A look at the Free Market Economy

The fact that a free market economy functions automatically is one of its major advantages. There is no need for costly and complex bureaucracies to co-ordinate economic decisions. The economy can respond quickly to changing demand and supply conditions. When markets are highly competitive, no one has great power. Competition between firms keeps prices down and acts as an incentive to firms to become more efficient. The more firms there are competing, the more responsive they will be consumer wishes. The more efficiently firms can combine their factors of production, the more profit they will make. The more efficiently workers work, the more secure will be their jobs and the higher their wages. The more carefully consumers decide what to buy, the greater the value for the money they will receive. Thus people pursuing their own self-interest through buying and selling in competitive markets helps to minimise the central economic problem of scarcity, by encouraging the efficient use of the nation’s resources in line with consumer wishes. From this type of argument, the following conclusion is often drawn by defenders of the free market: ‘The pursuit of private gain results in the social good.’ This is obviously a highly significant claim and has profound moral implications. In practice, however, markets do not achieve maximum efficiency in the allocation of scarce resources, and governments feel it necessary to intervene to rectify this and other problems of the free market. The problems of a free market are as follows: •Competition between firms is often limited. A few giant firms may dominate an industry. In these cases they may charge at high prices and make large profits. Rather than merely responding to consumer wishes, they may attempt to persuade consumers by advertising. Consumers are particularly susceptible to advertisements for products that are unfamiliar to them. •Lack of competition and high profits may remove the incentive for firms to be efficient. •Power and property may be unequally distributed. Those who have power and/or property will gain at the expense of those without power and property. •The practices of some firms may be socially undesirable. For example, a chemical works may pollute the environment. •Some socially desirable goods would simply not be produced by private enterprise. What firm would build and operate a lighthouse, unless it were paid for by the government? •A free-market economy may lead to macroeconomic instability. There may be periods of recession with high unemployment and falling output, and other periods of rising prices. •Finally, there is the ethical objection, that a free-market economy, by rewarding self-interested behaviour, may encourage selfishness, greed, materialism and the acquisition of power.