their enterprise) in addition to receiving a fixed wage or salary. Similar outcomes could be accomplished in a capitalistic free market if the employee were to purchase stock of the company they work for. |
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Excessive disparities in income distribution emerging from private ownership are alleged by proponents of this system to lead to social instability that requires costly corrective measures in the form of [[social welfare]] and redistributive taxation and heavy administrative costs to administer them while weakening the incentive to work, inviting dishonesty and increasing the likelihood of tax evasion while reducing the overall efficiency of the market economy and necessitating government regulation over markets.<ref name="The Political Economy of Socialism 1982. P.197-198">''The Political Economy of Socialism'', by Horvat, Branko. 1982. (P.197-198)</ref> |
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==Concepts== |
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===Supply and demand=== |
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{{Main|Supply and demand}} |
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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 in return sellers offer the item for money. When the bid matches the offer, a transaction can easily occur (even instantenously, as in a typical [[stock market]]). In Western society, most shops and markets do not resemble the stock market, and there are significant costs and barriers to "shopping around" (comparison shopping). |
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The model is commonly applied to wages, in the market for labor. The typical roles of supplier and consumer are reversed. The suppliers are individuals, who try to sell (supply) their labor for the highest price. The consumers of labors are businesses, which try to buy (demand) the type of labor they need at the lowest price. As population increase wages fall for any given unskilled or skilled labor supply. Conversely, wages tend to go up with a decrease in population. |
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When demand exceeds supply, suppliers tend to raise their prices, but when supply exceeds demand, suppliers will tend to decrease their prices 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. |
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===Economic equilibrium=== |
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{{Main|Economic equilibrium}} |
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[[General equilibrium theory]] has demonstrated, with varying degrees of mathematical rigor over time, that under certain conditions of [[Perfect Competition|competition]], the law of [[supply and demand]] predominates in this ideal free and competitive market, influencing prices toward an [[economic equilibrium|equilibrium]] that balances the demands for the products against the supplies.<ref>''Theory of Value'', by [[Gérard Debreu]]</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 [[purchasing power]]. This result is described as market efficiency, or more specifically a [[Pareto optimum]]. |
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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 several which are impossible to fully achieve in a real market, such as complete information, interchangeable goods and services, and lack of market power. 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 [[asymmetric information]]. |
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Some models in [[econophysics]]<ref name="ball"/> have shown that when agents are allowed to interact locally in a free market (i.e. 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 scale sensitive (a pair of agents bargaining for a purchase will agree on a different price than 100 identical pairs of agents doing the identical purchase). [[Economic bubble|Speculation bubbles]] and the type of [[herd]] behavior often observed in stock markets are quoted as real life examples of non-equilibrium price trends. Some laissez-faire free-market advocates, like Chicago school economists, often dismiss this endogenous theory, and blame external influences, such as weather, commodity prices, technological developments, and government meddling for non-equilibrium prices. |
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===Low barriers to entry=== |
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A free market does not require the existence of competition, however it does require that there are no legal barriers to new market entrants. Hence, in the lack of coercive barriers, and in markets with low entry cost it is generally understood that competition flourishes in a free-market environment. It often suggests the presence of the [[Profit (economics)|profit motive]], although neither a profit motive or profit itself are necessary for a free market. All modern free markets are understood to include [[entrepreneur]]s, both individuals and [[business]]es. Typically, a modern free market economy would include other features, such as a [[stock exchange]] and a [[financial services]] sector, but they do not define it. |
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===Spontaneous order=== |
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{{Main|Invisible hand|Spontaneous order}} |
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[[Friedrich Hayek]] argues for the classical liberal view that market economies allow [[spontaneous order]]; 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 [[invisible hand]] proposed by [[Adam Smith]] in ''[[The Wealth of Nations]]'' who said that the individual who: |
