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.
Providing a definition of the term is complicated by the fact that no one owns such terms. No definition turns out to be the final word on the topic. Diametrically opposed definitions have no intrinsic criteria to conclusively resolve their differences.
Semantics or historical precedent, the resort of many, in reality solves little. Precedents are simply too abundant when sought by determined and clever partisans. There is no science of definition. It is an unfailingly subjective enterprise.
This is prologue to acknowledging the limits of offering my own definition. It is not offered under the delusional burden of finality or conclusiveness, but only because I believe it is useful to do so. It is a definition that I believe provides useful distinctions about the nature of our world. This is why I find it useful and insist upon its use.
Additionally, my definition is not piecemeal or makeshift. Rather, it is principled and lends itself to precise analysis. I believe there's value in that. If anyone thinks differently, there's nothing I can do about that.
What is not in any way vague about these matters though is that in providing this definition, the terms of debate are set. Criticism of my attitude to - or conception of - a free market economy must address it as I define it. To substitute one's own definition at the locus of criticizing my claims about a free market economy is quite literally to miss the point.
So, working back to front, an economy is that part of a society concerned with employing resources: material, human or otherwise. It assumes nothing about how they are employed.
Markets are nexuses for the trading of resources by economic actors. (Use of the term "resources" should not mislead the reader into assuming "natural resources" - e.g., stuff dug out of the ground. "Resources" rather refer to anything which an actor might put to some use. The term could be treated as interchangeable with "goods.") It is worth mentioning that "market" does not assume the operation of money. A barter economy is no less 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.
We've now established three separate phenomena: an economy, a market economy and a free market economy. Let's illustrate the distinctions with reference to the case of marijuana. Most jurisdictions of the world prohibit selling and buying (not to mention growing and consuming) of marijuana. Police forces exercise their monopoly of legitimized violence to suppress trade in this resource.
It is a fact though that in many parts of the world the buying and selling of marijuana is a major part of the economy. It funnels income into areas that otherwise might not see nearly so much cash available to be spent locally.
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 demand is sufficient, suppression of a resource, even by violence, will not eliminate the market for it. Threats of police violence do diminish the number of buyers and sellers in that market. And, since "trafficking" or "dealing" or otherwise holding large quantities is usually dealt with more severely, selling in particular is very dangerous. Dealing with this danger incurs elevated business costs. Those costs, combined with the violence-induced supply reduction, result in prices higher than the market would otherwise provide.
Government violence used to suppress markets increases prices by constraining free trade. The same dynamic is not restricted to supposedly criminal resources. All government tariffs, zoning, subsidies, bailouts, and most taxation and regulation, effectively - and usually intentionally - constrains freedom to trade.
Politically well connected sellers can influence government policy, directing its police powers in service of their economic interests. It is this kind of crony mercantilism that 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.
Providing a definition of the term is complicated by the fact that no one owns such terms. No definition turns out to be the final word on the topic. Diametrically opposed definitions have no intrinsic criteria to conclusively resolve their differences.
Semantics or historical precedent, the resort of many, in reality solves little. Precedents are simply too abundant when sought by determined and clever partisans. There is no science of definition. It is an unfailingly subjective enterprise.
This is prologue to acknowledging the limits of offering my own definition. It is not offered under the delusional burden of finality or conclusiveness, but only because I believe it is useful to do so. It is a definition that I believe provides useful distinctions about the nature of our world. This is why I find it useful and insist upon its use.
Additionally, my definition is not piecemeal or makeshift. Rather, it is principled and lends itself to precise analysis. I believe there's value in that. If anyone thinks differently, there's nothing I can do about that.
What is not in any way vague about these matters though is that in providing this definition, the terms of debate are set. Criticism of my attitude to - or conception of - a free market economy must address it as I define it. To substitute one's own definition at the locus of criticizing my claims about a free market economy is quite literally to miss the point.
So, working back to front, an economy is that part of a society concerned with employing resources: material, human or otherwise. It assumes nothing about how they are employed.
Markets are nexuses for the trading of resources by economic actors. (Use of the term "resources" should not mislead the reader into assuming "natural resources" - e.g., stuff dug out of the ground. "Resources" rather refer to anything which an actor might put to some use. The term could be treated as interchangeable with "goods.") It is worth mentioning that "market" does not assume the operation of money. A barter economy is no less 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.
We've now established three separate phenomena: an economy, a market economy and a free market economy. Let's illustrate the distinctions with reference to the case of marijuana. Most jurisdictions of the world prohibit selling and buying (not to mention growing and consuming) of marijuana. Police forces exercise their monopoly of legitimized violence to suppress trade in this resource.
It is a fact though that in many parts of the world the buying and selling of marijuana is a major part of the economy. It funnels income into areas that otherwise might not see nearly so much cash available to be spent locally.
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 demand is sufficient, suppression of a resource, even by violence, will not eliminate the market for it. Threats of police violence do diminish the number of buyers and sellers in that market. And, since "trafficking" or "dealing" or otherwise holding large quantities is usually dealt with more severely, selling in particular is very dangerous. Dealing with this danger incurs elevated business costs. Those costs, combined with the violence-induced supply reduction, result in prices higher than the market would otherwise provide.
Government violence used to suppress markets increases prices by constraining free trade. The same dynamic is not restricted to supposedly criminal resources. All government tariffs, zoning, subsidies, bailouts, and most taxation and regulation, effectively - and usually intentionally - constrains freedom to trade.
Politically well connected sellers can influence government policy, directing its police powers in service of their economic interests. It is this kind of crony mercantilism that is the antithesis of a free market economy.
About the Author:
If you're interested in protecting you and your family's wealth, keeping tabs on what's going on in the economic world and understanding free markets, you need to be following the latest scoops and analysis on the Free Market Economy blog.
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