The free market economy is a system that regulates itself based on the principles of supply and demand. There is little or no government control over the way that businesses and customers interact with one another. It is a summary of every voluntary exchange that takes place in that specific environment.
A free market approach has several characteristics to consider, including the decentralized and spontaneous order of arrangements in which individuals and households make economic choices. A country’s economy can range from one that is large and transparent to one that is entirely black market based on the legal and political rules that exist.
The trademark of a free market economy is an absence of coerced transactions or conditions. Consumers have the right to choose what company provides them with the goods or services they require at any time.
Although there isn’t a 100% example of this structure in the world today, it is still imperative to review these free market economy advantages and disadvantages.
List of the Advantages of the Free Market Economy
1. A free market economy gets rid of a significant amount of red tape.
Because there is much less government interference in a free market economy, the levels of bureaucracy are significantly lower. The absence of red tape and complex rules reduces the administrative costs that companies face when developing or marketing goods and services. Since the expenses are lower on the development side, customers can benefit by spending to access more innovative products.
This advantage also makes it possible for organizations to put extra money toward other endeavors, including new research and development opportunities.
2. The free market provides more freedom to innovate.
A free market economy enables organizations to become innovative when imagining new ideas. That means the products and services that become available to the average person have more long-term value to consider. Entrepreneurs aren’t dependent on government agencies to tell them what to do or how to develop new products or services that the public needs.
It is up to each company to study consumer demand, popular trends, and basic needs to provide the best value promise possible. This process creates a higher level of competition in each industry, allowing customers to decide who is the best and deserves their money.
3. Customers always drive transactions in a free market economy.
Organizations in a free market economy have the ability to pursue profit in whatever way they choose. That means any goods and services that are not profitable will usually not receive any attention. Customers make the final determination as to whether an idea will succeed or fail, which means they are the judge and jury for each company.
When someone receives the choice between two products that offer similar benefits, it is the customer who votes with their purchase to decide which one survives. The consumer also determines the final price point for goods and services in the economy, requiring companies to set prices high enough to make a profit, but not so high that it limits the number of people who are willing to commit money.
4. The free market economy naturally promotes equality.
What is unique about the free market economy is the fact that each person gets the same opportunity to discover success. Although not everyone achieves their personal definition of a dream, every individual gets to start on their journey in a similar way. Anyone from any social or economic status can achieve the highest level of success in society because of their hard work, determination, and emphasis on innovation.
5. Free market economies regulate themselves naturally.
Supply and demand principles govern a free market economy, which means the decisions that people make enable a process of self-regulation. If goods or services don’t meet the ethical standards that consumers have for their transactions, then a choice to avoid those items will put pressure on the organization to make changes. Misleading people about the quality of an item or the availability of services causes circumstances that could force the company into bankruptcy or worse.
If an organization wants to remain operational in a free market economy, then it must focus on the exact needs of its targeted demographics. Customers always have the opportunity to vote with their checking accounts.
6. A free market economy creates a rising tide that lifts all boats.
The free market economy might have a self-focus as its top priority, but that shouldn’t be viewed as a lack of compassion from an outside perspective. The goal of this approach is to improve the standard of living for everyone. It’s the epitome of the expression that a “rising tide lifts all boats.” Companies are developing goods and services as a way to solve the pain points of consumers at the local level. Although the motivation might be selfish in doing so, the only way to create profits is to find ways to help others.
7. Individual skills are what drives a free market economy forward.
A free market economy takes on a nationalist tone because of the selfish nature of profit-making it proposes. Because a company can only become innovative with individual skills and talents, the strongest economies are the ones that have the most diversity in its structure. Even when we look at the mixed economies that operate around the world today, the most productive nations are the ones that have several methods of immigration available. These people then contribute to the greater good by promoting more competition globally.
That’s why the free market economy does an excellent job of bringing people together even though everyone is competing with one another to get the biggest share of the available products.
8. Free expression is a natural component of this society.
A free market economy cannot exist if the people making purchases do not have the freedom to express themselves. That means free speech and the right to defend oneself are natural mechanisms built into this approach. That’s why the Founding Fathers of the United States protected the concepts of capitalism with the Constitution and Bill of Rights. Without these structures in place, unexpected shifts in economic conditions could lead toward a monarchy or a complete dissolution of a country.
List of the Disadvantages of the Free Market Economy
1. Profit is always the motive for success in a free market economy.
The primary objective of every business in a free market economy is to earn as much profit as possible. Most situations will see an organization deciding to sacrifice worker safety, compromise on environmental standards, and act without ethics because no controls are in place to govern their behavior. The ends will always justify the means when it comes to the survival of a company in this economy.
Even with a partial free market economy in place, we’ve seen numerous examples throughout history of this disadvantage. Companies like WorldCom and Enron attempted to mislead their customers and government regulators, while the incident on Deepwater Horizon proved to be one of the most significant environmental disasters in U.S. history due to cost-cutting measures like the use of sub-standard cement.
2. Market failures can create severe recessions and ongoing economic consequences.
If a free market economy begins to lose control, then the consequences that happen as an outcome can be quite severe. Two specific incidents in the United States created long-term financial hardships for families: the Great Depression in the 1930s, and the Great Recession from the real estate market crash in 2008. Failures can devastate the lives of millions of households, resulting in lost income, unemployment, and homelessness.