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{{quote|By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, 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 [an individual] 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 [common] good.|Adam Smith, ''[[Wealth of Nations]]''}} |
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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 labor. |
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{{quote|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.|Adam Smith<ref>{{Citation | last = Smith | first = Adam | author-link = Adam Smith | title = Wealth of Nations | place = London | publisher = W. Strahan and T. Cadell | year = 1776 |
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| month= | volume = 1 | edition = | 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 | page = | pages = | url = http://www.econlib.org/LIBRARY/Smith/smWN.html |
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| archiveurl = | archivedate = | doi = | id = | isbn = }}</ref>}} |
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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. |
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Critics, such as political economist [[Karl Polanyi]], question whether a spontaneously ordered market can exist, completely free of "distortions" of political policy; claiming that even the ostensibly freest markets require a state to exercise coercive power in some areas - to enforce [[contract]]s, to govern the formation of [[labor union]]s, to spell out the rights and obligations of [[corporation]]s, to shape who has standing to bring legal actions, to define what constitutes an unacceptable [[conflict of interest]], etc.<ref>''Winner-Take-All Politics: How Washington Made the Rich Richer--and Turned Its Back on the Middle Class'' by [[Jacob S. Hacker]] and [[Paul Pierson]], Simon & Schuster 2010, p.55</ref> |
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==Studies== |
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{{Main|Distribution of wealth}} |
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[[Joshua M. Epstein|Joshua Epstein]] and [[Robert Axtell]] have attempted to predict the properties of free markets empirically in the agent-based computer simulation "[[Sugarscape]]". They came to the conclusion that, under idealized conditions, free markets lead to a [[Pareto distribution]] of wealth.<ref name="ball">''Critical Mass'' – [[Philip Ball|Ball, Philip]], ISBN 0-09-945786-5</ref> |
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The [[Heritage Foundation]], a [[Conservatism|conservative]] [[think tank]], tried to identify the key factors necessary to measure the degree of freedom of economy of a particular country. In 1986 they introduced the [[Index of Economic Freedom]], 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: |
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* Trade policy, |
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* [[Fiscal burden of government]], |
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* Government intervention in the economy, |
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* Monetary policy, |
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* Capital flows and foreign investment, |
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* Banking and finance, |
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* Wages and prices, |
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* Property rights, |
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* Regulation, and |
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* Informal market activity. |
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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 [[Milton Friedman]] and other [[Laissez-faire|Laissez-faire economists]] have argued that there is a direct relationship between economic growth and economic freedom, and studies suggest this is true.<ref name=CHICAGO>[http://www.freetheworld.com/papers/Ayal_and_Karras.pdf AYAL, Eliezer B. and KARRAS, Georgios. ''Components of Economic Freedom and Growth.''] Journal of Developing Areas, Vol.32, No.3, Spring 1998, 327–338. Publisher: Western Illinois University.</ref> 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>[http://www.econjournalwatch.org/pdf/ColeLawsonRejoinderJanuary2007.pdf COLE, Julio H. and LAWSON, Robert A. ''Handling Economic Freedom in Growth Regressions: Suggestions for Clarification.''] Econ Journal Watch, |
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Volume 4, Number 1, January 2007, pp 71–78.</ref><ref name=HAAN>[http://www.econjournalwatch.org/pdf/deHaanSturmReplySeptember2006.pdf DE HAAN, Jacob and STURM, Jan-Egbert. ''How to Handle Economic Freedom: Reply to Lawson.''] Econ Journal Watch, Volume 3, Number 3, September 2006, pp 407–411.</ref><ref name=SECOND>[http://www.econjournalwatch.org/pdf/DeHaanSturmReplyJanuary2007.pdf DE HAAN, Jacob and STURM, Jan-Egbert. ''Handling Economic Freedom in Growth Regressions: A Reply to Cole and Lawson''.] Econ Journal Watch, |
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Volume 4, Number 1, January 2007, pp 79–82.</ref> |
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==Misconceptions== |
