A buzz word (or phrase) is one that just sort of rings true. Upon hearing it, we have an automatic sense of knowing what it means. "Free market economy" is a case in point.
Impressions can be deceiving, though. Many people who are prone to such a reflex, when asked to actually define or describe such a thing, find they have a more difficult time than the original confidence would have suggested.
And, of course, definition as a matter of course is fraught with uncertainty. As confident as any of us may feel about ours, nobody is obliged to share it.
On these matters, we might say that semantics or historical precedent is often the last refuge, but a dubious refuge it is. Precedents, after all, are plenty easy enough to find with enough determination and cleverness. It's not as though there's a science of definition. It rather is an area fraught with subjectivity.
All this is to say that I have no illusions that my definition is irreproachable or objectively truth. I don't offer it under the delusion that no one can disagree. I offer it because I believe it is a definition that allows us to make an important distinction about the nature of the world.
It also enjoys the virtue of not being merely piecemeal or makeshift. It is principled, which recommends it as a tool of analytic precision. I can of course do nothing about those who fail or refuse to observe these benefits.
The central point in this prologue is that, despite anyone else's opinion on the matter, the definition offered here is what I mean by the phrase "free market economy." Refuting my definition in no way refutes the arguments made on behalf of that which I define as such. Attempting that would be a colossal case of missing the point.
My definition, then, begins back to front: an economy is that part of a society concerned with employing resources. This refers to all and any resources, be they material, human or otherwise. Defining the nature of economy, though, defines nothing about the means by which such resources are employed. That requires distinguishing kinds of economies.
A market is a nexus through which actors trade those resources. (By "resources" I do not restrict my meaning to "natural resources" - e.g., stuff dug out of the ground. Rather I refer to anything for which anyone has a use. The term "goods" could be interchangeable with "resources.") A market does not assume the existence of money. A barter economy can still be a market economy.
The non-essential role of money is not to be confused with the elective nature of prices in markets. Prices after all are not based on monetary units (even if expressed in them where money exists). They are rather expressions of the consensus on the comparable valuation of resources. When money does exist, it is only one more resource. Like all the others, its value is determined through supply-and-demand driven trade. (For more on this, see my article on the Meaning of Money at the Fiat Currency Review.)
Relative supply and demand, arising from the vicissitudes of trade, determine the value of resources in a market economy. If it is readily available and/or very few people want it, it will be perceived as having a lower value. Since those offered the resource find it comparatively easy to get, more of it will usually be required for them to exchange it for what is valued higher on a one-to-one basis. This is what is meant by saying that if fetches a lower price. In comparison, resources that are less readily available, and/or more widely in demand, all else being equal, command a higher price in relation to other resources. Prices are than the differential between the values of resources as derived from supply and demand. Though, demand is always subjective .
This is the operation of a market economy. A free market economy is still more specific. The use of the word "free" would allow it to be interchangeable with "voluntary." In a free market economy anyone is free to exchange any resource with anyone else who wants to freely participate in that trade.
The distinctions here may be illustrated with the case of marijuana. In most of the world the selling and buying (not to mention growing and consuming) of marijuana is illegal. Police forces use their monopoly of legitimized violence to attempt to prevent such exchanges.
Nonetheless, such markets exist and often thrive. They frequently are the major source of income in the economies of many areas. For some regions the marijuana market is the difference between local economic hardship and relative prosperity.
Police threats of violence (surely abducting and caging qualifies as violent means, whatever one thinks of the ostensible ends) eliminate a free market marijuana trade. High demand, however, ensures that markets persist to serve that demand.
If there is enough demand, whatever types of suppression of a resource may be attempted, markets will rise to serve it. However, the threat of police violence does eliminate both potential buyers and sellers from the market. Selling is especially dangerous and thus incurs very high costs. Consequently, prices are extremely high.
It is in this way that government suppression of markets, constraining freedom to trade, raises prices. Such an effect, though, is universal; it is not restricted to demonized resources. In fact, all government tariffs, zoning, subsidies, bailouts, and most taxation and regulation, equally backed by the threat of violence, effectively - and usually intentionally - reduces freedom to trade.
Virtually all the well documented corruption is a direct result of this dynamic. Politically well connected sellers influence government policy-making, curbing police powers in directions beneficial to their economic interests. Such crony mercantilism is the antithesis of a free market economy.
