Free market
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A '''free market''' is a [[market]] in which prices of goods and services are arranged completely by the mutual consent of sellers and buyers. By definition, in a free market environment buyers and sellers do not coerce or mislead each other nor are they coerced by a third party.<ref>[[Fred E. Foldvary|Foldvary, Fred E.]]. [http://www.progress.org/archive/fold253.htm ''Has Deregulation Failed?''], The Progress Report, 2002. [http://www.econlib.org/library/Enc/FreeMarket.html "Free Market."] Rothbard, Murray. The Concise Encyclopedia of Economics</ref>
In the aggregate, the effect of these decisions ''[[en masse]]'' is described by the law of [[supply and demand]]. Free markets contrast sharply with ''[[controlled market]]s'', in which governments directly or indirectly regulate prices or supplies, distorting market signals.<ref>Dictionary of Finance and Investment Terms. Barrons, 1995 --- "market in which price is determined by the free, unregulated interchange of supply and demand. The opposite is a ''controlled market'', where supply, demand, and price are artificially set, resulting in an ''inefficient market''."</ref>
In the marketplace the price of a good or service helps to quantify its value to consumers and thus balance it against other goods and services. In a free market, this relationship between price and value is more clear than in a controlled market {{Fact|date=April 2008}}. Through 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 [[perfect market]] where individuals have [[perfect information]] and there is [[perfect competition]].
Free market economics is closely associated with ''[[laissez-faire]]'' 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. Hence, with government force limited to a defensive role, government itself does not initiate force in the marketplace beyond levying taxes in order to fund the maintenance of the free marketplace. Some free market advocates oppose taxation as well, claiming that the market is better at providing all valuable services of which [[National security|defense]] and [[law]] are no exception, and that such services can be provided without direct taxation. [[Anarcho-capitalist]]s, for example, would substitute [[arbitration]] agencies and [[Private defense agency|private defense agencies]].
While some economists regard the free market as a useful if simplistic model in developing economic policies to attain social goals, others regard the free market as a [[normative]] rather than descriptive concept, and claim that policies which deviate from the ideal free market solution are 'wrong' even if they are believed to have some immediate social benefit. [[Samuelson]] treated market failure as the exception to the general rule of efficient markets{{Fact|date=December 2007}}.
In [[political economy|political economics]], one opposite extreme to the [[market economy|free market economy]] is the [[command economy]], where decisions regarding production, distribution, and pricing are a matter of governmental control. Other opposites are the [[gift economy]] and the [[subsistence economy]]. The [[mixed economy]] is intermediate between these positions.
In other words, a free market economy is "an economic system in which individuals, rather than government, make the majority of decisions regarding economic activities and transactions."<ref>[http://encarta.msn.com/encyclopedia_761579938/Free-Market_Economy.html ''Free-Market Economy''], Microsoft® Encarta® Online Encyclopedia 2006</ref> In [[social philosophy]], a [[free market economy]] is a system for [[allocation|allocating]] goods within a society: [[purchasing power]] mediated by [[supply and demand]] 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 [[medieval]], [[Early Modern|early modern]], and [[Mercantilism|mercantilist]] economies which preceded it.
=== 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. 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 [[stock market]]). In reality, most shops and markets do not resemble the stock market (eg the job market), and there are significant costs and barriers to "shopping around" (comparison shopping).
When demand exceeds supply, suppliers can raise the price. Consumers who can afford the higher prices may still buy, but others may forgo the purchase altogether, buy a similar item, or shop elsewhere. (i.e., the consumer might say: "A two-dollar hot dog? I'd rather buy a hamburger at [[McDonald's]]!"). As the price rises, suppliers may also choose to increase production. Or more suppliers may enter the business. For example, the [[gourmet coffee]] business, pioneered by [[Starbucks]], revealed a demand for three-dollar cups of coffee. Other stores began offering such coffee to satisfy the demand.
