Advantages and Disadvantages of Free Market Economy

Here are the Advantages and Disadvantages of Free Market Economy. The pros and cons of free market economy

 Advantages and Disadvantages of Free Market Economy
The price mechanism lies at the heart of western economic theory. Anyone studying economics comes across the phrase “price mechanism” (or “market mechanism”) and it is a popular topic for setting in essays or in examinations. Here we look at what is good about it and what is bad.

The advantages of a totally free market 

* It allocates resources where people want them; we get maximum consumer satisfaction.
* It works automatically, is essentially costless, and requires no bureaucracy to run it.
* This means no wasted resources in providing a huge civil service; so people are left with more to spend rather than pay a higher proportion of their income as tax, which means they can enjoy either an increased level of personal consumption or else save more for their future.
* It allows the maximum economic freedom to the people to spend their own money in their own way.
* People have the choice for whom they will work and in what industries or service sectors they will spend their lives.
* People have the freedom to set up their own businesses and try to do better in life for themselves and their families.
* This means that there is a strong incentive effect. People are encouraged to work hard and get on in life as they have the freedom to try anything they want. This can stimulate economic growth.
* Competition forces out the inefficient firms, which means lower prices for consumers, and it also releases re- sources needed by the more efficient firms.
* Forcing out the inefficient firms and releasing their resources for better uses encourages faster economic growth.
* There is a constant striving to improve production methods and distribution chains, which is a stimulus to technical progress. Technical progress is an important source of growth and is the major source in developed countries.
* With a totally free market there is less for the national government to do. This might help to prevent the emergence of a dictatorial government that spends money and behaves in ways that the people do not want. Totally free markets also tend to go along with some form of democracy. A free market cannot prevent a brutal dictatorship but if it goes hand in hand with a democratic system it does lessen the danger of this as the government knows that it will be voted out if it goes too far.

The disadvantages of a totally free market 

* There is no guarantee that growth will be maximised under perfect resource allocation; the macro-economic side, and aggregate supply and demand, matter here.
* The allocation of resources is determined by the distribution of income; and incomes are usually distributed unequally. The rich get more “economic votes” than the poor so the economy produces a lot of luxury goods. One result can be that the poor and needy might suffer and at the same time the dogs in rich areas, like Hollywood, probably eat better than some babies in the ghetto.
* Those who are physically or mentally challenged would suffer greatly in a totally free market and unless they have a caring family or private charity help their life, in the words of the political philosopher Thomas Hobbes, would be poor, nasty, brutish, and short.
* In similar fashion, the elderly would not do well. There would be no state pensions if the market is left to do everything. Not everyone can, or chooses to, accumulate enough wealth to take care of their own old age. Those without families would be especially vulnerable: in the developed countries of the West the extended family, which used to take care of its own vulnerable members, has broken down and largely disappeared.
* Economic growth may be slower, rather than faster, if the people choose to spend more and save less. This would mean lower investment levels now which in turn mean slower growth to come.
* Public goods, such as defence, a police force, and a justice system will not be provided unless the state does it. The safety of the nation and individuals cannot be guaranteed. Street lighting would not exist, as whoever paid for it could not prevent others from using or benefiting from the free light. Similarly, a state education system or national health system would not be provided only private ones and these would be of a more limited coverage.
* Some economic endeavours, such as a nation-wide transport system or postal system, may not be established by private enterprise, and where they are, they may favour only the rich, well-populated areas.
* Abilities and resources are not equally distributed, so that rather than a host of perfectly competitive firms we commonly see a small number of firms in imperfect competition which can form cartels or raise prices and make monopoly profits. This distorts consumer choice, resource allocation, and the distribution of income.
* Monopolies too are likely to exist, with similar distortion implications. * Advertising wastes may occur, where virtually identical products are heavily advertised as being different from and better than rival products. The rival firms compete with each other by using advertising and the total spent in that area increases. Much advertising is “percussive” i.e., repeatedly hitting consumers with statements to influence their purchases, rather than “informative”, or telling people the product exists and what it does.
* The rise of a few rich and powerful companies, and monopolies, results in the emergence of a small number of very rich and powerful people. “Monopoly capitalism” arises. Power tends to corrupt and these powerful individuals gain the ear of the government, influencing what laws will be passed; these often help this small group of people to the disadvantage of society as a whole. The Rupert Murdoch empire has been accused of this.
* Lack of knowledge is common, for example the decisions by workers on what job to pursue is taken in ignorance of the full range of opportunities available; producers do not know what their rivals are going to do either in the near future or in the longer term; and consumers lack knowledge about the range and especially the quality of goods and services that are available or about to become available.
* The factors of production (land, labour and capital) are not fully mobile, especially in the case of workers who often will not or cannot move to where the jobs are for social or other reasons.
* Many of the “better” jobs in the professions, such as lawyers, doctors, or dentists may require lengthy training during which time the young trainee is out of the workplace and not earning. Socially, this frequently means the rich and middle class parents are the only ones who can support their children through the training period. The children of the poor and of the working classes, while not excluded, make up a much smaller proportion of such professions than their innate abilities suggest they should.
* Gender issues arise too. In a free market, women often find it more difficult to get equal access to higher level positions in industry, commerce and government. “The glass ceiling” is a commonly seen description of this. It would seem that in many countries social values and centuries of male-dominated systems are responsible.
* When firms make decisions to maximise profits, only private costs are considered; public costs and benefits are ignored. As a result, there is too little production of “merit goods” and too much output of “demerit goods”.
* Similarly, externalities are ignored in the decision-making process. This means that when there are external benefits, too little is produced; and when there are external costs too much will be produced for society.
* Economies of scale can result in one or a few companies growing large enough to develop monopoly power which they can then use for their own benefit at a cost to society in general.
* Economic cycles naturally occur, involving booms and slumps. In a boom there can be inflation and short- ages of various goods and services. In a slump, people can be suddenly laid off and become unemployed, with severe personal consequences, such as difficulty in meeting the rent or mortgage payments, feeding themselves and their family, and paying off things bought earlier on credit. These social problems are created by the system and none of this is the fault of those caught up in it and suffering.
* Anti-social groups like the Mafia in Italy or the USA may behave in ways that damage the economy, e.g., by offering to remove and properly process toxic waste at a low price then simply dumping it untreated in or near reservoirs or water catchment areas, thereby poisoning crops, animals or people.


The price mechanism has advantages and disadvantages attached. No economic system is perfect. Many economists prefer the market mechanism because of its advantages over economic planning but many sociologists and political scientists are unhappy with it as the focus of their disciplines is different. There are few real world economies that are purely market mechanism, although Hong Kong perhaps approaches it more closely than most. There are equally few economies that are run purely under a system of economic planning and those that are, such as North Korea, are poor and, to put it mildly, life there seems unattractive to many foreign ob- servers. For such reasons, a mixture of market mechanism and state planning or intervention is most commonly observed in the world in which we live.



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Study Archives: Advantages and Disadvantages of Free Market Economy
Advantages and Disadvantages of Free Market Economy
Here are the Advantages and Disadvantages of Free Market Economy. The pros and cons of free market economy
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