Free Markets

Why Should We Care About Free Markets?

Some folks speak negatively of so-called protectionist policies that interfere with the free market and how this is a terrible thing making us “less competitive”. Others warn of the harmful social consequences of many free market side effects. In order to debate the implications of any type of market economy, we must first understand the semantics of this important term.

What is a Free Market?

Left alone, every market will exhibit the behavior of a free market. By definition, a lack of intervention in the forces that act on supply and demand will produce free market behavior. Specifically, there is freedom in the availability and movement of capital (money), the prices of goods (products & services) and information about those goods. A good example of a free market is eBay. Items are bought & sold to the highest bidder with no government intervention. From a purely economic perspective, free markets will produce the optimum price for goods. Does this mean that a free market has no rules? It is quite the opposite. Even eBay has a set of rules everyone agrees to abide by. This is a very important concept – that information about the market is as available and transparent as the items being sold. It is a level playing field. No one has “inside information” that provides an undue advantage in a transaction. It is regulated. Notice also that all items are bought and sold using the same currency. If a different currency is used, an adjustment is made in the price in terms of that currency to equate the value. This is another critical point. No one can enter a bid in American dollars and then later expect to pay the same number in say Mexican Pesos. In other words there is a consistent medium of exchange.

Here Come the Cheaters

In a highly competitive marketplace with low barriers to entry, price will soon equilibrate and profits will stabilize. Since participants act in their own self-interest, some will seek to gain any competitive edge they can. Since they can’t compete on price, they will seek to fix the game in their favor in any way possible. Some will resort to bribery, price-fixing and collusion. That is exactly what many lobbyists do today with our elected representatives. Special interests seek to rig the markets in their favor by introducing legislation supportive of their “cause”. So in any free market economy, we need to be continually on the lookout for these kinds of shenanigans. [Note to self: If shenanigans are allowed, there is no free market. Rather it is a rigged market. Lobbying leads to rigged markets].

Monopolies & Oligopolies

Sometimes, companies don’t have to resort to elicit behavior if they can have the market do it for them. One of the harmful consequences possible in a free market is the existence of various degrees of monopolistic behavior brought about by the very nature of some markets. If a single company can command the means of production, they can control prices and are said to be a monopoly. If instead a few suppliers can collude together to control prices artificially, they are oligopolies. Note that the “invisible hand” of economics is powerless to stop this type of behavior. Nevertheless, monopolies are actually very rare – unless they can be manufactured by multinational influence on politicians to fix the game in their favor. Again, in these cases it is no longer a free market – it is a corrupt market.

Caveat Emptor?

Some argue that buyers need to be informed and should defend themselves against the kinds of abuses described above by “staying informed”. They should expect that everything they are told about what is being sold is a lie and behave accordingly; buyers beware. This is how we get melamine instead of milk. More fundamentally, if buyers have to “stay informed”, it is not a free market because information is not flowing freely. When the government gets involved, it is no longer a free market; rather it is a mixed market. Sometimes the government has to get involved to enforce a free market.


Does this mean that free markets are bad? No, they are what they are. Even if one considers free markets “bad” what are the alternatives? The only alternatives are a traditional or a command market, neither of which is a very attractive option. By definition, the only thing we can do in a free market is to meddle with it somehow to “correct” it’s naturally undesirable consequences or to expose and correct any corruption. Very few free markets work well without government regulation of some kind. That’s why America’s economy is a mixed market, not a free market. Since any meddling is a subjective exercise, we can get into a lot of trouble here. In any case, we shouldn’t “throw the baby out with the bathwater”. Instead the notion of free markets should be the basis of the starting point in a mixed market. This meddling is called Political Science.