Increased supply (meaning volume) can indirectly result in lower prices, particularly with [[computer]]s and other electronic devices. [[Mass production]] techniques have been steadily reducing prices 20 to 30% per year since the 1960s. The functions of a multi-million dollar mainframe computer in the 1960s could be performed by a $500 dollar computer in the 2000s. The [[camcorder]] has been said to place "a television studio in your hand".{{Who|date=December 2007}}
=== Spontaneous order or "Invisible hand"===
[[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:
<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 [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." (''[[Wealth of Nations]]'')</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=[[Wealth of Nations]] |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 ===
The law of [[supply and demand]] predominates in the ideal free market, influencing prices toward an [[economic equilibrium|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 preference (or utility) for each product and within the relative limits of each buyer's [[purchasing power]].
This equilibrating behavior of free markets makes certain assumptions about their agents, for instance that they act independently. Some models in [[econophysics]] <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). [[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. Free-market advocates, especially [[Austrian school]] followers, often dismiss this endogenous theory, and blame external influences, such as weather, commodity prices, technological developments, and government meddling for non-equilibrium prices. Market equilibria are determined by the aggregate of buyers and sellers and do not normally result in unique pricing.
=== Distribution of wealth ===
On a purely theoretical level, proponents of a free market do not care about the distribution of wealth resulting from the system; however, on a ''practical political'' level the issue is important. The distribution of purchasing power in an economy depends to a large extent on the nature of government intervention, [[social class]], [[labor market|labor]] and [[financial markets]], but also on other, lesser factors such as family relationships, [[inheritance]], [[gift]]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 [[dollar voting]], where a purchase of a product is tantamount to casting a vote for a producer to continue producing that product.
The effect of [[economic freedom]] on society's and individuals' [[wealth]] remains a subject of controversy. [[Kenneth Arrow]] and [[Gerard Debreu]] have shown that under certain idealized conditions, a system of free trade leads to [[Pareto efficiency]], but the traditional [[Arrow-Debreu model|Arrow-Debreu]] paradigm within economics is now being challenged by the new Greenwald-[[Stiglitz]] 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 [[Milton Friedman]], 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 (EF) and economic growth clearly indicate: <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,
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,
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>[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>. [[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, again 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> .
On the other hand more recent research, specially the one led by [[Joseph Stiglitz]] seems to contradict [[Friedman]]'s conclusions. According to Boettke:
::Once incomplete and imperfect information are introduced, [[Chicago school (economics)|Chicago-school]] defenders of the market system cannot sustain descriptive claims of the [[Pareto efficiency]] of the real world. Thus, [[Stiglitz]]'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--[[socialism]]--as a remedy.<ref name=BOETTKE>[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]</ref>
=== [[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, [[tariff]]s, or government regulation (other than protection from coercion and theft), and no [[government-granted monopoly|government-granted monopolies]] (usually classified as [[coercive monopoly]] by free market advocates) like the [[United States Post Office]], [[Amtrak]], arguably [[patent]]s, etc.
==== Deregulation ====
In an absolutely ''free-market economy'', all capital, goods, services, and money flow transfers are unregulated by the government. 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 ''[[laissez-faire]]''. Internationally, free markets are advocated by proponents of [[economic liberalism]]; in Europe this is usually simply called ''liberalism''. In the [[United States]], support for free market is associated most with [[libertarianism]]. Since the 1970s, promotion of a global free-market economy, [[deregulation]] and [[privatization]], is often described as [[neoliberalism]]. The term ''free market economy'' is sometimes used to describe some economies that exist today (such as [[Hong Kong]]), 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 ''[[mixed economy]]''.
==== 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 [[profit|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.
=== Legal tender and taxes ===
In a truly free market economy, money would not be monopolized by [[legal tender]] laws or by a central money maker authority which coerces society to use its own money as the unique medium of exchange in trades, in order to receive [[Value added tax|taxes]] from the transactions or to be able to issue [[loan]]s. {{Fact|date=January 2007}} [[Minarchists]] (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 -- they maintain that private property and free markets can be protected by voluntarily-funded services under the concept of [[individualist anarchism]] and [[anarcho-capitalism]] <ref>[http://www.mises.org/rothbard/newlibertywhole.asp} Biography of Murray N. Rothbard (1926-1995)<!-- Bot generated title -->]</ref><ref>[http://www.daviddfriedman.com/Libertarian/Machinery_of_Freedom/MofF_Contents.html The Machinery of Freedom<!-- Bot generated title -->]</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 freely, without coercion and violence{{Fact|date=January 2007}}.
