What are pros and cons of a free market?

Answer 1

First off, to answer the question even superficially, one needs to state one major generality - first, a free market only works when the knowledge needed to make an intelligent choice about products and/or services is available and correct. In other words, it presumes that people have the intelligence to learn and make correct choices. A 'free' market with controlled information flow is not free.

A free market is one in which the decisions about what to produce, how much to produce, and what to charge for the production are made by 'the market', e.g. the buyers and sellers. Prices are NOT set by the government, a group of manufacturers or producers, or any other artificial means.

A free market has unrestricted entry into and out of the market by producers - in other words, no licensing, unions, guilds, trade association memberships or other requirements can be set as to who can or can not be a producer.

In a free market, the prices are set by the producer and consumer of a product. No artificial prices are 'set' by trade boards or government edict. If you want a product at a certain price, and a producer will sell it to you at that price, that's a free market. If a producer wants to lower prices to attract more buyers, but is prevented from doing so by 'price guidelines', then that is not a free market.

Free markets are good because they TEND to allocate capital and labor in areas where there is a demand for products and services. If there is no demand, resources are free to be allocatd to other goods and/or services. We don't have a government board deciding that we need to produce 50 million farm tractors, whether they're needed or not (See: Soviet Russia).

There are no really 'free market' economies in the world, except in certain 'underground' economies where the visible, regulated economy does not provide what the consumer wants. In heavily centralized 'planned' economies, like the Soviet Communist, Communist Chinese and others like them, there waa a thriving 'black market' economy that tried to provide people with the goods they WANTED (meat, bread, clothing, etc) instead of the goods they were told to buy (tractors, machinery, etc).

As the Soviets found, and as China is finding out, people do not prosper under a planned economy, because labor and capital do not go where they would normally go (e.g. Demand) but instead flow into markets where the government thinks things need to be produced (e.g. tractors, guns, tanks, bombs, etc etc) Sooner or later, all planned economies will collapse.

The 'cons' of a free economy are simple - if you do not produce what people want, at a price they are willing to pay, you will go out of business. In a free economy, you do not get government bail-outs, loan guarantees, high tariffs on competing imported goods, etc etc. You can not go to the government for laws to protect you against competitors, or to artificially set prices for your product (such as milk, sugar, honey, tea, etc etc etc) In a free market, bad or incorrect decisions are YOUR responsibility.

A free market generally leads to innovation (e.g., build a better mousetrap),lower prices (competition for the consumer dollar) and a raising of the standard of living. But it also leads to market expansion and contraction as buying habits and Demographics change - these disruptions sometimes lead to job losses as workers are forced to move from one industry to another, but in the long run, EVERYONE benefits more than from a planned or centralized economy in which a FEW benefit far more than most.

Since World War II, the Western economies, while certainly not "free" completely, were obviously far better at meeting consumer needs than the planned economies of the communist countries. Most people in America would not believe that the average citizen in Soviet Russia would need to stand in line for several hours, two or three times a week, in order to buy a few pounds of questionable meat or a loaf or two of bread. Yeah, we had to pay for "education" and "housing" and "health care" but our education, housing and medical care was and is, far better than the typical Russian or Chinese ever got. Your 'free' housing in Russia was probably a three-room barely heated concrete block apartment. Your 'free' medical care involved waiting three weeks for an appointment with a barely trained doctor, in most cases. Your 'free' education was free so long as you studied what the government wanted you to - usually agriculture or some form of military science.

Free markets are better all around for the majority of people - planned markets only benefit the planners.