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The free market system described an economy in which people trade with each other voluntarily and in which the supply and demand for goods and services lead to an “invisible hand” that creates order. A purely free market has little or no government intervention or regulation, and individuals and businesses are free to do what they want (economically).

The market economy has existed in various forms ever since human beings began to trade with each other. Free markets emerged as a natural process of social coordination, much like language. No intellectual invented voluntary exchange or private property rights; no government developed the concept or implemented the first use of money as a medium of exchange.

Key points to remember

  • A free market is one where voluntary exchange and the laws of supply and demand form the sole basis of the economic system, without government intervention.
  • A key feature of free markets is the absence of coercive (forced) transactions or conditions on transactions.
  • No one invented the free market; it was born organically as a social institution for trade and commerce.
  • While proponents of free trade frown upon government intervention and regulation, certain legal frameworks such as private property rights, limited liability, and bankruptcy laws have helped spur global free markets.

Where does the free market come from?

Even without money, human beings traded with each other. Evidence of this goes back much longer than written history can explain. The trade was informal at first, but economic players eventually realized that a medium of monetary exchange would help facilitate these beneficial transactions.

The earliest known means of exchange were agriculture – such as grain or cattle (or debt related to gran or cattle) – probably as far back as 9000-6000 BC. It was only around 1000 BC. AD that metal coins were minted in China and Mesopotamia and became the earliest known example of a commodity that only functioned as currency.

Although there is evidence of banking systems in early Mesopotamia and ancient Rome, the concept would not reappear until the 15th century in Europe. This did not happen without significant resistance; the church first condemned usury. Slowly thereafter, merchants and wealthy explorers began to alter notions of business and entrepreneurship.

two pillars

The market economy rests on two pillars: voluntary exchange and private property. It’s possible that trade would take place without either, but it wouldn’t be a market economy—it would be a centralized economy.

Private property existed long before recorded history, but important intellectual arguments for a private system of ownership of the means of production did not emerge until John Locke in the 17th and 18th centuries.

Free markets versus capitalism

It is important to distinguish free markets from capitalism. Capitalism is an economic system of how goods are produced – where business owners and investors (capitalists) organize production into a centralized entity, such as a firm or corporation or factory, and these capitalists own all the tools and means of production, real estate, raw materials, finished products and profits.

Capitalists, in turn, hire employees as labor in exchange for wages or salaries. Workers do not own any of the tools, raw materials, finished products or profits – they only work for pay.

A free market, on the other hand, is an economic distribution system. It determines, through the laws of supply and demand, who gets what and how much in an economy.

Historical resistance to market forces

Many historic advances in free market practices have initially met with some resistance from existing elites. For example, the market tendency towards specialization and division of labor ran counter to the caste system existing in feudal Europe within the aristocracy.

Mass production and factory work were also challenged by politically connected guildsmen. Technological change was notoriously attacked by the Luddites between 1811 and 1817. Karl Marx believed that the state should remove all private ownership of the means of production.

Central authority and government planning have been the main opponents of the market economy throughout history. In contemporary parlance, this is often presented as socialism versus capitalism. While technical distinctions can be drawn between common interpretations of these words and their actual meanings, they represent modern manifestations of an age-old conflict: private and voluntary markets versus state control.

Almost all modern economists agree that the market economy is more productive and operates more efficiently than centrally planned governments. Even so, there is still considerable debate as to the proper balance between freedom and government control in economic affairs.