The term ‘free market’ is often used to describe an economic system based on laissez-faire capitalism.
The French term ‘laissez-faire’ (literally translating to “let [it/them] do”) describes a policy of letting things take their own course, without direct interference.
Economists have generally found a positive relationship between free markets and economic wellbeing.
The freest markets tend to exist within nations that value private property, capitalism, and individual sovereignty.
What is a free market economy?
A free market is an economy where the laws of supply and demand (or voluntary exchange) rule supreme.
According to Investopedia, free markets are characterised by “a spontaneous and decentralised order of arrangements through which individuals make economic decisions.”
In plain English, the average citizen in a free market is allowed to manage their own financial and business affairs as he or she sees fit – not a central authority.
This system tends to emerge organically or “freely” in the absence of government intervention or coerced and limited transactions.
But in fact, no pure free market economy exists.
All markets are constrained and moderated to some degree.
Where are a free market’s limitations?
In nations where a government or national financial authority exists, the free market has its limitations.
Implicit or explicit threats of force toward those who do not submit to these limitations include: taxation laws, prohibition or mandates on certain exchanges, regulations, licensing requirements, and even criminal punishment.
While these rules may constrain a free market to some extent, they are largely deemed essential due to a need to protect consumer safety, disadvantaged groups, and the provision of public goods and services for the benefit of all.
Is a free market good for investors?
As is the case with any economic system, there are strong arguments advocating for and against the extent to which free markets are regulated.
Those who desire less regulation believe that without government restrictions, the free market will encourage businesses to hold more accountability in the way they treat consumers, innovate more competitive products and services, and fuel stronger growth in the national economy – creating a better experience for the market’s contributors at large.
These advocates also often believe that government bureaucracy merely increases the cost of doing business, harming the bottom line for everyone.
On the other side of the fence, many economists believe government regulations are necessary to protect consumers, the environment and other considerations.
For example, in the case that not all corporations are looking out for public interest, some regulations may help to mitigate the risks posed to vulnerable individuals.
In general, it seems that a successful free market (albeit with some limitations) is one that looks out for the interests of both businesses and individuals, whilst also encouraging members of a society to pursue individual and collective prosperity.