Disadvantages of a Free Market Economy

A free market economy is a system where prices are determined by supply and demand, with little or no government control. Thus, this form of a market runs on its own accord with prices and quantities of transactions being determined solely by supply and demand. The market functions without any external intervention. Regulation remains at a minimal level. There has been some dispute over whether a free market entails freedom from monopolies or the freedom to form monopolies, with the classical economists like Adam Smith supporting the former view and monetarists such as Milton Friedman supported the latter view point.

In the opinion of the classical economists, a free market economy should allow players in the market the comfort of knowing that they were safe from monopolies and other market tactics that would create barriers to entry for any new entrepreneur. They went more with a spirit of socialism while the opposing point of view was taken by monetarists who related a free market to a laissez faire or capitalist market system. Laissez faire, literally translated as “let them be”, is a concept which advocates freedom for market players to do as they please without intervention from central forces. A free market economy has come to be associated with this stand and is identified with the laissez faire sentiment courtesy Milton Friedman through his book ‘Capitalism and Freedom’ published in 1962.   The fundamental argument in support of a free market economy comes from Adam Smith’s usage of the phrase ‘invisible hand’. This phrase stresses on the fact that markets have the ability to regulate themselves and this self-regulating nature of markets makes external intervention or regulation unnecessary.

A number of arguments for and against a free market economy have been raised by noted economists over the years. Especially due to the fact that such market systems determine the political setup of a nation to a great extent, the importance of assessing the pros and cons of various market economies becomes highlighted. The free market economy is a significantly popular form of market economy. There has been ample discussion and debate over the reasons for its popularity as well as opposition towards it. We attempt to examine one aspect of this debate through this article by studying the disadvantages of a free market economy.

Inefficient Market

Some critics of the free market economy say that a market economy which has a minimal level of government regulation finds itself in market failure more often than other market economies. As history is its witness, market failures have been occurring time and again as new financial and market systems have been established globally. This has led to a number of recessions most of which have required government intervention to be brought into control. As is the nature of a business cycle, booms and busts are bound to happen in a capitalist setup with minimal government intervention, creating recessionary scenarios which affect the entire economy. As was evident in case of the Great Depression of 1930 and again in the 2008 recession, when things go downhill in the economy, government control has been proven to help in bringing the nation out of its misery. Be it temporary fiscal measures infusing government money into the economy or bailouts pulling ‘free-market players’ out of bankruptcy, some amount of government regulation is necessary to smoothen out the market function.

free market economy

However as soon as government regulation becomes a norm in the market, the concept of a free market economy collapses. Hence, it is important to understand that a pure free market economy does not in fact exist in reality. Some partial form of it is in action in certain parts of the world.

Furthermore, a free market economy is fed by ambition and entrepreneurial spirit which is supposed to encourage competition in the market. This brings higher quality products to the public at competitive prices, providing them a wider range to choose from. However, sometimes a free market economy curbs this very entrepreneurial spirit by giving rise to monopolies, thus creating barriers to entry in the market. With collaboration of private enterprises, monopolies become a common occurrence, pushing smaller players out of the market and giving unfair market advantages to the large conglomerates. Due to the unregulated nature of the market, monopolies can set the prices of products artificially high, provide poor services and low quality of goods, exploiting consumers in the process. Competition is curbed and nothing can be done about it due to the non-interventionist policies of a free market economy.

This makes the concept of a free market economy flawed as it could suppress the same ideals it sets out to achieve.

For the greater good?

The free reins given to producers of goods and services in a free market economy allows them to choose the nature of the goods they wish to produce. In the process, the larger picture, or the immediate needs of the economy are sometimes overlooked. For instance, farmers may lean towards the production of cash crops which bring in higher revenues and greater business for them as compared to that provided by food crops. Thus, the essential need for food crops is not fulfilled. Governments usually encourage such production with provisions such as high floor prices for crops, subsidies and higher government expenditure on agriculture. However in case of free market economies, such forces are not allowed to function freely. All this administers adequate fodder for critics to point out the evils of a free market economy which fails to look after the needs of its citizens due to curtailment of forces which work for the greater good.

Not only in case of agriculture, but a number of other services rendered imperative for an economy to function, such as military services to roads and even health care, are not accommodated within the definition of a free market economy. The fact is, a free market concerns itself with profit making opportunities for market players and has been criticised of serving the vested interests of the wealthy. Protectionist policies, which may be required in various developing economies, find no place in such a system.

There may be a number of long run consequences of a free market economy including negative externalities (negative effects of production activities such as pollution whose costs have to be borne by the general public) and income inequalities, which pave the way for mass unrest and threaten the stability of a nation. After all great revolutions such as the French Revolution and Russian Revolution were sparked by the balance of power, financial and administrative, tipping in favour of a few wealthy individuals. Assuming that mankind has realised the error of its ways, most economies these days are mixed economies. Market economies are subject to varying degrees of societal and government regulation, rather than simply self-regulation by market forces. 

It would be brash to suggest that a free market economy is an inferior form of a market economy when compared to other forms. It has a number of positive aspects which although not mentioned in this article, present a highly favourable stand for it. Making decisions about the type of economy that should be adopted by a nation requires tremendous deliberation and forethought. We must not be hasty to judge.