Free Market vs. Controlled Economies: Structure and Solutions

Features of a Free Market Economy

A "free market economy" is one in which most businesses are privately owned and where individual producers and consumers determine the kinds of goods and services produced as well as the prices of such products through voluntary exchange. Competition is a key factor in market economies as it keeps product prices in check, forces competitors to enhance the efficiency of their production processes, and drives inefficient producers out of the market. Another important feature of a free market economy is that income is distributed largely through the operation of markets.

Economic Efficiency and Specialization

Efficiency in economics is the absence of waste, expense, or unnecessary effort, achieved primarily through gains in productivity resulting from specialization and the consequent division of labor. An efficient economy utilizes all of its available resources in an optimum manner and produces the maximum amount of output that its technology permits.

Market Failures and Government Intervention

Market failures occur largely because an important prerequisite of a free market economy—a "perfectly competitive market"—is largely a theoretical economic concept that does not exist in practice. Market failures may occur due to imperfect competition, which gives rise to an inefficient allocation of resources; monopolistic markets in which there may be only one producer supplying a particular product or markets dominated by only a handful of major suppliers; and periodic "boom and bust" cycles triggered by large-scale speculation in areas such as stock markets, currency markets, and real estate. These cycles lead to unsustainable "price bubbles." The government has a key role in preventing or correcting such market failures by enacting and enforcing anti-trust and other regulatory laws.

Perhaps no other single field of knowledge impacts everyday lives and the well-being of people as much as economics. Almost every major present-day problem—such as poverty, economic inequality, unemployment, inflation, and pollution—can theoretically be solved by the application of economic theories.

Real-World Applications of Economic Theory

Poverty is one of the most formidable challenges facing economists and policymakers in the twenty-first century. Rural poverty in developing countries, in particular, has worsened in recent decades. The main reasons include falling commodity prices, dumping of competing goods from developed countries at subsidized prices, trade barriers in rich countries that deny market access to the poorest countries, inappropriate national policies, and decreasing overseas development aid. All of these issues can be tackled by adopting appropriate economic policies.

Inequality is another major problem facing the present-day world. Unfortunately, most growth-oriented economic policies, such as "supply-side" economic policies, tend to exacerbate inequality. A greater role for government in the economy—such as increased taxation on the rich—can reduce inequality. Inflation and unemployment are usually inversely proportional in most economies: increases in money supply through deficit financing reduce unemployment but increase inflation, while tight monetary policies reduce inflation but increase unemployment.

According to many analysts, a major cause of terrorism is an acute sense of deprivation among a large section of the population. Economic measures can arguably prove more effective in addressing terrorism than military action. Note that according to FAO statistics, more than 900 million people live on less than one dollar a day in the rural areas of the developing world.