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Some advocates of free market ideologies have criticized mainstream conceptions of the free market, arguing that a truly free market would not resemble the modern-day capitalist economy. For example, contemporary mutualist [[Kevin Carson]] argues in favor of "free market anti-capitalism." Carson has stated that "From Smith to Ricardo and Mill, classical liberalism was a revolutionary doctrine that attacked the privileges of the great landlords and the mercantile interests. Today, we see vulgar libertarians perverting ‘free market’ rhetoric to defend the contemporary institution that most closely resembles, in terms of power and privilege, the landed oligarchies and mercantilists of the Old Regime: the giant corporation."<ref>Kevin Carson, [http://mutualist.blogspot.com/2007/11/naomi-klein-shock-doctrine.html Naomi Klein: The Shock Doctrine November 7, 2007]</ref> |
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Carson believes that a true free market society would be "[a] world in which... land and property [is] widely distributed, capital [is] freely available to laborers through mutual banks, productive technology [is] freely available in every country without patents, and every people [is] free to develop locally without colonial robbery..."<ref>Kevin Carson, [http://flag.blackened.net/daver/anarchism/iron_fist.html The Iron Fist Behind the Invisible Hand: Corporate Capitalism as a State-Guaranteed System of Privilege]</ref> |
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==Criticisms== |
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Two prominent Canadian authors (both very hostile to the "Chicago School" philosophy) argue that government at times has to intervene to ensure competition in large and important industries. [[Naomi Klein]] illustrates this roughly in her work ''[[The Shock Doctrine]]'' and [[John Ralston Saul]] more humorously illustrates this through various examples in ''The Collapse of Globalism and the Reinvention of the World''.<ref name="The End of Globalism. Saul, John">The End of Globalism. Saul, John.</ref> While its supporters argue that only a free market can create healthy competition and therefore more business and reasonable prices, opponents say that a free market in its purest form may result in the opposite. According to Klein and Ralston, the merging of companies into giant corporations or the privatization of government-run industry and national assets often result in monopolies (or oligopolies) requiring government intervention to force competition and reasonable prices.<ref name="The End of Globalism. Saul, John"/> |
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Critics dispute the claim that in practice free markets create [[perfect competition]], or even increase [[market competition]] over the [[long run]]. Whether the marketplace ''should be'' or ''is'' free is disputed; many assert that government intervention is necessary to remedy [[market failure]] that is held to be an inevitable result of absolute adherence to free market principles. These failures range from [[military]] services to [[free market roads|roads]], and some would argue, to health care. This is the central argument of those who argue for a mixed market, free at the base, but with government oversight to control social problems. |
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Critics of laissez-faire since [[Adam Smith]]<ref>"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."—''Wealth of Nations'', I.x.c.27 (Part II)</ref> variously see the unregulated market as an impractical ideal or as a [[rhetorical device]] that puts the concepts of freedom and anti-[[protectionism]] at the service of vested wealthy interests, allowing them to attack [[labor law]]s and other protections of the [[working class]]es.<ref>"Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate… [When workers combine,] masters… never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against the combinations of servants, labourers, and journeymen."—Adam Smith, ''Wealth of Nations'', I.viii.13</ref> |
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Because no national economy in existence fully manifests the ideal of a free market as theorized by economists, some critics of the concept consider it to be a fantasy – outside of the bounds of reality in a complex system with opposing interests and different distributions of wealth. |
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These critics range from those who reject markets entirely, in favour of a [[planned economy]], such as that advocated by various [[Marxists]], to those who wish to see market failures regulated to various degrees or supplemented by government interventions. For example, [[Keynesians]] support a role for government in providing corrective measures, such as use of fiscal policy for economy stimulus, when decisions in the private sector are believed to lead to suboptimal economic outcomes, such as [[depression (economics)|depression]] or [[recession]], which manifest in widespread hardship. Business cycle theory is used by Keynes to explain '[[liquidity trap]]s' by which underconsumption occurs, to argue for government intervention with central banking. Free market economists consider this credit-expansion as the cause of the business cycle in refutation of this Keynesian criticism. |
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===Simulation of biological laws=== |
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{{See also|Social Darwinism}} |
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[[File:Impala mutualim with birds wide.jpg|thumb|250px|The [[Red-billed Oxpecker]] feed on ticks off the [[impala]]'s coat.]] |
