What is a Free Market?

These days when someone extols the virtues of the free market we typically assume they have in mind a marketplace free of government regulation. The term, however, once focused more on evil doers in the private sector, typically aristocrats, land owners, and capitalists.

Dating back to Biblical times it has been recognized that some forms of economic activity are “bad” whereas others are “good.” The classical economists — Smith, Ricardo, Marx and their peers — tried to explain how this could be. To aid the explanation, they invented the concept of economic value. They sought to establish value as an objective reality to which reason could be applied.

Thus, for the classical economists some economic processes subtracted value from society whereas others added value. A market was said to be free when it carried no subtractive burdens and could therefore add value to society, purely, just as markets which conform to the transcendent laws of Nature should be expected to do. This approach ran into a snag, however, when careful analysis revealed that no such thing as objective value could be defined. There was a brief attempt by the neoclassical economists to solve the problem by inventing a scientific unit of value called the util, short for utility, but it soon became obvious that utils don’t exist in nature.

So, what of “good” and “bad” economic activity? The distinction remains intuitively compelling today but there is still no scientifically respectable basis for it. Some attempts to establish the desired foundation have been made. In 2011, for example, the United Nations adopted standards of happiness and well being to be used by member states as an economic indicator. Other economists — noting there is an observable correlation between energy consumption and prosperity — have tried to establish a BTU basis for economic value. Projects like these have, as yet, borne little fruit.

In the shadow of this history and predicament, the concept of a free market can be somewhat difficult to convey. Ideally, a free market is a type of market, primarily one that is not regulated, controlled or manipulated against the wishes of the participants. Some definitions help to clarify.

A market is a social domain in which people exchange goods.

A good is any object or thing, tangible or intangible, ownership of which can be transferred from one person to another.

A market in which exchanges are voluntary is called a free market. Voluntary has three main meanings in this context:

(1) The goods offered in the market are chosen by the offerors.

(2) The prices at which exchanges take place are chosen by the exchange participants.

(3) No one is compelled to participate (or to not participate) in any exchange.

Notice that these market freedoms can be infringed in various ways by private actors as well as by government, but that government inherently has a superior ability to preserve and protect them. For this reason, free markets are a political concept as much as an economic one. Where people are free, markets also will be free. The social benefits of free markets are really the benefits of freedom itself.

9 thoughts on “What is a Free Market?

  1. I think the moment economists and government decide they know what a “good” economy is and start to steer the economy in that direction, you have lost the free market.

    Government should only exclude force and fraud from the marketplace(including measurable externalities) but otherwise leave people free to trade among themselves to their mutual advantage.

    Like

    1. RE: “Government should only exclude force and fraud from the marketplace…”

      I puzzled over the question of fraud. It seems obvious that you can’t have a meeting of the minds for a sales contract when one or both parties is deceived. But at the same time it is generally impractical to try to protect people from their own bad decisions.

      I concluded that the exclusion of fraud violates the principle of voluntary exchange such that a free market is one that permits fraud.

      Like

      1. I don’t have a problem with the government maintaining a system of weights and measures, so that I know when I compare prices on gasoline that a gallon at WaWa is the same as a gallon at BP.

        I would prefer it be an industry based solution, like Underwriters Laboratory, but it is convenient to accomplish it collectively through government.

        Like

      2. I can see how standard weights and measures might be described as a type of regulation that makes the detection of fraud easier. I would emphasize, however, that for exchanges to be voluntary in a meaningful sense, government’s regulatory role must be limited by the assumption of innocence until guilt can be proved.

        This is the paradox of freedom. It includes the right to do wrong, but not protection from the consequences.

        Like

  2. Has there ever been a truly free market anywhere in recent history?

    No partially, but “truly”.

    If not, how can you keep up the mantra about its virtues. Speculation? Logic?

    Liked by 1 person

    1. RE: “Has there ever been a truly free market anywhere in recent history?”

      Yes, of course. Free markets happen all the time. It is because they do that we are able to distinguish free from non-free markets.

      Like

        1. I wrote the post to explain the concept, because Mr. Murphy in another thread demanded a definition.

          The answers to your questions are contained in the post, but for this question I would draw your attention to this part: “A market is a social domain in which people exchange goods…A market in which exchanges are voluntary is called a free market.”

          Notice in particular that a “social domain in which people exchange goods” is different from other domains, such as the one in which people produce goods, or the one in which people consume goods. The point is to not confuse the market domain with the economy as a whole.

          Surely you approve of voluntary exchange?

          Like

          1. I think you are complicating the issue with over-simplification and semantics.

            The debate over “free markets” is simply whether any government regulation is good or bad, and what that means.

            It is not a matter of me selling you my golf clubs for an agreed upon price.

            Liked by 1 person

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s