Free Market Economy

October 13, 2010Economic Systemsby EconomyWatch


The term free market economy primarily means a system where the buyers and sellers are solely responsible for the choices they make. In a way, free market gives the absolute power to prices to determine the allocation and distribution of goods and services. These prices, in turn, are fixed by the forces of supply and demand of a respective commodity. In cases of demand falling short of the supply of a respective commodity, the price will fall as opposed to a price rise when the supply is inadequate to meet the growing demand of a good or service. Free market economy is also characterized by free trade without any tariffs or subsidies imposed by the government.

The role of the government of a nation is only limited to controlling the law and order of a country and to ensure that a 'fair price' is charged by the sellers. That is to say, the government, having no role in administering the price of a commodity, has to see that the prices taken by the sellers is true and commensurate with the price determined by the forces of demand and supply.

The basic feature of the free market economy is that only people with sufficient control over resources, and wealth, in particular have the privilege to purchase goods and services, often priced very highly in a free economy. Prices, which are the only allocating and distributing factor in a free market economy, place the poor in an unenviable situation who are gradually thrown out of the system without any access to wealth and the basic needs of subsistence.

Thus it deems absolutely imperative that a country like India and a few Latin American countries like Brazil, Peru and Nicaragua having a large number of poor have a public distribution system in place with subsidized prices being fixed by the government to protect the poor. Free market economy is considered to the most efficient or optimum device to allocate a country’s resources, with wealth or income being the only yardstick.Free market economy is often associated with a Capitalistic Economy with means of production being privately owned.

On the other hand, totalitarian economies or Socialistic Economies like the erstwhile USSR, China and North Korea, till date, have an altogether government regulated system. The prices of goods and services are totally administered by the government right from the support price fixed at which the government procures raw agricultural products from the farmers.

Socialistic countries, such as parts of the erstwhile Soviet Republic like Ukraine, Belarus and Lithuania are gradually coming out of the Communist shadow and moving towards a free market economy. Capitalistic Economies have the biggest advantage of giving people what they deserve rather than putting everybody in the same plane.

Success of countries practicing free market is only evident with the growth of the USA, the Scandinavian countries, Germany and France as major world powers. Countries such as India and China, by allowing liberalization of its trade to some extent and practicing free market principles brought about more efficiency among its domestic producers and increased its growth rate markedly.

Free market existing with the doctrines of Socialism like limited regulation of prices by the government to protect the poor can be an ideal situation for developing countries like India, China and South East Asian countries to attain growth and prosperity.

Mixed Economy |  Socialist Economy |  Capitalist Economy

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