Impressions can be deceiving, though. Many people who are prone to such a reflex, when asked to actually define or describe such a thing, find they have a more difficult time than the original confidence would have suggested.
And, of course, definition as a matter of course is fraught with uncertainty. As confident as any of us may feel about ours, nobody is obliged to share it.
On these matters, we might say that semantics or historical precedent is often the last refuge, but a dubious refuge it is. Precedents, after all, are plenty easy enough to find with enough determination and cleverness. It's not as though there's a science of definition. It rather is an area fraught with subjectivity.
All this is to say that I have no illusions that my definition is irreproachable or objectively truth. I don't offer it under the delusion that no one can disagree. I offer it because I believe it is a definition that allows us to make an important distinction about the nature of the world.
It also enjoys the virtue of not being merely piecemeal or makeshift. It is principled, which recommends it as a tool of analytic precision. I can of course do nothing about those who fail or refuse to observe these benefits.
The central point in this prologue is that, despite anyone else's opinion on the matter, the definition offered here is what I mean by the phrase "free market economy." Refuting my definition in no way refutes the arguments made on behalf of that which I define as such. Attempting that would be a colossal case of missing the point.
My definition, then, begins back to front: an economy is that part of a society concerned with employing resources. This refers to all and any resources, be they material, human or otherwise. Defining the nature of economy, though, defines nothing about the means by which such resources are employed. That requires distinguishing kinds of economies.
A market is a nexus through which actors trade those resources. (By "resources" I do not restrict my meaning to "natural resources" - e.g., stuff dug out of the ground. Rather I refer to anything for which anyone has a use. The term "goods" could be interchangeable with "resources.") A market does not assume the existence of money. A barter economy can still be a market economy.
The non-essential role of money is not to be confused with the elective nature of prices in markets. Prices after all are not based on monetary units (even if expressed in them where money exists). They are rather expressions of the consensus on the comparable valuation of resources. When money does exist, it is only one more resource. Like all the others, its value is determined through supply-and-demand driven trade. (For more on this, see my article on the Meaning of Money at the Fiat Currency Review.)
Relative supply and demand, arising from the vicissitudes of trade, determine the value of resources in a market economy. If it is readily available and/or very few people want it, it will be perceived as having a lower value. Since those offered the resource find it comparatively easy to get, more of it will usually be required for them to exchange it for what is valued higher on a one-to-one basis. This is what is meant by saying that if fetches a lower price. In comparison, resources that are less readily available, and/or more widely in demand, all else being equal, command a higher price in relation to other resources. Prices are than the differential between the values of resources as derived from supply and demand. Though, demand is always subjective .
This is the operation of a market economy. A free market economy is still more specific. The use of the word "free" would allow it to be interchangeable with "voluntary." In a free market economy anyone is free to exchange any resource with anyone else who wants to freely participate in that trade.
The distinctions here may be illustrated with the case of marijuana. In most of the world the selling and buying (not to mention growing and consuming) of marijuana is illegal. Police forces use their monopoly of legitimized violence to attempt to prevent such exchanges.
Nonetheless, such markets exist and often thrive. They frequently are the major source of income in the economies of many areas. For some regions the marijuana market is the difference between local economic hardship and relative prosperity.
Police threats of violence (surely abducting and caging qualifies as violent means, whatever one thinks of the ostensible ends) eliminate a free market marijuana trade. High demand, however, ensures that markets persist to serve that demand.
If there is enough demand, whatever types of suppression of a resource may be attempted, markets will rise to serve it. However, the threat of police violence does eliminate both potential buyers and sellers from the market. Selling is especially dangerous and thus incurs very high costs. Consequently, prices are extremely high.
It is in this way that government suppression of markets, constraining freedom to trade, raises prices. Such an effect, though, is universal; it is not restricted to demonized resources. In fact, all government tariffs, zoning, subsidies, bailouts, and most taxation and regulation, equally backed by the threat of violence, effectively - and usually intentionally - reduces freedom to trade.
Virtually all the well documented corruption is a direct result of this dynamic. Politically well connected sellers influence government policy-making, curbing police powers in directions beneficial to their economic interests. Such crony mercantilism is the antithesis of a free market economy.
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