What is a Free Market?

A free market is an economic system that is typically characterized by the voluntary exchange of goods, services, and money. One example of a free market can be characterized as a system where two people are able to freely exchange money, labor, or other personal property in order to benefit both parties. Each person in such an exchange often views the commodity being offered as more valuable than what he or she is trading for it.

When operating in this type of system, each party involved in an economic exchange must make a set of value judgments. These decisions are usually based on a variety of factors, including personal preferences, needs, or desires. These can range from basic human needs, such as food and shelter, to more complex desires for convenience, status, or security. In a free market, these value judgments are all driven by the consumer.

A simple example of personal property exchange might be that of two young students who meet at lunch to exchange items of food. One child has an apple, wile the other has an orange. The student with the apple makes a value judgment about apples and oranges and decides she prefers oranges. She is willing to give up what she has to obtain what she wants. The other student makes the opposite value judgment, and the two trade fruit.

Voluntary exchange is the most important aspect of a free market. For an economy to be a free market, in its purest definition, there can be no outside influence or coercion on the economic decisions of individuals. Most economies in the world are not wholly free markets, and include some form of regulation.

Most modern free markets use money as the main commodity for free exchange. Money can only work if the people in the free market think it has value. In other words, most people will accept a standard currency in exchange for goods and services, because they know most other people in that society will also accept it.

The concept of price refers to the established, or agreed upon, exchange rate for different items. For example, like the aforementioned school children traded individual pieces of fruit, an administrative assistant may trade one hour of her labor for $10 US Dollars (USD). In a free market economy, governments or other organizations do not control economic decisions, so the laws of supply and demand are usually the main economic principles guiding prices. In general, statistics shows that, if supply is higher than demand, prices typically drop, but if supply is lower than demand, prices usually rise.