=== Ethical justification ===
The ethical [[justification]] of free markets takes two forms. One appeals to the intrinsic moral superiority of autonomy and freedom (in the market), see [[deontology]]. The other is a form of [[consequentialism]]—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 [[metaphor]] of the [[Invisible Hand]], familiar from the work of [[Adam Smith]].
Modern theories of [[self-organization]] 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 [[intrinsic value]] as a self-organising entity. Other philosophies such as some forms of [[Individualist anarchism]] and [[Mutualism (economic theory)]] anarchism believe that a truly "free market" would result in prices paid for goods and services to align with the labor embodied in those things.
== In practice ==
While the free-market is an idealized abstraction, it is useful in understanding real markets whether artificially created and regulated by governments or non-governmental agencies, or phenomena such as the [[black market]] and the [[underground economy]], which can be remarkably robust in persisting despite attempts to suppress these markets; in fact, many proponents of the free market point to sectors such as the drug trade to prove the phenomenon is both spontaneous and can function without government intervention though some would still prefer the contracts be brought under court protection.
=== Index of economic freedom ===
The [[Heritage Foundation]], a [[Conservatism|conservative]] [[think tank]], tried to identify the key factors which allow to measure the degree of freedom of economy of a particular country. In 1986 they introduced [[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|Laissez-faire economists]] 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 (EF) 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,
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,
Volume 4, Number 1, January 2007, pp 79-82.</ref>. <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>.
::"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>[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>
== History and ideology ==
Some theorists 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 [[Ludwig von Mises]], [[Friedrich Hayek|Hayek]]). The consensus among [[economic history|economic historians]] 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 [[Classical Antiquity]], and in some non-western societies. By the 19th century the market certainly had organized political support, in the form of [[laissez-faire liberalism]]. 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 [[ideology]], combined with the specific interests of the [[entrepreneur]].
=== Marxism ===
In [[Marxism|Marxist]] theory, the idea of the free market simply expresses the underlying long-term transition from [[feudalism]] to [[capitalism]]. Note that the views on this issue - emergence or implementation - do not necessarily correspond to pro-market and anti-market positions. [[Libertarian]]s would dispute that the market was enforced through government policy, since they believe it is a [[spontaneous order]] and [[Marxists]] agree with them because they as well believe it is evolutionary, although with a different end.
=== Liberalism ===
Support for the free market as an ordering principle of society is above all associated with [[liberalism]], especially during the 19th century. (In Europe, the term 'liberalism' retains its [[connotation]] as the ideology of the free market, but in American and Canadian usage it came to mean [[Socialism]], and acquired a [[pejorative]] meaning for supporters of the free market.) Later ideological developments, such as [[minarchism]], [[libertarianism]] and [[objectivism]] also support the free market, and insist on its pure form. Although the [[Western world]] shares a generally similar form of economy, usage in the United States and Canada is to refer to this as [[capitalism]], while in Europe 'free market' is the preferred neutral term. [[New liberalism|Modern liberalism]] (American and Canadian usage), and in Europe [[social democracy]], seek only to mitigate what they see as the problems of an unrestrained free market, and accept its existence as such.
To most [[libertarian]]s, there is simply no free market yet, given the degree of state intervention in even the most 'capitalist' of countries. From their 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 [[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 [[dividend tax|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 and governments, instead preferring protectors of life, liberty and property who were directly paid by the individuals they protected.
== Criticism ==
{{Mergeto|Criticism of capitalism|date=December 2007}}
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.
Critics of laissez-faire variously see the "free 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. Such people also claim that the running dog lackeys of the capitalist imperialist scum will be the first against the wall when the revolution comes.
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]] or a communal economy, such as that advocated by some types of [[socialism]], to those who merely wish to see markets regulated to various degrees, and these range from those who associate markets with [[greed]] which they believe to be inherently [[morality|immoral]] to those who raise practical objections.
===Externalities===
One practical objection is the claim that markets do not take into account [[externalities]] (effects of transactions that affect third parties), such as the negative effects of pollution or the positive effects of education, although this is disputed by those who contend that an externality such as pollution can be and is regularly dealt with by the courts through the principle of protecting [[individual liberty]] and [[property rights]]. What exactly constitutes an externality may be up for debate, including the extent to which it changes based upon the political climate.
