What is a free market?

A free market is a market in which property rights are voluntarily exchanged at a price arranged completely by the mutual consent of sellers and buyers. By definition, buyers and sellers do not coerce each other, in the sense that they obtain each other’s property without the use of physical force, threat of physical force, or fraud, nor is the transfer coerced by a third party.[1] In the aggregate, the effect of these decisions en masse is described by the law of supply and demand. Free markets contrast sharply with controlled markets or regulated markets, in which governments directly or indirectly regulate prices or supplies, which distorts market signals according to free market theory.[2] In the marketplace the price of a good or service helps communicate consumer demand to producers and thus directs the allocation of resources toward consumer, as well as investor, satisfaction. In a free market, price is a result of a plethora of voluntary transactions, rather than political decree as in a controlled market. Through free competition between vendors for the provision of products and services, prices tend to decrease, and quality tends to increase. A free market is not to be confused with a perfect market where individuals have perfect information and there is perfect competition.

Free market economics is closely associated with laissez-faire economic philosophy, which advocates approximating this condition in the real world by mostly confining government intervention in economic matters to regulating against force and fraud among market participants. Hence, with government force limited to a defensive role, government itself does not initiate force in the marketplace beyond levying taxes in order to fund the maintenance of the free marketplace. Some free market advocates oppose taxation as well, claiming that the market is better at providing all valuable services of which defense and law are no exception, and that such services can be provided without direct taxation. Anarcho-capitalists, for example, would substitute arbitration agencies and private defense agencies.

While some economists regard the free market as a useful if simplistic model in developing economic policies to attain social goals, others regard the free market as a normative rather than descriptive concept, and claim that policies which deviate from the ideal free market solution are ‘wrong’ even if they are believed to have some immediate social benefit. Paul Samuelson treated market failure as the exception to the general rule of efficient markets[citation needed].

In political economics, one opposite extreme to the free market economy is the command economy, where decisions regarding production, distribution, and pricing are a matter of governmental control. Other opposites are the gift economy and the subsistence economy. The mixed economy is intermediate between these positions.

In social philosophy, a free market economy is a system for allocating goods within a society: purchasing power mediated by supply and demand within the market determines who gets what and what is produced, rather than the state. Early proponents of a free-market economy in 18th century Europe contrasted it with the medieval, early modern, and mercantilist economies which preceded it.

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