Free market economy, whether being sanctified or vilified, just rolls off the tongue. We use it so casually, surely we know to what it refers.
Perhaps we shouldn't be too hasty in that assumption. Though we may be prone to assuming such understanding, a surprising number of people when queried have a harder time than you might think providing a precise definition of the term.
Additionally, there is the problem that no one owns such terms. No one gets the final say over what the definition is. Two people with radically different definitions are just as entitled to use their own version.
Semantics or historical precedent, the resort of many, in reality solves little. Precedents are simply too abundant when sought by determined and clever partisans. There is no science of definition. It is an unfailingly subjective enterprise.
All this is to say that I have no illusions that my definition is irreproachable or objectively truth. I don't offer it under the delusion that no one can disagree. I offer it because I believe it is a definition that allows us to make an important distinction about the nature of the world.
I'd also recommend it because unlike some others it is not piecemeal or makeshift. It is rooted in principle. As such, there is value in the precision it offers. I of course have no control over what others think on that matter.
The central point in this prologue is that, despite anyone else's opinion on the matter, the definition offered here is what I mean by the phrase "free market economy." Refuting my definition in no way refutes the arguments made on behalf of that which I define as such. Attempting that would be a colossal case of missing the point.
With those caveats in mind, I offer my definition, building as it were, back-to-front. An economy is defined as the dimension of a society addressing the employment of resources: material, human or otherwise. Exactly how those resources are employed exceed the definition.
A market is a nexus through which actors trade those resources. (By "resources" I do not restrict my meaning to "natural resources" - e.g., stuff dug out of the ground. Rather I refer to anything for which anyone has a use. The term "goods" could be interchangeable with "resources.") A market does not assume the existence of money. A barter economy can still be a market economy.
The non-essential role of money is not to be confused with the elective nature of prices in markets. Prices after all are not based on monetary units (even if expressed in them where money exists). They are rather expressions of the consensus on the comparable valuation of resources. When money does exist, it is only one more resource. Like all the others, its value is determined through supply-and-demand driven trade. (For more on this, see my article on the Meaning of Money at the Fiat Currency Review.)
So a market economy is one in which value is determined by the relative supply of and demand for resources in the process of trading them. If a given resource is widely available and/or very few people want it, it will be valued less: it would take relatively more of it for most people to trade something they valued higher (i.e., it would have a lower price), than another resource less available and/or more widely in demand. Though, demand is always subjective .
This describes the workings of a market economy. More precision still is required to define a free market economy. "Free" might be regarded as interchangeable with "voluntary." A market is free when actors may enter or exit it at will: the freedom is freedom to exchange any resource desired with any partner both desired and likewise disposed.
These distinctions are illustrated by the marijuana market. Most of the world has prohibitions against selling and buying (not to mention growing and consuming) marijuana. The police of such jurisdictions mobilize their monopoly of legitimized violence to hinder such market exchanges.
Nonetheless, such markets exist and often thrive. They frequently are the major source of income in the economies of many areas. For some regions the marijuana market is the difference between local economic hardship and relative prosperity.
The threat of violence by the police (being physically abducted and caged, surely qualifies as violence, whether you consider it legitimate or not) of course eliminates a free market in marijuana trading. Due to the high demand, though, nonetheless markets emerge to serve the needs of the prospective consumers.
If demand is sufficient, suppression of a resource, even by violence, will not eliminate the market for it. Threats of police violence do diminish the number of buyers and sellers in that market. And, since "trafficking" or "dealing" or otherwise holding large quantities is usually dealt with more severely, selling in particular is very dangerous. Dealing with this danger incurs elevated business costs. Those costs, combined with the violence-induced supply reduction, result in prices higher than the market would otherwise provide.
Government suppression of markets, thus, increases prices by reducing freedom to trade. This is not only true in the case of demonized (though victimless) crimes. All government tariffs, zoning, subsidies, bailouts, and most taxation and regulation, has the effect - and very often the intent - of reducing freedom to trade.
Virtually all the well documented corruption is a direct result of this dynamic. Politically well connected sellers influence government policy-making, curbing police powers in directions beneficial to their economic interests. Such crony mercantilism is the antithesis of a free market economy.
