The free market is an economic system where the state only intervenes to collect taxes, enforce contracts and private ownership. This means the government in countries with a free market economy does not set the price for goods and services. Instead, suppliers fix prices using the forces of supply and demand from consumers to gauge their worth.
The government's intervention can become necessary in some spheres. For example, many developed countries with a free market economy are found literally subsidizing their farm sectors. The same can also be said for other areas where market failure, distortion or the inability of the free market economy to provide vital goods and services needed by people in general at costs they cannot afford might cause hardships.
Critics of the free market economy model claim this is mainly a theoretical concept, as every country, even those with capitalist economies, place some restrictions on the ownership, exchange of commodities and put in place lots of subsidies for large businesses. Regardless of the critics, the free market economy is still considered to be the most efficient system to allocate a country's resources, with wealth or income being the only yardstick. It is often associated with Capitalistic Economy and economist Adam Smith's (1723-1790) beliefs that the free market is the best economy for ensuring the maximum wealth of nations and citizens.
The free market economy is used in many countries throughout the world including the United States, viewed as a leader in the field. The concept emerged over a period of time in the United States and it was largely possible because of the country's enormous resources and various other endowments. Besides, in the political sphere too it was not burdened with any baggage of history. Hence political democracy could be easily embraced with all of these virtues.
The long-term success of the free market can be seen in countries such as the United States, United Kingdom, Germany and France. Recent examples of how free trade can help a country to grow are China and India. In these nations, practice of free market principles has brought greater efficiency among its domestic producers and markedly increased its growth market rate.
However, not all recent converts to the free market economy model have been convinced of its merits.
When communist regimes such as Russia underwent a change in their economic market from a centrally planned to a free market economy in the 1990s, thousands were unconvinced of the benefits. Mark Medish, a Russia expert with the Carnegie Endowment for International Peace, explained why 41 percent of Russians questioned in Gallup Polls from 2006-2007 believed the creation of free of state control was wrong for their country's future. Medish said: "The phrase ‘free market economy' conjures up the ‘Wild East' and loss of control."
The feelings in Russia can be attributed to the transition a country has to undergo when they change from being a centrally planned fixed economy to a free market. It includes the transition of economic liberalization, macro-economic stabilization and the privatization of state-run enterprises. Other reforms also take place, such as land or property ownership changes as well as the creation of stock exchanges. Such changes often lead to increased income inequality, dramatic inflation, and a fall of the gross domestic product (GDP).
The free market economy is often viewed as highly successful. However, in the aftermath of the terrorist attacks on the United States on September 11, 2011, it took a big hit leading to countries around the globe suffering sluggish growth and then an outright recession. The exception here was China, where the economy remained buoyant.
Goldman Sachs International Vice Chairman Robert Hormats explained the situation: "To the extent the American economy weakens, which it will for sure, it will also weaken the global economy." The downturn in the free market economy particularly hurt countries with close ties to the United States economy including those linked to the North American Free Trade Agreement partners such as Canada, Mexico and Asian countries dependent on the North American consumer markets. There was also a knock-on effect for Europe and in the South American economies of Brazil and Argentina. The global market has suffered a further recession post September 11th and this has had an effect on the free market economy. However, those in favor of the economic model argue it does not harbor recovery but merely resolves the problem over time by getting rid of the dead wood the economy no longer requires.