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The free market is believed to self-regulate in the most efficient and just way. Adam Smith described this behavior applied to competitive markets with the metaphor of an [[invisible hand]] urging society towards prosperity. |
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Some economists, sociologists and political scientists proposed that in a fully competitive economic environment, the most potent individuals would thrive and in turn society would prosper. |
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==See also== |
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{{Div col|cols=3}} |
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* [[Capitalism]] |
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* [[Economic liberalism]] |
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* [[Free trade]] |
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* [[Black market]] |
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* [[Grey market]] |
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* [[Market socialism]] |
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* [[Participatory economy]] |
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* [[Quasi-market]] |
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* [[Self-managed economy]] |
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* [[Transparency (market)]] |
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{{Div col end}} |
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==Notes== |
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{{Reflist|colwidth=35em}} |
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==References== |
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* [http://www.freetheworld.com/papers/Ayal_and_Karras.pdf AYAL, Eliezer B. and KARRAS, Georgios. ''Components of Economic Freedom and Growth.''] Journal of Developing Areas, Vol.32, No.3, Spring 1998, 327–338. Publisher: Western Illinois University. |
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* [http://www.the-dissident.com/Boettke_CR.pdf BOETTKE, Peter J. ''What Went Wrong with Economics?'', Critical Review Vol. 11, No. 1, P. 35. p. 58] |
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* Palda, Filip (2011) ''Pareto's Republic and the New Science of Peace'' 2011 [http://www.paretorepublic.com] chapters online. Published by Cooper-Wolfling. ISBN 978-0-9877880-0-9 |
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* Stiglitz, Joseph. 1994. Whither Socialism? Cambridge, Massachusetts: MIT Press. |
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==External links== |
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* [http://www.dallasfed.org/educate/free/index.html Free Enterprise: The Economics of Cooperation] Looks at how communication, coordination and cooperation interact to make free markets work |
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* [http://www.fff.org/freedom/0292d.asp ''Fair versus Free''] by [[Milton Friedman]] |
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* [http://www.harrybrowne.org/GLO/FreeTrade.htm Freedom to Work, to Earn, & to Buy] by [[Harry Browne]] |
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* [http://www.econlib.org/library/Essays/LtrLbrty/bryTSO1.html The Tradition of Spontaneous Order], |
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{{Aspects of capitalism}} |
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{{Age of Enlightenment}} |
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{{DEFAULTSORT:Free Market}} |
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[[Category:Capitalism]] |
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[[Category:Classical liberalism]] |
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[[Category:Libertarian theory]] |
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[[Category:Economic liberalism]] |
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[[Category:Free market| ]] |
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[[af:Vrye mark]] |
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[[bg:Свободен пазар]] |
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[[ps:ازاد بازار]] |
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[[pt:Mercado livre]] |
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[[ro:Piața bunurilor economice]] |
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[[ru:Свободный рынок]] |
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[[sk:Voľný trh]] |
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[[fa:بازار آزاد]] |
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[[ta:திறந்த சந்தை]] |
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[[tr:Serbest piyasa]] |
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[[vi:Thị trường tự do]] |
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[[zh:自由市場]] |
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A free market is a market structure in which the distribution and costs of goods and services, wage rates, interest rates — along with the structure and hierarchy between capital and consumer goods — are coordinated by supply and demand unhindered by external regulation or control by government or monopolies.[1] A free market contrasts with a controlled market or regulated market, in which government policy intervenes in the setting of prices. An economy composed entirely of free markets is referred to as a free-market economy.
