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What is a free market?

By Fitri Wulandari

Reviewed by Alexandra Pankratyeva

Fact checked by Rachel Roberts

two people are standing one with money the other with an envelope

A free market economy means one that is mostly driven by supply and demand and has little or no governmental interference. In a free market, buyers and sellers can exchange goods and services without any obstruction. 

A broader free market definition refers to an economic system in which buyers and sellers conduct private transactions of their own accord, without the intervention of authorities. Participants are free to buy and sell any products they want at any price. 

According to the Corporate Finance Institute, there are three major free market principles: private ownership of resources, thriving financial markets and freedom to participate.

Three features of free market economy

1. Private ownership of resources

Free economies exist because individuals or businesses in the private sector control a significant share of resources; not the central government. As a result, the owners have control over product production, allocation and exchange, as well as labour supply.

2. Thriving financial markets

The presence of financial institutions contributes to the success of a free market economy. Banks and brokerages enable individuals and businesses to exchange goods and services. They offer various types of financial services. Financial institutions profit from transactions by charging interest or fees.

3. Freedom to participate

A free economy is one in which any individual can participate. The decision to manufacture or consume a specific product is entirely voluntary. It means that businesses or individuals can make or buy as much or as little of a product as they want.

How free market works

Everyday life consists of various free market economy examples: when a consumer voluntarily buys fruits or vegetables from a farmer at a price set by the farmer, or a worker gets a mutually agreed monthly salary from a corporation in exchange for their labour service.

Private property, capitalism and individual rights are all covered by the principles of a free market economy. As a result, the free market thrives in countries where the political system opposes market regulation, protects property rights, and capitalists have an incentive to pursue profits.

However, there are no countries that have purely free market economies. They often have a combination of free and regulated markets. 

For example, the US government allows companies to set their own prices, but workers can bargain for better pay. The US government established guidelines, such as minimum wage, that must be followed.

Governments or the central authorities often use implicit or explicit force to put a degree of constraint on the free market. Some examples of this constraint are competition in publicly provided services, fixed exchange rates, quotas on productions or employee hiring practices. 

These constraints are usually politically motivated on the basis of consumer safety, provision of public goods, and equal opportunity for various groups.

Free economies: Index of economic freedom

Which countries have a free market economy or come closer to this notion? 

According to the Heritage Foundation’s 2022 Index of Economic Freedom,, Singapore tops the ranks with 84.4% of its economy being economically free due to its open and corruption-free business environment, prudent monetary and fiscal policy, as well as a transparent legal framework. 

Switzerland comes second with 84.2% free. Ireland and New Zealand occupy the third and fourth places respectively with 82% and 80.6%. 

The United States, on the other hand, only ranks 25 among the freest economies in the 2022 Index. The world’s largest economy by GDP ranks third among 32 countries in the Americas region. 

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