Perhaps we shouldn't be too hasty in that assumption. Though we may be prone to assuming such understanding, a surprising number of people when queried have a harder time than you might think providing a precise definition of the term.
Additionally, there is the problem that no one owns such terms. No one gets the final say over what the definition is. Two people with radically different definitions are just as entitled to use their own version.
Semantics or historical precedent, the resort of many, in reality solves little. Precedents are simply too abundant when sought by determined and clever partisans. There is no science of definition. It is an unfailingly subjective enterprise.
All this is to say that I have no illusions that my definition is irreproachable or objectively truth. I don't offer it under the delusion that no one can disagree. I offer it because I believe it is a definition that allows us to make an important distinction about the nature of the world.
I'd also recommend it because unlike some others it is not piecemeal or makeshift. It is rooted in principle. As such, there is value in the precision it offers. I of course have no control over what others think on that matter.
The central point in this prologue is that, despite anyone else's opinion on the matter, the definition offered here is what I mean by the phrase "free market economy." Refuting my definition in no way refutes the arguments made on behalf of that which I define as such. Attempting that would be a colossal case of missing the point.
With those caveats in mind, I offer my definition, building as it were, back-to-front. An economy is defined as the dimension of a society addressing the employment of resources: material, human or otherwise. Exactly how those resources are employed exceed the definition.
A market is a nexus through which actors trade those resources. (By "resources" I do not restrict my meaning to "natural resources" - e.g., stuff dug out of the ground. Rather I refer to anything for which anyone has a use. The term "goods" could be interchangeable with "resources.") A market does not assume the existence of money. A barter economy can still be a market economy.
The non-essential role of money is not to be confused with the elective nature of prices in markets. Prices after all are not based on monetary units (even if expressed in them where money exists). They are rather expressions of the consensus on the comparable valuation of resources. When money does exist, it is only one more resource. Like all the others, its value is determined through supply-and-demand driven trade. (For more on this, see my article on the Meaning of Money at the Fiat Currency Review.)
So a market economy is one in which value is determined by the relative supply of and demand for resources in the process of trading them. If a given resource is widely available and/or very few people want it, it will be valued less: it would take relatively more of it for most people to trade something they valued higher (i.e., it would have a lower price), than another resource less available and/or more widely in demand. Though, demand is always subjective .
This describes the workings of a market economy. More precision still is required to define a free market economy. "Free" might be regarded as interchangeable with "voluntary." A market is free when actors may enter or exit it at will: the freedom is freedom to exchange any resource desired with any partner both desired and likewise disposed.
These distinctions are illustrated by the marijuana market. Most of the world has prohibitions against selling and buying (not to mention growing and consuming) marijuana. The police of such jurisdictions mobilize their monopoly of legitimized violence to hinder such market exchanges.
Nonetheless, such markets exist and often thrive. They frequently are the major source of income in the economies of many areas. For some regions the marijuana market is the difference between local economic hardship and relative prosperity.
The threat of violence by the police (being physically abducted and caged, surely qualifies as violence, whether you consider it legitimate or not) of course eliminates a free market in marijuana trading. Due to the high demand, though, nonetheless markets emerge to serve the needs of the prospective consumers.
If demand is sufficient, suppression of a resource, even by violence, will not eliminate the market for it. Threats of police violence do diminish the number of buyers and sellers in that market. And, since "trafficking" or "dealing" or otherwise holding large quantities is usually dealt with more severely, selling in particular is very dangerous. Dealing with this danger incurs elevated business costs. Those costs, combined with the violence-induced supply reduction, result in prices higher than the market would otherwise provide.
Government suppression of markets, thus, increases prices by reducing freedom to trade. This is not only true in the case of demonized (though victimless) crimes. All government tariffs, zoning, subsidies, bailouts, and most taxation and regulation, has the effect - and very often the intent - of reducing freedom to trade.
Virtually all the well documented corruption is a direct result of this dynamic. Politically well connected sellers influence government policy-making, curbing police powers in directions beneficial to their economic interests. Such crony mercantilism is the antithesis of a free market economy.
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