So what is this free market economy thing we keep hearing about? Well in its most basic definition, a free market economy is one where the Law of Supply and Demand is allowed to dictate pricing, amount of competition (or lack thereof) with little or even no government intervention. This is pure capitalism at its finest.
The benefit of this approach is that it encourages entrepreneurial spirit, innovation, creativity, competition, market driven products and services and it is often very efficient. It short it creates pricing pressure to continuously deliver more product for lowest cost or in other words, it creates “value”.
So why are more economies not "free market based?". Well let's look at some of the things that "constrain" the free market. One example is the introduction of patent law which of course has been implemented to protect innovation and the investment required to develop things like technology. Consider if there was no patent law, a company may invest a million dollars in developing a new idea only to have that idea stolen by another company two minutes after it hit the shelves.
Who do you think could offer the product less expensively? Obviously, the one that didn't have the up front costs of a million bucks! So - patent law prevents other people from stealing good ideas EVEN THOUGH those thieves could offer the product at a lower cost to consumers. In effect, the law represents a compromise to the “free market model”.
Another example of constraints placed on the free market is the development of a competition bureau or in some cases it may be called the anti-competition bureau. As an example of what this government department does, it can prevent huge companies from buying out their competition on a regular basis thereby limiting how much competition there is and thereby allowing them to keep their prices artificially high.
For example, if Microsoft were allowed to buy Apple, Unix and all other operating systems - then Microsoft could start charging really exorbitant prices for Windows because there would be no competition to keep prices low. So - the competition bureau can prevent big companies from buying little companies on the basis that doing so might limit healthy competition.
For a bit more obscure vocabulary, a monopoly is basically a situation where one company has the entire market to itself. That company is considered a monopoly and as such is often subject to a lot of governmental oversight and regulation so that they can’t just charge whatever they want for their services. An example of this is interstate pipelines or even local gas utility companies.
If there are only a few companies in the marketplace, it is called an oligopoly. The banking system in Canada would fit this description with only five major national banks. The old telephone networks, e.g. "Ma Bell" would also fit this description.
The final thing I will say about intervention in the "free market economy" is that the largest influence imposed on the free market is the government, through its tax system and through its legislative requirements.
In the case of taxes, the government may impose a tax system to either penalize a company or encourage its citizens to do something different. An example of this in the US is the “gas guzzler tax” imposed on vehicles that operate below a certain fuel efficiency level. Is there anything free market based about this tax? Nope. It is the government tilting the supply and demand pricing equation by artificially increasing the price of certain goods (inefficient vehicles) beyond what the market would dictate.
As another example, the American government may restrict the sale of a company to a foreign country due to reasons of "National Security". In these cases, it doesn’t matter what price that foreign country might offer the shareholders for their stock – the sale would be prevented.
A final example – often governments will impost a huge number of restrictions and requirements on specific projects or products to ensure that one group of companies is favored over another. This isn’t a bad thing but it isn’t the free market at play. An recent example is the “buy American clause” in the stimulus spending package. The American government wants to make sure that the American tax payer’s money is funding American products and services. Makes perfect sense – until you realize that the American taxpayer may be paying two or three times more than it has to for those products and services!
So a completely free market economy can leave a lot of things to chance and one of those is protecting the public good. I am not aware of any economy that operates completely the in free market but the American economy is one of the ones held up as an example of a free market economy that embraces almost unrestricted capitalism. It is far cry from that in reality but in the world, it is one of the most unrestricted.
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