What Is a Free Market Economy?
Governments highly control some economies. In the most extreme planned, or command economies, the government controls all of the means of production and the distribution of wealth, dictating the prices of goods and services and the wages workers receive. In a purely free market economy, on the other hand, the law of supply and demand, rather than a central planner, regulates production and labor. Companies sell goods and services at the highest price consumers are willing to pay while workers earnthe highest wages companies are willing to pay for their services.
A capitalist economy is a type of free marketeconomy; the profit motive drives all commerce and forces businesses to operate as efficiently as possible to avoid losing market share to competitors. In capitalism, businesses are owned by private individuals, and these business owners (i.e., the capitalists) hire workers in return for wages or salary. In such an economy, the government serves no role in regulating or supporting markets or firms.
In reality, no country is purely capitalist and no country has a purely free market -- there is some sort of combination of markets and regulation, with different countries falling at different places on the spectrum. Below, we list some of those countries that rank highest toward the free market end.
Key Takeaways:
- A free market economy is one where supply and demand regulate production and labor as opposed to government intervention.
- Most countries' economies contain elements of both free market and command economies.
- Singapore's economy is considered the freest, followed by Switzerland and Ireland, according to the Heritage Foundation's 2022 Index of Economic Freedom.
- The United States ranks just 25th on the list.
- Venezuela and North Korea ranked last in terms of economic freedom in 2022.
Understanding Free Market Economies
Purely free market economies and command economies exist more as theoretical concepts than as tangible realities; almost all of the world's economies feature some elements of both systems and are classified as mixed economies. For example, although the United States allows companies to set prices and workers to negotiate wages, the government establishes parameters such as minimum wages and antitrust laws that must be followed. The U.S. government furthermore has several regulatory bodies such as the FDA, EPA, FCC, and SEC that can intervene in firms or markets. Most countries, too, have some type of taxation and impose trade controls such as quotas andtariffs.
The countries with the greatest economic freedom tend to be those that encourage entrepreneurialism and protect private property. These policies encourage laissez-faire economics, another term for a free market structure. At the same time, however, these countries often see the largest disparities in income and wealth inequality.
Capitalism vs. Markets
"Capitalism" and "free markets" are often terms that go together, but the two are not the same thing.
- Capitalism is an economic system of how production is organized, whereby private business owners (capitalists) own the means of production and are entitled to the profits of goods sold. These individuals, in turn, hire workers to use the means of production in return for wages or a salary; the workers do not own them, nor the finished products that they make, and are not entitled to any profits, only their income.
- Free markets are a mechanism for distributing and allocating goods that have been produced by way of price discovery. This involves buyers and sellers competing with one another and among each other to agree upon a price that, in theory, reaches an equilibrium based on supply and demand.
Country Rankings of Economic Freedom
Based on the Heritage Foundation's 2022 Index of Economic Freedom, as of Jun. 2, 2022, Singapore, with its extremely low tax rates, minimal regulations on businesses, and highly capitalist system of economics, ranks first, being 84.4.% economically free. Switzerland ranks a close second at 84.2% free, followed by Ireland at 82.0%. These countries impose little or no tariffs, and there are few restrictions on investments and business creation. These also feature strong private property rights protections.
New Zealand, which ranks fourth at 80.6% free, also has low tariffs and strong private property rights. The government provides businesses with lots of flexibility and does not constrict them with overly complicated regulations or licensing procedures.
Luxembourg, Taiwan, Estonia, the Netherlands, Finland, and Denmark round out the 2022 top ten, as of Jun. 2, 2022.
The United States, thought to be among the world's most advanced financial markets, is only 72.1% economically free, as of 2022, ranking 25th. This number had decreased steadily over the past decades. While certain U.S. industries generate more government scrutiny than others, private companies rather than the government control most sectors.
Thefive countries with the least-free market economies in 2022 were Zimbabwe, Sudan, Cuba, Venezuela, and North Korea.
Other Examples of Free Market Economies
In addition to those already mentioned, there are a total of 88 countries that score as "mostly free" to "moderately free" market economies. The following are included (alphabetically):
- Australia
- Austria
- Bahamas
- Barbados
- Belgium
- Bulgaria
- Canada
- Chile
- Czech Republic
- Cyprus
- Georgia
- Germany
- Iceland
- Israel
- Italy
- Japan
- Latvia
- Lithuania
- Malta
- Norway
- Poland
- Portugal
- South Korea
- Slovenia
- Sweden
- United Arab Emirates
- United Kingdom
- Uruguay
How Does the Heritage Foundation Define Economic Freedom?
According to the Heritage Freedom, economic freedom is defined as, "the fundamental right of every human to control his or her own labor and property. In an economically free society, individuals are free to work, produce, consume, and invest in any way they please. In economically free societies, governments allow labor, capital, and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself."
What Is a Simple Definition of a Free Market Economy?
A free market economy is one without government intervention or regulation. In a purely free market, buyers and sellers arrive at prices based only on supply and demand. As such, buyers and sellers compete with one another and among each other to pay the lowest price (for buyers) or receive the highest price (for sellers). This sort of competition and price discovery would exist in a free market economy for everything from products and services to labor markets.
Is the U.S. a Free Market Economy?
Broadly, yes it is. However, the United States is not among the top 10 market economies ranked by economic freedom. This is because the U.S. has a relatively high degree of government spending and regulation.
Are Scandinavian Countries Like Sweden and Norway Free Market Economies?
Yes. Even though these countries tend to have high taxes and a robust social welfare system provided by the government, these economies still rank very highly on economic freedom. These nations tend to feature strong property rights protections, judicial effectiveness, and government integrity along with business freedom and open international trade.
Are Free Markets Good?
As with many things, it depends. In a free market, nobody is forced to do anything and transactions are entered into voluntarily. Economists theorize that free markets, through the price mechanism, competition, and the forces of supply and demand, are able to most efficiently allocate goods and capital to where they are most productive. The problem with free markets, however, is that they can lead to inequalities, especially when there are information asymmetries.
While economic theory assumes information is "perfect," in reality, sellers or producers tend to know far more about what they are selling than consumers or buyers. Moreover, economists assume that markets see "perfect" competition among buyers and among sellers, but we know that larger companies have more influence over their markets and that wealthier consumers can bid up the prices of necessities, especially in times of crisis. The result is that buyers can get screwed and sellers can cut corners or commit fraud more easily. The solution to these problems is to have some degree of government intervention or regulation to ensure the quality of what is being sold, to protect consumers from scams, and to ensure that competition is fair.
