What is a “free market”?
I have written a few pieces over the past week about economic policies that would greatly benefit the environment. A major contention that keeps coming up on the comment threads is that I use the term “markets” or “free markets” too loosely. So it’s time for a quick summary of what the market system is and isn’t.
Here are a few various definitions taken from the dictionaries on the web:
- A market in which supply and demand are unregulated except by the country’s competition policy, and rights in physical and intellectual property are upheld.
- One in which any individual may exchange their products or services by competitive bidding, open to all, without constraint.
- A system in which the market forces of supply and demand determine prices and allocate available supplies, without government intervention.
- Occurs where there is little or no regulation of commercial activity by government.
- A free market is an economic term for an idealized market system, where all economic decisions and actions by individuals regarding transfer of money, goods, and services are voluntary, and are therefore devoid of coercion and theft (some definitions of “coercion” are inclusive of “theft”).
A couple quick points.
First, there are various definitions of “free market,” but the key characteristic is that business decisions are largely voluntary and free of government intervention. Point two: of course, no pure free market exists, since we are talking about a continuum; e.g., of all of the developed countries, the U.S. is more of a free market system than, say, Norway or France. From now on when I speak of free markets or market systems I am describing a move in the direction of competitive markets with clear property rights largely free of government intervention. I am not saying zero intervention or zero regulation.
In the context of what I have been discussing in my recent posts, the term “free market” stands in stark contrast to the socio-economic systems that currently characterize many of the world’s natural resources. For example, I have mentioned how much of the world’s ocean resources and forests are currently being exploited in “open access” regimes, and I have advocated creating property rights over these resources as a means to protect them and limit their use; creating property rights that can be freely exchanged is one of the fundamental prerequisites of a market system (see definition #1 above). I have advocated eliminating natural resource subsidies and described this as a move towards a free market system, which it is, because subsidies distort prices and limit competition, and are a forceful and direct government intervention in the market.
In summary, no economist I know of claims that there are any pure free markets in the world (in fact, an example I use in class is that even my local farmers market has a rule book 85 pages long!). What most economists try to point out are the areas where moving in the direction of free markets would lead to environmental benefits (and sometimes costs).
For those interested in a more lengthy discussion of exactly why environmentalists should embrace economics and market-based solutions, please take a look at this essay I wrote on the subject (excerpts of which appeared on Gristmill earlier this year); it addresses almost all the criticisms I have seen expressed.
P.S. I will return shortly to the campaign against natural resource subsidies I am developing.