The free market is now mostly seen in terms of libertarian philosophy. But what is it ideally, and does it exist on earth at least somewhere now? And if you are interested in the signs of a free market and its characteristics, then you are reading now the right article that has answers to all your questions.
What is a free market from an economic point of view?
A free market is a market that is not subject to any external interference (including no government regulation). The entire function of the state is limited to the protection of property rights, and prices are set solely on the basis of supply and demand for products, as well as agreements between producers.
But a rather significant problem is the implementation of such an ideology. The reasons lie in the peculiarities of doing business in different countries, political structures, the presence and functioning of market mechanisms. And so far it remains to state that the free market is nowhere the dominant ideology in the economy. Why is that?
Characteristic of the free market
In a perfectly free market, the law of supply and demand rules. It influences prices, keeps the balance and balances the demand for products. At the same time, the products are distributed by the buyers themselves, taking into account their own preferences. The behavior of a free market in the presence of the interaction of several agents becomes non-linear. An example of the non-linear nature of interactions are speculative bubbles in the real estate market, in the banking sector and herding behavior in the stock exchanges, in stores.
In practice, it can be said that the free market is an idealized abstraction. But the theory itself can be useful during the analysis of real markets and the mechanisms of their interaction. The theory of the free market is also used in the analysis of the shadow economy and the black market. Thus, some economists point to a number of processes (such as the illegal sale of narcotic substances) that can function safely without government intervention.
Market mechanism
Under the market mechanism is meant the mechanism of interaction and relationship between the various elements of the market: supply, demand, price and competition. It operates on the basis of the laws of change in demand, supply, equilibrium price, competition between economic entities, utility, cost and profit. The main ones are supply and demand, because it is their interaction (according to theorists)determines what will be produced and at what price it will be sold. And the main features of a free market: the market mechanism and its functions, because they allow the economy to develop freely without any restrictions.
Prices, in turn, are seen as an important market tool that provides its participants with the information necessary to make decisions about increasing or reducing production of a good. Information is what speeds up the movement of cash flows between industries.
Functions of the market mechanism
What is the market mechanism, of course. And what is its functionality? What does it affect? Market mechanism functions:
- Informational. Informing about the state of affairs regarding the need to manufacture products or reduce the size of their production, as well as the transmission of data on where it is most profitable to sell them.
- Mediation. The market mechanism allows you to create a situation that will satisfy both the producer of the product and its consumer as much as possible. There is a constant search for the golden mean: producers are looking for a price that will allow them to effectively market their products, and consumers are looking for products that will satisfy them in terms of quality and price.
- Pricing. Since the manufacturer must have income from his activities, but at the same time not lose to competitors, prices must be within certain limits.
- Regulating. If a certain product is produced too much, then this may affectto lower its price or force enterprises to reduce production volume.
- Stimulating. Since the specter of competition constantly hangs over manufacturers, in order not to lose their market share, they are obliged to develop better products by investing their money in new developments and improving their products.
How is it determined if a market is free?
What are the main features of the free market, which will allow you to say for sure that this is it, and not another form of economic activity? Speaking of the free market, now they mean freedom from the influence of the state. Fifty different parameters are usually called as parameters that determine the level of freedom. In order not to overwhelm everyone, the article will list only those that are currently not controversial. So the sign of a free market is:
- State trade policy.
- Monetary policy of the state.
- The level of government intervention in the economy.
- The government's financial burden.
- The size of capital flows, foreign investment and their direction.
- What is meant by private property and how it is spelled out in state laws.
- Regulation of economic processes in society by the state.
- Position of banks and the financial sector.
- The situation with wages, prices and purchasing power.
- Informaleconomic activity.
Despite the fact that the idea of the prosperity of economically free states in the first place is very popular, in practice there are quite significant refutations of this approach. Thus, studies by a number of scientists have found that there is no relationship between the political system and economic growth, and the situation depends solely on people.
Conclusion
Some theorists believe that the free market is a natural form of social self-organization, believes that it will arise in any society where there are no barriers. A relative consensus of opinion about the operation of a free economy is observed regarding the time of the late Middle Ages and the beginning of the Renaissance. Be that as it may, it is problematic to see a free economy now with your own eyes, because although the principles of organizing economic activity in some countries have signs of a free market, there is still no full implementation of this mode of functioning of the economy on the planet.
