Free Market Economy

Free Market Economy, economic system in which individuals, rather than government, make the majority of decisions regarding economic activities and transactions. Individuals are free to make economic decisions concerning their employment, how to use or accumulate capital, what expenditures to make, and whether to use their resources now or to save them for later consumption.

The principles underlying free-market economies are based on laissez-faire (non-intervention by government) economics and can be traced to the 18th century British economist Adam Smith. According to Smith, individuals acting in their own economic self-interest will maximize the economic situation of society as a whole, as if guided by an “invisible hand.” In a free market economy the government’s function is limited to providing what are known as “Public goods” and performing a regulatory role in certain situations.

The following are the shortcomings of the free market economy:
  1. Leads to monopoly: Competition which is regarded as the very basis of capitalism contains within itself the tendency to destroy competition, and leads to monopoly. It is the profit motive under capitalism which leads to cut-throat competition and ultimately to the formation of trusts, Cartels and combinations. It brings about a reduction in the number of firms actually engaged in production.
  2. Inequalities: The institution of private property creates inequalities of income and wealth under capitalism. The price mechanism through competition brings huge profits to big producers, the landlords, the entrepreneurs and the traders who accumulate vast amount of wealth. Which the rich roll in wealth and luxury, the poor live in property and squalor.
  3. Consumer’s sovereignty a myth: Consumer’s sovereignty is a myth under capitalism consumers have to being only those commodities which are manufactures and supplied by the producers in the market. The majority of consumers are not rational buyers and are often ignorant about the utility and quality of the products available at the stores or shops. They are also misled by advertisement and propaganda about the usefulness of the products. Products which are produced by monopoly concerns are often of an inferior quality and are priced highs. There is no consumers’ sovereignty in a seller’s market.
  4. Depression and unemployment: Capitalism is characterized by business fluctuations and unemployment excessive competition and unplanned production lead to over production and glut of commodities in the market and ultimately depression and unemployment.
  5. Inefficient production: Capitalism facts to produce goods in keeping with society’s requirements. Frivolous luxury goods and obnoxious articles are produced to satisfy the wants of the few rich at the expense of the necessities needed by the poor. Thus, there is social wastage of economy’s resources.
  6. Non-utilization of resources: The price mechanism under capitalism fails to employ the country’s resources fully. Free and unfettered competition inequalities of income distribution. Over production and consequent depression lead to wastage of productive resources. Besides, there is mass unemployment and freedom of occupation has little under capitalism.
  7. Class conflict: A capitalism society is characterized by class conflict. The poor are exploited by the rich. This leads to mutual distrust between the workers and employers and to social unrest.
These are defects of capitalism have led the free enterprise economic of the west to modify this system by regulating and controlling the institution of private property and freedom of enterprises to serve the best interests of the community large.

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