Although free markets are commonly associated with capitalism in contemporary usage and popular culture, markets have been advocated by socialists and have been included in various different proposals for market socialism.[2]
Economic systems
Laissez-faire economics
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The laissez-faire principle expresses a preference for an absence of non-market pressures on prices and wages, such as those from government taxes, subsidies, tariffs, regulation (other than protection from coercion and theft), or government-granted or coercive monopolies. Friedrich Hayek argued in The Pure Theory of Capital that the goal is the preservation of the unique information contained in the price itself.[3]
The exact definition of free market has been disputed and made complex by collectivist political philosophers and socialist economic ideas.[4] This contention arose from the divergence of classical economists such as Adam Smith, David Ricardo, Thomas Malthus and Karl Marx from the continental economic science developed primarily by the Spanish scholastic and French classical economists, including Richard Cantillon, Anne-Robert-Jacques Turgot, Jean-Baptiste Say and Frédéric Bastiat. To illustrate the ambiguity, Smith discarded subjective value theory and contended that an unregulated market was prone to the rise of monopolies and was therefore not "free" in this sense. Eventually Marx expanded Ricardian cost theory into the labour theory of value and suggested that the market was inherently unstable, prone to crisis and exploitative.[5][6][7] In modern economics, this split is still present both in scientific methodology and political philosophy. Neoclassical Keynesian, monetarist and Chicago school economists employ logical positivism and promote the socialisation of money, price fixed interest rates, market regulation, as well as public spending programs in order to "free" people from the inherent inequalities of laissez-faire economies.
During the marginal revolution, subjective value theory was rediscovered, which prompted the restoration of praxeological methodology previously employed.[8] In contrast with other schools of economic thought, Austrian economists reject positivistic and panphysicalistic distortions of determinism, the doctrines of materialism, positivism, behaviorism, historicism, relativism, and other methodologies developed in physics and biology from the study of human action in general, economics, and catallactics.[9] Praxeological developments in economic theory such as methodological individualism in turn restored classical liberal individualist policy. Modern Austro-libertarians and neo-classsical liberals advocate laissez-faire as the only alternative to bureaucracy and authoritarianism.[10] In contrast to Smith, the individualist-anarchist Benjamin Tucker saw the market as the only alternative to state monopoly.
Socialist economics
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Various forms of socialism based on, or which advocate, free markets have existed since the 19th century. Early notable socialist proponents of free-markets include Pierre-Joseph Proudhon, Benjamin Tucker and the Ricardian socialists, who believed that genuinely free markets and voluntary exchange cannot exist within the exploitative conditions of capitalism.
These proposals ranged from various forms of worker cooperatives coordinated by free markets such as Mutualism (economic theory), to state-owned enterprises competing with each other in open and unregulated markets. These models of socialism are not to be confused with other forms of market socialism (e.g. the Lange model) where publicly owned enterprises are coordinated by a degree of economic planning in setting prices for capital goods.
Léon Walras, one of the founders of the neoclassical school of economics who helped formulate the general equilibrium theory, argued that free competition could only be realized under conditions of state ownership of natural resources and land. Additionally, income taxes could be eliminated because the state would receive income to finance public services through owning such resources and enterprises.[11]
Advocates of free-market socialism, such as Jaroslav Vanek, argue that genuine free markets are not possible under conditions of private ownership over productive property because the class differences and inequalities in income and power that ensue from this arrangement enable interests of the dominant class to skew the market to their favor, either in the form of monopoly and market power, or by utilizing their wealth and resources to pass government regulations and policies that benefit their specific business interests.[12] Additionally, Vanek states that workers in a socialist economy based on cooperative and self-managed enterprises would have stronger incentives to maximize productivity because they would receive a share of the profits (based on the overall performance of their enterprise) in addition to receiving a fixed wage or salary. Similar outcomes could be accomplished in a capitalistic free market if the employee were to purchase stock of the company they work for.
Excessive disparities in income distribution emerging from private ownership are alleged by proponents of this system to lead to social instability that requires costly corrective measures in the form of social welfare and redistributive taxation and heavy administrative costs to administer them while weakening the incentive to work, inviting dishonesty and increasing the likelihood of tax evasion while reducing the overall efficiency of the market economy and necessitating government regulation over markets.[13]
Concepts
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.[14] 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 in return sellers offer the item for money. When the bid matches the offer, a transaction can easily occur (even instantenously, as in a typical stock market). In Western society, most shops and markets do not resemble the stock market, and there are significant costs and barriers to "shopping around" (comparison shopping).
The model is commonly applied to wages, in the market for labor. The typical roles of supplier and consumer are reversed. The suppliers are individuals, who try to sell (supply) their labor for the highest price. The consumers of labors are businesses, which try to buy (demand) the type of labor they need at the lowest price. As population increase wages fall for any given unskilled or skilled labor supply. Conversely, wages tend to go up with a decrease in population.
