The free market is now largely viewed in terms of libertarian philosophy. But what is he ideally, and does he now exist on earth at least somewhere? And if you are interested in the signs of the free market and its characteristics, then you are reading the right article now, in which there are 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 of products, as well as agreements between manufacturers.
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 systems, the presence and features of the functioning of market mechanisms. And for now, it remains to be noted that the free market is nowhere the dominant ideology in the economy. Why is that?
Free Market Feature
In a perfectly free market, the law of supply and demand prevails. It affects prices, maintains balance and balances demand for products. In this case, the products are distributed by the customers themselves, taking into account their own preferences. The behavior of the 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 herd behavior on stock exchanges, in stores.
In practice, we can say that a 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 smoothly without government intervention.
Market mechanism
Under the market mechanism mean the mechanism of interaction and interconnection 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, value and profit. The main ones are supply and demand, because it is their interaction (as theorists believe) that determines what will be produced and at what price to be realized. And the main signs of a free market are the market mechanism and its functions, because it is they that allow the economy to develop freely without any restrictions.
Prices, in turn, are considered as an important market tool, which provides its participants with the information necessary for making decisions about increasing the production of goods or reducing them. Information is what speeds up cash flow between sectors.
Market mechanism functions
What is a market mechanism, of course. And what is its functionality? What does it affect? Functions of the market mechanism:
- Informational. Informing about the state of affairs regarding the need to manufacture products or reduce the size of their manufacture, as well as transmitting data on where it is most profitable to sell it.
- Intermediary. The market mechanism allows you to create a situation that will satisfy both the producer of the product and its consumer. The search for a middle ground is constantly happening: manufacturers are looking for a price that will allow them to sell their products efficiently, and consumers are looking for products that will satisfy them in terms of quality and price.
- Pricing. Since the manufacturer must have income from its activities, but not lose to competitors, prices should be within certain limits.
- Regulatory. If some product is produced too much, this may affect its price in the direction of reduction or force enterprises to reduce the volume of production.
- Stimulating. Since the ghost of competition constantly hangs over manufacturers so as 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 whether the market is free?
What are the main signs of a free market that will allow us to say for sure that it is he, and not another form of organization of economic activity? Speaking of a free market, they now mean freedom from state influence. As the parameters that determine the level of freedom, usually called fifty different parameters. In order not to bother everyone, the article will list only those that are currently not controversial. So, a sign of a free market is:
- State trade policy.
- Monetary policy of the state.
- The level of government intervention in the economy.
- The size of the financial burden of government.
- The size of capital flows, foreign investment and their direction.
- What is meant by private property and how it is prescribed in state laws.
- Regulation of economic processes in society by the state.
- The situation of banks and the financial sector.
- The situation with wages, prices and purchasing power.
- Informal economic 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 are no relationships between the political system and economic growth, and the situation depends solely on people.