Some proponents of market economies believe that governments should not diminish market freedom because they disagree on what is a market externality and what are government-created externalities, and disagree over what the appropriate level of intervention is necessary to solve market-created externalities. Others believe that government should intervene to prevent [[market failure]] while preserving the general character of a market economy. In the model of a [[social market economy]] the state intervenes where the market does not meet political demands. [[John Rawls]] was a prominent proponent of this idea.
=== Martin J. Whitman ===
Not all advocates of [[capitalism]] consider free markets to be practical. For example, [[Martin J. Whitman]] has written, in a discussion of [[John Maynard Keynes|Keynes]], [[Milton Friedman|Friedman]] and [[Friedrich Hayek|Hayek]], that these "…great economists…missed a lot of details that are part and parcel of every [[value investor]]'s daily life." While calling Hayek "100% right" in his critique of the pure command economy, he writes "However, in no way does it follow, as many Hayek disciples seem to believe, that government is ''per se'' bad and unproductive while the private sector is, ''per se'' good and productive. In well-run industrial economies, there is a marriage between government and the private sector, each benefiting from the other." As illustrations of this, he points at "[[Japan]] after [[World War II]], [[Singapore]] and the other [[Asian Tigers]], [[Sweden]] and [[People's Republic of China|China]]. The notable exception is [[Hong Kong]] which found prosperity on an extremely austere free market concept.
He argues, in particular, for the value of government-provided credit and of carefully crafted tax laws.<ref>''Ibid.'', p.4.</ref> Further, Whitman argues (explicitly against Hayek) that "a free market situation is probably also doomed to failure if there exist control persons who are not subject to external disciplines imposed by various forces over and above competition." The lack of these disciplines, says Whitman, lead to "1. Very exorbitant levels of [[executive compensation]]… 2. Poorly financed businesses with strong prospects for money defaults on credit instruments… 3. Speculative [[bubble (economics)|bubbles]]… 4. Tendency for industry competition to evolve into [[monopoly|monopolies]] and [[oligopoly|oligopolies]]… 5. Corruption." For all of these he provides recent examples from the U.S. economy, which he considers to be in some respects under-regulated,<ref>''Ibid.'', p.4.</ref> although in other respects over-regulated (he is generally opposed to [[Sarbanes-Oxley Act|Sarbanes-Oxley]]).<ref>Martin J. Whitman, [http://www.thirdavenuefunds.com/taf/documents/shareholderletters/aboutus-letters-04Q3.pdf Third Avenue Value Fund Letters to our Shareholders July 31, 2004] ([[PDF]]), page 2.</ref>
He believes that an apparently "free" relationship—that between a corporation and its investors and creditors—is actually a blend of "voluntary exchanges" and "coercion". For example, there are "voluntary activities, where each individual makes his or her own decision whether to buy, sell, or hold" but there are also what he defines as "[c]oercive activities, where each individual security holder is forced to go along…provided that a requisite majority of other security holders so vote…" His examples of the latter include [[proxy voting]], most merger and acquisition transactions, certain cash tender offers, and reorganization or liquidation in [[bankruptcy]].<ref>''Ibid.'', p.5.</ref> Whitman also states that "[[Corporate America]] would not work at all unless many activities continued to be coercive."<ref>Martin J. Whitman, Third Avenue Value Fund letter to shareholders [[October 31]] [[2005]]. p.6.</ref>