When demand exceeds supply, suppliers tend to raise their prices, but when supply exceeds demand, suppliers will tend to decrease their prices 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.
Economic equilibrium
General equilibrium theory has demonstrated, with varying degrees of mathematical rigor over time, that under certain conditions of competition, the law of supply and demand predominates in this ideal free and competitive market, influencing prices toward an equilibrium that balances the demands for the products against the supplies.[15] 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 purchasing power. This result is described as market efficiency, or more specifically a Pareto optimum.
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 several which are impossible to fully achieve in a real market, such as complete information, interchangeable goods and services, and lack of market power. 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 asymmetric information.
Some models in econophysics[16] have shown that when agents are allowed to interact locally in a free market (i.e. 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 scale sensitive (a pair of agents bargaining for a purchase will agree on a different price than 100 identical pairs of agents doing the identical purchase). Speculation bubbles and the type of herd behavior often observed in stock markets are quoted as real life examples of non-equilibrium price trends. Some laissez-faire free-market advocates, like Chicago school economists, often dismiss this endogenous theory, and blame external influences, such as weather, commodity prices, technological developments, and government meddling for non-equilibrium prices.
Low barriers to entry
A free market does not require the existence of competition, however it does require that there are no legal barriers to new market entrants. Hence, in the lack of coercive barriers, and in markets with low entry cost it is generally understood that competition flourishes in a free-market environment. It often suggests the presence of the profit motive, although neither a profit motive or profit itself are necessary for a free market. All modern free markets are understood to include entrepreneurs, both individuals and businesses. Typically, a modern free market economy would include other features, such as a stock exchange and a financial services sector, but they do not define it.
Spontaneous order
Friedrich Hayek argues for the classical liberal view that market economies allow spontaneous order; that is, "a more efficient allocation of societal resources than any design could achieve."[17] 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 invisible hand proposed by Adam Smith in The Wealth of Nations who said that the individual who:
By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, 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 [an individual] 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 [common] good.
— Adam Smith, Wealth of Nations
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 labor.
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.
— Adam Smith[18]
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.
Critics, such as political economist Karl Polanyi, question whether a spontaneously ordered market can exist, completely free of "distortions" of political policy; claiming that even the ostensibly freest markets require a state to exercise coercive power in some areas - to enforce contracts, to govern the formation of labor unions, to spell out the rights and obligations of corporations, to shape who has standing to bring legal actions, to define what constitutes an unacceptable conflict of interest, etc.[19]
Studies
Joshua Epstein and Robert Axtell have attempted to predict the properties of free markets empirically in the agent-based computer simulation "Sugarscape". They came to the conclusion that, under idealized conditions, free markets lead to a Pareto distribution of wealth.[16]
The Heritage Foundation, a conservative think tank, tried to identify the key factors necessary to measure the degree of freedom of economy of a particular country. In 1986 they introduced the Index of Economic Freedom, 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 Milton Friedman and other Laissez-faire economists have argued that there is a direct relationship between economic growth and economic freedom, and studies suggest this is true.[20] 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.[21][22][23]
Misconceptions
Some advocates of free market ideologies have criticized mainstream conceptions of the free market, arguing that a truly free market would not resemble the modern-day capitalist economy. For example, contemporary mutualist Kevin Carson argues in favor of "free market anti-capitalism." Carson has stated that "From Smith to Ricardo and Mill, classical liberalism was a revolutionary doctrine that attacked the privileges of the great landlords and the mercantile interests. Today, we see vulgar libertarians perverting ‘free market’ rhetoric to defend the contemporary institution that most closely resembles, in terms of power and privilege, the landed oligarchies and mercantilists of the Old Regime: the giant corporation."[24]
Carson believes that a true free market society would be "[a] world in which... land and property [is] widely distributed, capital [is] freely available to laborers through mutual banks, productive technology [is] freely available in every country without patents, and every people [is] free to develop locally without colonial robbery..."[25]
Criticisms
Two prominent Canadian authors (both very hostile to the "Chicago School" philosophy) argue that government at times has to intervene to ensure competition in large and important industries. Naomi Klein illustrates this roughly in her work The Shock Doctrine and John Ralston Saul more humorously illustrates this through various examples in The Collapse of Globalism and the Reinvention of the World.[26] While its supporters argue that only a free market can create healthy competition and therefore more business and reasonable prices, opponents say that a free market in its purest form may result in the opposite. According to Klein and Ralston, the merging of companies into giant corporations or the privatization of government-run industry and national assets often result in monopolies (or oligopolies) requiring government intervention to force competition and reasonable prices.[26]
Critics dispute the claim that in practice free markets create perfect competition, or even increase market competition over the long run. Whether the marketplace should be or is free is disputed; many assert that government intervention is necessary to remedy market failure that is held to be an inevitable result of absolute adherence to free market principles. These failures range from military services to roads, and some would argue, to health care. This is the central argument of those who argue for a mixed market, free at the base, but with government oversight to control social problems.
