Free market capitalism - Myth or Reality?
By Nishita Bansal
Stretching back to ancient times, humans engaged in trade activities even before they had money. As people began trading with each other, free markets were formed. Owning a business in a free market allows one to set their own prices and operate with the primary goal of making a profit.
Several economists, such as Adam Smith, Milton Friedman, and Friedrich Hayek, have been advocates of a free market economy. Milton Friedman, in his book Capitalism and Freedom, wrote, "The free market is the best way to coordinate the actions of millions of individuals, and government intervention distorts market signals and creates inefficiencies.”
In a purely free market society, there is no interference from government intervention at all (known as laissez-faire functioning). But here's the catch: Are these markets really free?
Ha Joon Chang explains, “A market looks free only because we so unconditionally accept its underlying restrictions that we fail to see them.”
Let’s try to understand this through an example. A few decades ago, when environmental regulations were imposed (e.g., factory emissions), they were opposed by many as serious limitations on our freedom of choice. Their opponents asked: If factories find more polluting production methods profitable, why should the government prevent them from making such choices? Today, we accept these regulations as ‘natural’ and believe actions that can harm others unintentionally (such as pollution) need to be restricted.
Another scenario when these restrictions become implicit to us is when the government imposes restrictions on the buying and selling of drugs, weapons, and alcohol in an economy. We believe that these restrictions should be mandated in an economy, but if we consider the perspective of a business firm, restrictions on them would affect their profit margins.
Further, the free market assumes that competition, free trade, supply, and demand will sort out any issues that arise within an economy. In reality, this hasn't really worked out. A prime example of this is that of the Great Depression, when, without sufficient regulation, big banks and mortgage companies took advantage of consumers and damaged the entire economy.
In response to the Great Depression, Keynes, a prominent 20th-century economist, argued that free markets have no self-balancing mechanisms and may fail to produce optimal outcomes, such as during recessions or depressions. He proposed that the government should employ fiscal policy, such as increasing public works, subsidies, or transfers, or reducing taxes, to increase aggregate demand and reduce the output gap. He also suggested that the government could use monetary policy, such as lowering interest rates or increasing the money supply, to stimulate investment and consumption. Considering this, the United States government intervened and created a revised version of the free market model, adopting its ideals while attempting to regulate and improve the model's inherent flaws.
So finally it boils down to How can we organise our economy to operate in free markets without damaging itself? The profit motive is the most powerful and effective fuel to power our economy, but we must remember that letting it loose without any restraint is not the best way to make the most of it. Just like a stringless kite, no restrictions on the functioning of the economy would initially seem to be prosperous, but eventually, it would collapse, leading to market failure.
References:
Chang, H. (n.d.). 23 Things They Don’t Tell You about Capitalism. Penguin UK
What is free market capitalism? (2021, November 20). Bizfluent. https://bizfluent.com/13711418/what-is-free-market-capitalism
Well written and actually free markets are necessary to take India to a 5 trillion dollar economy!!
Vividly explained...