The Free Market Economy: What is it Really?

If you’ve been here at Gratefully Helena for any amount of time, you’ve probably caught on to how much we love the free market. We make the case as often as we can that the free market is good for the world, and that socialist policies are not all they’re cracked up to be.

But what is the free market anyway?  Sure, we can throw the term around, but what exactly do we mean?

So here is a quick guide to the free market economy.  Just call me Professor ;).

At its most basic, a free market is an economic system in which the market is driven entirely by supply and demand.  In such a system, anyone can offer a product or service, and the value of that good is determined by the consumer. 

So, if Molly offers a product (supply) that people want and are willing to pay for (demand), her business will do well, and she’ll make money.  If no one wants the product, that means that the supply outweighs the demand, and the value of Molly’s supply goes down. 

Similarly, if Jane has a skill that Molly needs, Molly can pay Jane to provide that skill.  But if Sarah comes along and can provide that same skill better or at a lower price, Molly may choose to hire Sarah instead.  Jane and Sarah can then choose to adjust their service and/or price accordingly, or even go find Annie, who might be willing to pay more for their skills.

It’s important to understand that the term “free market” refers to the degree of government regulation on the economy.  Notice that I said degree.  Having a free market does not necessarily mean that there is no government regulation at all.  In fact, an argument could be made that certain laws are necessary to ensure a truly “free” market. (link to Common Free Market Myths)  It may help to know that several think tanks and publications, most notably the Heritage Foundation and the Wall Street Journal, publish an annual index ranking different countries based on their level of economic freedom. 

For example, North Korea ranks dead last, because in North Korea, there is virtually no private property, and entrepreneurship and trade are discouraged as they may be considered a threat to the state.  Under this system, not only would Molly not be free to offer a product (entrepreneurship), but she also couldn’t hire Jane or Sarah, and neither could Annie.  See the problem?

Alternatively, Singapore, which has ranked number one in economic freedom for the second year in a row, not only interferes very little in private trade and entrepreneurship, but also has effective and rigorous property protection and anti-corruption laws.

One need only to look at the way people live in Singapore, compared with North Korea, to see which system makes life better for its participants.

 And that’s today’s lesson on free markets!  For more, check out Common Free Market Myths.