Critics of laissez-faire since Adam Smith[27] variously see the unregulated market as an impractical ideal or as a rhetorical device that puts the concepts of freedom and anti-protectionism at the service of vested wealthy interests, allowing them to attack labor laws and other protections of the working classes.[28]
Because no national economy in existence fully manifests the ideal of a free market as theorized by economists, some critics of the concept consider it to be a fantasy – outside of the bounds of reality in a complex system with opposing interests and different distributions of wealth.
These critics range from those who reject markets entirely, in favour of a planned economy, such as that advocated by various Marxists, to those who wish to see market failures regulated to various degrees or supplemented by government interventions. For example, Keynesians support a role for government in providing corrective measures, such as use of fiscal policy for economy stimulus, when decisions in the private sector are believed to lead to suboptimal economic outcomes, such as depression or recession, which manifest in widespread hardship. Business cycle theory is used by Keynes to explain 'liquidity traps' by which underconsumption occurs, to argue for government intervention with central banking. Free market economists consider this credit-expansion as the cause of the business cycle in refutation of this Keynesian criticism.
Simulation of biological laws
The free market is believed to self-regulate in the most efficient and just way. Adam Smith described this behavior applied to competitive markets with the metaphor of an invisible hand urging society towards prosperity.
Some economists, sociologists and political scientists proposed that in a fully competitive economic environment, the most potent individuals would thrive and in turn society would prosper.
See also
Notes
- ^ [1]. Dictionary.com
- ^ Bockman, Johanna (2011). Markets in the name of Socialism: The Left-Wing origins of Neoliberalism. Stanford University Press. ISBN 978-0-8047-7566-3..
{{cite book}}: Check|isbn=value: invalid character (help); Cite has empty unknown parameter:|month=(help) - ^ The Pure Theory of Capital, F.A. Hayek, 1941
- ^ Popper, Karl (1994). The Open Society and Its Enemies. ISBN 978-0-415-61021-6.
{{cite book}}: Unknown parameter|Publisher=ignored (|publisher=suggested) (help) - ^ Popper, Karl (2002). The Logic of Scientific Discovery. ISBN 10: 0415278449..
{{cite book}}: Check|isbn=value: invalid character (help); Unknown parameter|Publisher=ignored (|publisher=suggested) (help) - ^ [2] Classical Economics.
- ^ History of economic thought
- ^ Popper, Karl (2002). The Poverty of Historicism. ISBN 0415278465.
{{cite book}}: Unknown parameter|Publisher=ignored (|publisher=suggested) (help) - ^ [3] Theory and History.
- ^ Böhm-Bawerk, Eugen von (2011). Control or Economic Law. ISBN 1908089164..
{{cite book}}: Check|isbn=value: invalid character (help); Unknown parameter|Publisher=ignored (|publisher=suggested) (help) - ^ Bockman, Johanna (2011). Markets in the name of Socialism: The Left-Wing origins of Neoliberalism. Stanford University Press. p. 21. ISBN 978-0-8047-7566-3.
