Economy is one in which individuals are free to make their own economic decisions.

Economics is the study of how societies handle the distribution of money (wealth) and the production of goods and services.  There are several different types of economic systems that historians and economists have identified throughout history, including: command economy, mixed economy and free market economy.  Below is the details of a free market economy.
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OVERVIEW OF A FREE MARKET ECONOMY

A free market economy is considered to be on the right side of the economic spectrum and is based on the principles of individualism, such as: economic freedom, self-interest, competition and private property.  This means that a free market economy contains a low degree of government intervention in the economy and focuses on the maximum freedom of choice for the individuals and businesses of the country.  For example, in a free market economy the economic decisions of a country are generally determined by the individual needs or wants of the people and businesses.  Therefore, the market forces of supply and demand are responsible for determining the needs of the citizens of the country, deciding what should be produced and who should get them.  The individual wants or desires of the people of the country are the most important factor in a free market economy and the leadership of the government is usually focused on maintaining this freedom and staying out of the way of supply and demand.  Furthermore, in a free market economy, the means of production is controlled by individuals and businesses through the use and promotion of private property.  As a result, the production output of the economy and the wages of the workers are determined by the market forces of supply and demand.  This contrasts with a command economy, where the central government sets wages and quotas for production.

EXAMPLES OF A FREE MARKET ECONOMY

Because of the nature of free market economies, they are often associated with democratic societies based upon the principles of laissez-faire capitalism.  A democracy is a form of government in which most or all authority of the country is in the hands of the people who elect representatives to run the government.  Often, laissez-faire capitalism is also referred to as free market capitalism or market capitalism.  Simply put, laissez-faire translates to “leave us alone” meaning that the government should remain out of the economy and instead allow individuals to freely carry out their own economic affairs. Historically, laissez-faire capitalism was most common in Britain during the 18th and 19th centuries in the timeframe of the Industrial Revolution.  At the time, it was a revolutionary idea, because in the previous centuries, mercantilism had been the dominant economic system.  In general, mercantilism is viewed as an economic system that favored heavy government control and regulation.  At the time, absolute monarchs ruled over vast empires and controlled almost all aspects of the economy.  However, prominent thinkers, including Adam Smith, began to argue against mercantilism in favor of an economic system with more freedom for individuals.  The development of capitalism as an economic system, sought to reject the idea of government control of the economy and instead put the focus on individuals. On the economic spectrum, laissez-faire capitalism is a right-wing ideology that is fundamentally based on: private ownership, competition, free trade, self-reliance, self-interest, and the principles of supply and demand.  These principles are central to understanding a free market economy.  Some modern examples of countries that embrace the principles of free market economies are: Hong Kong, Singapore, Australia and the United States.  While no current country is considered to be a true free market economy, these four contain high levels of economic freedom for their citizens by ensuring many of the principles above.  In reality, most countries contain a mix of right and left wing economic values.

POSITIVES OF A FREE MARKET ECONOMY

On the positive side, a free market economy benefits society because it focuses on competition and economic freedom as its main principles.  Competition is important because it allows privately owned businesses to compete for the money of consumers.  This leads to several different things including: lower prices for goods and services, increased innovation and a wider selection of products.  Consumers benefit from this system because they receive low prices for high quality goods and services.  Next, while a command economy may sometimes lead to waste if the leader is not producing the exact goods and services desired by the people, a free market economy is excellent at avoiding waste.  In general, the concept of competition pushes individuals and businesses to use resources in an efficient manner in order to maximize profits.  Therefore, free market economies are generally less wasteful.  The next positive aspect of a free market economy is that they lead to high levels of economic output.  The competition present in a free market economy is not just limited to businesses but also drives individuals to work as hard as possible to earn money.  This incentive for profit and wealth benefits the overall economy because it causes a high level of economic output that means the economic system is producing many goods and services in an efficient manner.
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NEGATIVES OF A FREE MARKET ECONOMY

Although there are several positive aspects of a free market economy, there are also several negative aspects as well.  First, a free market economy is based on little or no government intervention in the economy.  While this may be beneficial in promoting economic freedom and choice, it also has the ability to cause large income gaps in society.  For example, during the Industrial Revolution in Britain, which had a free market economy, the business owners were able to amass large fortunes while the working class people struggled.  Because the government did not intervene in the economy, working class people suffered with low wages, a lack of worker rights and horrible working conditions.  The lack of a government to protect the working class people meant that wealthy entrepreneurs could take advantage of the poor.  The next problem associated with free market economies are that they often lead to higher levels of unemployment.  A key feature of a command economy is that the government provides full employment for all people in society.  However, the nature of a free market economy is such that individuals cannot count on the government to protect or help them in a time of need.  As such, most countries based on a free market economy have some level of unemployment.  This means, that at some points a certain percentage of the population will be struggling with poverty and be unable to support themselves.  Further to this idea, because the government does not intervene in a free market economy, monopolies may also form.  A monopoly is when one corporation dominates and controls an entire industry.  This is bad for consumers, because without the benefit of choice, the corporation would increase prices to whatever they wanted.  Finally, free market economies are usually reliant on the forces of supply and demand.  While this provides a framework for economic freedom to exist it also creates a system of ‘boom and bust’ in the overall economy.  As such, free market economies are often susceptible to changing economic conditions, which could be difficult to endure for many average consumers.

SUMMARY OF A FREE MARKET ECONOMY

In conclusion, a free market economy is an economy in which individual people and businesses make the majority of the economic decisions and usually controls most or all of the means of production through private ownership and competition.  It is viewed as a contrasting system to mixed or command economies.  While a free market system promises the highest level of consumer choice, it often suffers from wide income gaps between the rich and the poor and the highs and lows of the boom and bust cycle.  Free market economies have occurred throughout history, but is best well known in Britain during the Industrial Revolution.

What kind of economy allows individuals to make all of their own decisions?

What is the term for the economic system in which people or individuals own their own business?

What is individual freedom in economics?

What economic system has economic freedom?