Emergence of the Free-Market Economy
The free-market economy is an economic system in which individuals make the majority of decisions regarding economic activities and transactions without government control. Individuals have the freedom to make economic decisions pertaining to their employment, what expenditures to make, how to use or accumulate capital, and whether to use their resources now or to save them for later consumption. But where did this concept start What or who were the influences What are the advantages and disadvantages of free-market economies In the following, we discuss the historical and philosophical forces and issues that influenced the emergence of the free-market economy.
Laissez-Faire (French, ???let things alone???)
In Western Europe during the 18th century, the policy of domestic non-intervention by government in individual or industrial monetary affairs was known as laissez-faire, French for ???let things alone, let them pass??? (http://en.wikipedia.org). The principle favors capitalist self-interest, competition, and natural consumer preferences as forces leading to optimal prosperity and freedom. It was believed that the natural economic order, untouched by regulations or adjustments, was best designed to produce maximum well-being for all. In France, pioneer economists, known as physiocrats, first developed the theory of laissez-faire, which stressed non-interference with commercial ventures. The primary principles of free-market economies are based on this theory. The most important and influential proponent of laissez-faire capitalism was 18th century British economist Adam Smith.
Economist Adam Smith
British philosopher and economist Adam Smith authored The Wealth of Nations (1776), the first serious attempt to study the nature of capital and the historical development of industry and commerce among European nations. Smith believed that individual welfare was more important than national power. He supported a policy of free trade so that the ???invisible hand??? of competition could act as an economic regulator.
The “invisible hand” is the way supply and demand balance out? a competitive? market. Competition in the marketplace stabilizes the price, and the demand or lack of, determines production. It is the? mechanism of competition that provides a successful social provisioning.
In Adam Smith??™s view, capital is best employed for the production and distribution of wealth under conditions of governmental non-interference, or laissez-faire, and free trade. In his opinion, the production and exchange of goods can be stimulated, and a consequent rise in the general standard of living attained, only through the efficient operations of private industrial and commercial entrepreneurs acting with a minimum of regulation and control by governments. Therefore any interference with free competition by government is almost certain to be detrimental. ???His whole economic philosophy stemmed from his unquestioning faith in the ability of the market to guide the systems to its point of highest return??? (Heilbroner, 1999, p. 68).
Proponents of free-market economies believe they provide numerous advantages. They see free-market economies as encouraging individual responsibility for decisions and they believe that economic freedom is essential to political freedom. Also, many believe that free markets are more efficient in economic terms. Free markets provide incentives both to individuals to allocate resources such as labor and capital, among the most productive uses, and to firms to produce goods and services that the public wants, using the most efficient means of production.
Free-market economies are also criticized. Opponents believe that a free-market economy cannot ensure basic social values such as alleviating poverty, or that the income distribution that results from a free-market economy may not be equitable. A free-market economy may also permit the accumulation of vast wealth and powerful special interests that could threaten the survival of political freedom.
Although Adam Smith??™s view has gone through substantial changes by economists due to historical events since Smith??™s time, several portions of The Wealth of Nations, especially those relating to sources of income and the nature of capital, have continued to form the basis for theoretical study in the field of political economy. Smith??™s and other physiocrats??™ belief that government interference in the free-market economy would be damaging is not all true, but their theories have served as a guide to the formulation of governmental economic policies. Government??™s role in a free-market economy includes protecting private property, enforcing contracts, and regulating certain economic activities. Governments may also restrict economic freedom for the sake of protecting individual rights such as child labor laws, prohibit toxic emissions, or forbid the sale of unsafe goods. In this respect, laissez-faire is c??™est fini.
Britannica Online. Neo-classical theory ??“ beliefs. Retrieved December 10, 2004, from http://www.bized.ac.uk/virtual/economy/library/theory/classical 1.htm.
Heilbroner, R.L. (1999). The worldly philosophers. New York: Simon & Schuster.
Heilbroner, R.L., & Milberg, W. (2002). The making of economic society. Upper Saddle River: Prentice Hall.
Routledge Encyclopedia of Philosophy Online. Conservatism and the market. Retrieved December 10, 2004 from Apollo Library.
Emergence of the Free-Market Economy