Free market: what it is, its origin and its characteristics

We explain what the free market is, its origin and its characteristics. Also, what liberal and Marxist theories consist of, and more.

In the free market there are few State controls and the law of supply and demand applies.

What is the free market?

The free market, or liberal market, is a physical or virtual space in which buyers and sellers exchange products and services for money. The market is considered liberal because sellers can choose what to sell and at what price, and consumers can choose what to buy from different competitors or suppliers.

The opposite of a free market economy is a planned economy that is regulated and controlled by the State, which also owns the means of production, decides what is produced and at what price it is sold. Currently, the free market is typical of capitalist economies and, although to a lesser extent, there is some government control that impacts prices, raw materials, and imports and exports.

Origin of the term “free market”

The term “free market” comes from ancient economic theories, such as that expounded by the Scotsman Adam Smith (1723-1790), considered the greatest exponent of capitalism, who promoted economic freedom without the intervention of the State.

Smith’s theory held that:

• The market could regulate itself. As a metaphor, Smith used the phrase “the invisible hand of the market” to refer to the fact that free competition and the free market were capable of being regulated by the law of supply and demand to maintain the balance of prices, both to generate profits for producers and so that consumers can pay them without decreasing demand.
• Individual benefit in society. The fact that people pursued their own economic self-interest contributed to an indirect but positive impact on society as a whole. Social well-being was considered to be the sum of individual economic well-being.

Criticisms of Smith’s theory

In practice, The free economic market has not been able to guarantee the moral and equitable order of resources in society. Even with the partial intervention of the State, through market regulations and controls, it was not possible to maintain a balance in prices or social justice. The main cause is political corruption, among other institutional issues.

At the end of the 19th century, Marxism emerged, a new ideology in opposition to the liberal ideas put forward by Smith, which aimed to end the struggle between classes for control of the means of production.

The German Karl Marx (1818-1883) was an economist and politician who, through his work Communist Manifesto He promoted his theory on social conflict as a consequence of economics and class relations.

Marx maintained that the means of production should be owned by the State to avoid private property conflicts between classes, that is, he promoted total intervention by the State in the means of production and the market. However, total intervention can lead to an authoritarian and absolutist system with abuse of power, as occurs in countries governed by dictatorships.

Features of the free market

Among the main characteristics of the free market we can highlight the following:

• Commercial exchange between individuals takes place spontaneously and freely, with few restrictions or controls from the State.
• The extent of state intervention may vary among the different nations with capitalist economies in the world, although theory suggests that government control over the market should be as minimal as possible.
• The role of the State is to guarantee the rights of workers and employers with the support of the situations and should not intervene in the laws of the market, unless human rights are violated.
• Perfect competition is an ideal situation in which suppliers and demanders coexist in equilibrium to establish the market price of products. There are so many competitors and consumers that a single seller cannot influence the definition of the prices of a product in the market. What happens in a monopoly or oligopoly is different, in which there is one or very few suppliers who can decide the price, even if it is excessive, because no one else offers their product.
• The means of production are privately owned and can produce spontaneously and based on individual interests to satisfy consumer demand.
• The price of goods and services is set by the law of supply and demand, which allows achieving a balance between the quantities demanded and what is produced or offered.
• The law of supply and demand is governed by the free interaction between suppliers and demanders, that is, suppliers can choose what to sell and at what price, while demanders can choose between several options or competitors of the same product.
• The large number of competitors or suppliers of the same product contributes to the diversity of prices in the market, which is a benefit for buyers.
• People from vulnerable classes who do not have capital tend to be marginalized from the group of consumers and entrepreneurs.
• Situations of unfair competition or monopoly often occur and, in most of these cases, the intervention of the State is necessary to apply penalties for these crimes.
• The negative impact on the environment as a result of the production and consumption system has rarely been mentioned in classical market theories, and is currently only partially addressed.

Problems in the application of the free market

The liberal market theory presented a positive foundation, however, when put into practice it cannot be implemented in a pure form due to multiple factors. Among the main ones we can highlight:

• Unfair competition. Various crime situations may occur that consist of deception between suppliers and consumers, with the aim of profit. For example: that a product that is almost identical in appearance to the original of the brand and is sold at the same price, even if it is a copy, with the intention that the buyer believes that he is paying for the original product.
• Political corruption. Any situation between State officials that breaks moral principles or democratic laws in exchange for economic benefits or personal advantages is considered an act of corruption and a crime. Sometimes, the owners of means of production who are also part of influential and power groups tend to hold public positions or have links with certain officials to influence State regulations in a way that favors certain businesses over others.
• Environmental pollution. The economic system promotes mass consumption that generates multiple harmful impacts on the planet, such as the overexploitation of non-renewable natural resources, animal abuse in the livestock industry, indiscriminate deforestation and soil deterioration due to monoculture agricultural activity, the large amount of waste generated during the production process and the excessive amount of garbage resulting from products that have already been used, among many other impacts, both direct and indirect, that affect biodiversity and the environment.
• The lack of worker protection. On many occasions, economic liberalism led to situations of overexploitation of labor and violation of human rights, which allowed the owners of the means of production to obtain more profits. This context exacerbated socialist ideologies and the need for there to be an entity that acts as an intermediary to protect people’s rights.
• The difference of social classes. The free market in practice deepened the class difference: it kept the rich and made them increasingly richer, while the most vulnerable were excluded by not being able to integrate into the productive system and became increasingly poorer. In turn, the working and working middle and lower-middle classes are those that support an economic and tax system that enriches the States and the most powerful classes, instead of enriching the general population that that State represents.
• The economic crises. The economies of developing countries are more unstable and tend to have inflation, which is the constant rise in prices and the loss of value and support of the national currency. It is a situation that reduces investments in projects that generate sources of work and productivity and, as a consequence, causes the impoverishment of the population and the country.

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References

• In minutes (2021). The free market (video). Youtube
• Bloghemia (2022). Noam Chomsky: “Business doesn’t want free markets, it wants captive markets”. Bloghemia
• Pigna, F. (2022). Political liberalism and economic liberalism. The historian
• Santaella, J. (2023). What are the differences between a free market economy and a planned economy? Economy3