The reason for this disadvantage is a lack of control over profit-seeking behavior. Instead of creating investments that provide slow and steady gains, short-term profits are often the priority in a free market economy. Highly-leveraged assets, loose credit, and no government intervention create a higher risk of failure.
3. A free market economy can provide limited product choices.
Organizations in a free market economy don’t pursue the development of products unless there is a profit potential available. That means limitations in the range of goods and services offered to consumers can exist locally, nationally, or internationally. This disadvantage can impact specific groups of customers more than others based on household income and other factors.
If it is too expensive to send goods or provide services to a rural community, then a free market economy suggests that the best decision is to withdraw from that area. That means there are always communities that will miss out on innovative ideas because they don’t help the bottom line as much.
4. Those who are unable to produce in a free market economy get cast aside.
The free market economy emphasizes an individual’s ability to contribute to a company’s profits or ability to innovate. That means able-bodied workers always have a top priority in a society dominated by the structure. Children, the elderly, the disabled, and anyone else who is unable to maintain their quota will have a secondary status. Even if you get sick or injured while working, you can go from being at the top of the economic ladder to the bottom at any time unless you have enough money saved up to support yourself.
This economy doesn’t provide a social safety net unless there is a process that can make them profitable.
5. A free market economy requires consumption to survive.
If people decide to save their money instead of spending it on goods and services, then a free market economy will struggle to stay alive. Households must be in the habit of buying or selling for there to be growth. Without any purchasing activities, then there are fewer employment opportunities available for the average person.
That’s why the greatest share of wealth accumulation occurs in the top 1% of a free market economy. These are the households that can access their needed resources without worrying about income shortages that arise because only entry-level jobs are available.
6. Equality doesn’t always equate to equal opportunities.
The levels of wealth that a family can achieve will dictate how many chances that individuals receive when attempting to complete goals or dreams. Anyone born into a household that struggles with poverty is going to find fewer opportunities to create the success they want to see. Some families only have one chance to hold themselves out of their economic circumstances. Households with wealth might have unlimited opportunities to achieve something similar.
Some people are automatically rewarded with success because of their family’s history in the free market economy. A single moment to achieve success isn’t the same as a lifetime of opportunities.
7. The free market economy alters the priority of governing.
Because the government doesn’t have full control over the decision making process of organizations, this body must generate income and structure from other resources. That’s why the taxation of residential income is typically higher than that of corporate profits in a free market economy. Because there is such an emphasis on innovation with this structure, the allocation of resources always goes toward whatever threat might exist to put a company out of business.
Instead of providing resources to families that promote better health and wellness, corporate longevity becomes the top priority of the government. That means it is the worker who takes on the most risk and receives the least amount of rewards.
8. Free market economies promote the idea of monopolization.
Although competition never completely goes away in a free market economy, the goal of each business is to eliminate as much of it as possible. When one organization provides the most goods or services in their industry, then it gives them the option to set higher profit levels while reducing innovation because consumers no longer have choices. That means the ultimate goal of this structure runs counter to the benefits that are often discussed when looking at this option compared to socialism or communism.
Once the government sets laws or regulations that forbid the creation of a monopoly, then the society is no longer benefitting from a 100% free market system.
9. If large businesses fail in a free market economy, so does everyone else.
When companies become the primary drivers of economic development in a society, then the largest contributors become too big to fail. If these organizations were to go out of business for any reason, then the jobs and money that would immediately get removed would be devastating to families and other companies. It could be enough to trigger the entire collapse of the economic systems being used.
This disadvantage is another reason why workers are the ones that take the most risk in this system. Government bailouts might exist in some societies, which is an option not given to the average household. Companies can lay off workers at any time for any reason, focusing only on high-value customers if that’s where their profits exist.
10. The free market system restrains wages instead of encouraging them to grow.
Although organizations can survive when they provide innovative resources to their core demographics, this process doesn’t apply to their employees. When periods of economic decline occur, then the wages of workers typically take the first hit because labor is the most expensive budget item for the average company. It is a process that some businesses could artificially trigger as a way to reduce their salary requirements.
It took over 30 years for the middle class in the United States to see an increase in the value of their salaries. Some households are still earning less today than what was available in the 1980s. That’s why a completely free market system struggles to survive. At some point, only the wealthy can continue moving forward – and eventually, almost all of the wealth gets put into the hands of a designated few people.
Every economy in the world today is a mixture of freedom and government regulation. History has taught us that going 100% in either direction creates more harm than good. We must find a balance where the needs of a company and those of individuals can come together in profitable ways for everyone.
This economy functions upon the laws of supply and demand. The characteristics of private ownership, free choice, and self-interest work to optimize the buying and selling platforms. This process creates high levels of competition, but it can also reduce the amount of choice that is present for the average consumer.
Repetition is what primarily defines the advantages and disadvantages of the free market economy. This structure fosters innovation and efficiency, but it also marginalizes those who are unable to maintain appropriate productivity levels. That’s why income inequality tends to occur more often in the economies that use this concept most often.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.