For Walras, socialism would provide the necessary institutions for free competition and social justice. Socialism, in Walras's view, entailed state ownership of land and natural resources and the abolition of income taxes. As owner of land and natural resources, the state could then lease these resources to many individuals and groups, which would eliminate monopolies and thus enable free competition. The leasing of land and natural resources would also provide enough state revenue to make income taxes unnecessary, allowing a worker to invest his savings and become 'an owner or capitalist at the same time that he remains a worker.
{{cite book}}: Cite has empty unknown parameter:|month=(help) - ^ "Cooperative Economics: An Interview with Jaroslav Vanek", interview by Albert Perkins. Retrieved March 17, 2011: http://www.ru.org/51cooper.html
- ^ The Political Economy of Socialism, by Horvat, Branko. 1982. (P.197-198)
- ^ http://www.donsheelen.org/page14.aspx
- ^ Theory of Value, by Gérard Debreu
- ^ a b Critical Mass – Ball, Philip, ISBN 0-09-945786-5
- ^ Hayek cited. Petsoulas, Christian. Hayek's Liberalism and Its Origins: His Idea of Spontaneous Order and the Scottish Enlightenment. Routledge. 2001. p. 2
- ^ Smith, Adam (1776), "2", Wealth of Nations, vol. 1, London: W. Strahan and T. Cadell
{{citation}}: Cite has empty unknown parameter:|month=(help); External link in|chapterurl=|chapterurl=ignored (|chapter-url=suggested) (help) - ^ Winner-Take-All Politics: How Washington Made the Rich Richer--and Turned Its Back on the Middle Class by Jacob S. Hacker and Paul Pierson, Simon & Schuster 2010, p.55
- ^ AYAL, Eliezer B. and KARRAS, Georgios. Components of Economic Freedom and Growth. Journal of Developing Areas, Vol.32, No.3, Spring 1998, 327–338. Publisher: Western Illinois University.
- ^ COLE, Julio H. and LAWSON, Robert A. Handling Economic Freedom in Growth Regressions: Suggestions for Clarification. Econ Journal Watch, Volume 4, Number 1, January 2007, pp 71–78.
- ^ DE HAAN, Jacob and STURM, Jan-Egbert. How to Handle Economic Freedom: Reply to Lawson. Econ Journal Watch, Volume 3, Number 3, September 2006, pp 407–411.
- ^ DE HAAN, Jacob and STURM, Jan-Egbert. Handling Economic Freedom in Growth Regressions: A Reply to Cole and Lawson. Econ Journal Watch, Volume 4, Number 1, January 2007, pp 79–82.
- ^ Kevin Carson, Naomi Klein: The Shock Doctrine November 7, 2007
- ^ Kevin Carson, The Iron Fist Behind the Invisible Hand: Corporate Capitalism as a State-Guaranteed System of Privilege
- ^ a b The End of Globalism. Saul, John.
- ^ "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."—Wealth of Nations, I.x.c.27 (Part II)
- ^ "Masters are always and everywhere in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate… [When workers combine,] masters… never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against the combinations of servants, labourers, and journeymen."—Adam Smith, Wealth of Nations, I.viii.13
References
- AYAL, Eliezer B. and KARRAS, Georgios. Components of Economic Freedom and Growth. Journal of Developing Areas, Vol.32, No.3, Spring 1998, 327–338. Publisher: Western Illinois University.
- BOETTKE, Peter J. What Went Wrong with Economics?, Critical Review Vol. 11, No. 1, P. 35. p. 58
- Palda, Filip (2011) Pareto's Republic and the New Science of Peace 2011 [4] chapters online. Published by Cooper-Wolfling. ISBN 978-0-9877880-0-9
- Stiglitz, Joseph. 1994. Whither Socialism? Cambridge, Massachusetts: MIT Press.
External links
- Free Enterprise: The Economics of Cooperation Looks at how communication, coordination and cooperation interact to make free markets work
- Fair versus Free by Milton Friedman
- Freedom to Work, to Earn, & to Buy by Harry Browne
- The Tradition of Spontaneous Order,