"I am one with Professor Friedman that, other things being equal, it is far preferable to conduct economic activities through voluntary exchange relying on free markets rather than through coercion. But Corporate America would not work at all unless many activities continued to be coercive."<ref>''Ibid.'', p.5-6.</ref>
== Notes and References ==
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== See also ==
*[[Adam Smith]]
*[[Anarcho-capitalism]]
*''[[An Austrian Perspective on the History of Economic Thought]]''
*[[Austrian School]]
*[[Ayn Rand]]
*[[Capitalism]]
*[[Economic liberalism]]
*[[Economics]]
*[[Free-market anarchism]]
*[[Free-market environmentalism]]
*[[Free Market Roads]]
*[[Free price system]]
*[[Free trade]]
*[[Friedrich Hayek]]
*[[Game theory]]
*[[Heritage Foundation]]
*[[History of theory of capitalism]]
*[[LIEO]]
*[[Libertarianism]]
*[[Ludwig von Mises]]
*[[Market economy]]
*[[Milton Friedman]]
*[[Minarchism]]
*[[Neoliberalism]]
*[[Murray Rothbard]]
*[[Neoconservatism in the United States]]
*[[Negative liberty]]
*[[Night watchman state]]
*[[Non-profit organization]]
*[[Nash equilibrium]]
*[[Objectivist Philosophy]]
*[[Open Source Initiative]]
*[[Political Economy]]
*[[School of Salamanca]]
*[[Self-organization]]
*[[Transparency (market)]]
*[[Underground economy]]
*[[Voluntaryism]]
=== Contrast ===
*[[Communism]]
*[[Gift economy]]
*[[Inclusive Democracy]]
*[[Karl Marx]]
*[[Libertarian socialism]]
*[[Limited liability]]
*[[Market abolitionism]]
*[[Market socialism]]
*[[Mixed economy]]
*[[Participatory economy]]
*[[Planned economy]]
*[[Quasi-market]]
*[[Socialism]]
*[[Statism]]
*[[Subsistence economy]]
*[[Humanist Movement]]
*[[Marxism]]
== External links ==
Another name for capitalism;
*[http://www.FreeMarketeers.com Free Marketeers Network] The networking site for Free Marketeers around the world
*[http://www.econlib.org/library/Enc/FreeMarket.html Free Market] by [[Murray N. Rothbard]]
*[http://www.freemarketdoctors.blogspot.com Free Market Doctors] Utilizing the ideals of a free-market economy to revitalize the healthcare industry
*[http://globalpolitician.com/articles.asp?ID=145 In Defense of the Free Market]
*[http://www.mises.org Mises.org] is the official website of the [[Ludwig von Mises Institute]] for [[Austrian School|Austrian economics]] and [[classical liberalism]]
*[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
*[http://www.heritage.org/research/features/index/ Index of Economic Freedom] by the [[Heritage Foundation]]
*[http://www.sprott.com/pdf/pressrelease/TheVisibleHand.pdf ''Move Over, Adam Smith: The Visible Hand of Uncle Sam] Report concludes that the U.S. government surreptitiously intervenes in the American stock market
*[http://www.fff.org/freedom/0292d.asp ''Fair versus Free''] by [[Milton Friedman]]
*[http://www.harrybrowne.org/GLO/FreeTrade.htm Freedom to Work, to Earn, & to Buy] by [[Harry Browne]]
*[http://www.pmefocus.be/market_access/index_en.php The EU's Market Access Strategy in a Changing Global Economy]
==Bibliography==
* [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.
* [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]
* Stiglitz, Joseph. 1994. Whither Socialism? Cambridge, Mass.: MIT Press.
{{enlightenment}}
[[Category:Capitalism]]
[[Category:Classical liberalism]]
[[Category:Libertarianism]]
[[Category:Markets]]
[[Category:Economic liberalism]]
[[Category:Free market| ]]
[[af:Vrye mark]]
[[bg:Свободен пазар]]
[[de:Freier Markt]]
[[es:Libre mercado]]
[[fr:Marché libre]]
[[id:Pasar bebas]]
[[is:Frjáls markaður]]
[[it:Libero mercato]]
[[he:כלכלת שוק]]
[[lt:Laisvoji rinka]]
[[mk:Слободен пазар]]
[[ms:Pasaran bebas]]
[[nl:Vrije markt]]
[[ja:自由市場]]
[[pl:Wolny rynek]]
[[ro:Piaţă liberă]]
[[sk:Voľný trh]]
[[sh:Slobodno tržište]]
[[fi:Vapaat markkinat]]
[[sv:Fri marknad]]
[[ta:திறந்த சந்தை]]
[[th:ตลาดเสรี]]
[[tr:Serbest piyasa]]
[[uk:Вільний ринок]]
[[zh:自由市場]]