Abstract
The free market economy is a market system in which the prices of goods and services are the result of an agreement reached freely between sellers and consumers, without the intervention of outside forces. The laws and forces of supply and demand in such a market are free from the influence of government, price-fixing monopolies, or any other power. A free market is a controlled market or a regulated market in which the government intervenes in the regulation of supply and demand through non-market methods, such as laws that prohibit market entry or that directly regulate prices. A free-market economy (market economy) is a market-based economy where the prices of goods and services are freely formed by the forces of supply and demand, and they are able to reach equilibrium without government policy interference.
TopIntroduction – Main Principles Of The Free Market
A free market is a market free from any outside interference (including government economic intervention and government regulation of the economy).
At the same time, the function of the state in the free market is reduced to the protection of property rights and the maintenance of contractual obligations. Also, a free market is defined as a market in which prices are set freely without outside interference and other external factors, solely based on supply and demand. The declared basis of the free market is the right of any manufacturer to create any product or service and offer it to consumers and the consumer's right to purchase any offered product or service from any manufacturer. The price is determined as a result of an agreement between the seller and the buyer.
The History of the Emergence and Development of the Concept
The Spanish and Peruvian jurist and economist Juan de Matienso was the first to develop a detailed development of the free market in the second third of the 16th century. His theory of subjective value leads to a distinction between supply and demand elements within a market. Matienzo uses the term “competition” to describe the rivalry within the free market. In turn, it defines the concept of public auction and rivalry between buyers and sellers. But there are also other factors (described in his treatise “Commentaria Ioannis Matienzo Regii senatoris in cancellaria Argentina Regni Peru in librum quintum recollectionis legum Hispaniae. - Mantuae Carpentanae: Excudebat Franciscus Sanctius, 1580”, published posthumously), besides supply and demand, affecting to determine a fair price, and describing such a variable market morphology, namely:
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abundance or shortage of goods
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abundance of buyers and sellers
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the need for some product
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work and production costs
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transformation of raw materials
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transport and wear costs
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abundance or lack of money
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geographical and weather factors
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subjective opinion of market participants
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presence or absence of monopoly structures
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expectation of the future state of all the above factors (Jolia, 2015)
The scholar Oreste Popescu observes of this whole list, extracted from the writings of Matienzo, that “Europe was not even ready to fruitfully use such a treasure of knowledge” in the 16th century (Popescu, 1997).
The representative of the same Salamanca economic school as Matienso, Juan de Lugo in 1643, in his work De Justitia et Jure, finalized the theory of Matienso. Thus, an element of any rational evaluation of a commodity, he suggested, was its usefulness. But, he noted, this was determined according to the collective subjective assessment of people, both prudent and unreasonable. The subjective overall value of a product, de Lugo argued, was thus different from its objective user value. This was further complicated by factors such as the relative scarcity of the good in question and the magnitude of the demand. These observations led de Lugo to conclude that the fair price was the market price. Never considering himself an economist, Cardinal de Lugo produced works that were the culmination of the contribution of the Salaman school to free-market theory. His research exemplifies how a serious theological study of human choice and action helped discover economic laws.
Key Terms in this Chapter
Globalization of Labor: Integration of labor markets, predicated by the global nature of production as well as the increased size and mobility of the global labor force.
Money Supply: The total amount of currency in circulation in a state calculated to include demand deposits such as checking accounts in commercial banks, and time deposits such as savings accounts and bonds in savings banks.
Globalization of Finance: The increasing trans nationalization of national international markets through the worldwide integration of capital flows.
Comparative Advantage: The concept in liberal economics that a state will benefit if it specializes in the production of those goods which it can produce at a lower opportunity cost.
Geo-Economics: The relationships between geography and the economic conditions in the behavior of states that define their levels of production, trade, and consumption of goods and services.
Export-Led Industrialization: A growth strategy that concentrates on developing domestic export industries capable of competing in overseas markets.
General Agreement on Tariffs and Trade (GATT): An UN-affiliated IGO designed to promote international trade and tariff reductions, replaced by the World Trade Organization.
Ecopolitics: How political actors influence perceptions of, and policy responses to changing environmental conditions, such as the impact of carbon dioxide emissions on the temperature of the Earth.
International Liquidity: Reserve assets used to settle international accounts.
Import: Substitution industrialization –a strategy for economic development that centers on providing investors at home incentives to produce goods so that previously imported products from abroad will decline.
Complex Interdependence: A model of world politics based on the assumptions that states are not the only important actors, security is not the dominant national goal, and military force is not the only significant instrument of foreign policy. This theory stresses cross-cutting ways in which the growing ties among transnational actors make them vulnerable to each other’s actions and sensitive to each other’s needs.
Transparency: About the GATT the principle that trade barriers must be visible and thus easy to target.
Embedded Liberalism: Dominant economic approach during the Bretton Woods system, which combined open international markets with domestic state intervention to attain such goals as full employment and social welfare.
Globalization: The integration of states through increasing contact, communication, and trade as well as increased global awareness of such integration.
Tariffs: Tax assessed on goods as they are imported into a country.
International Regime: Embodies the norms, principles, and rules. An institution around which global expectations unite regarding a specific international problem.
Liberal International Economic Order (LIEO): The set of regimes created after World War II designed to promote monetary stability and reduce barriers to the free flow of trade and capital.
Washington Consensus: The view that Global South countries can best achieve sustained economic growth through democratic governance fiscal discipline free markets a reliance on private enterprise, and trade liberalization.
International Political Economy: The study of the intersection of politics and economics that illuminates why changes occur in the distribution of states' wealth and power.
Foreign Aid: Economic assistance in the form of loans and grants provided by a donor country to a recipient country for a variety of purposes.
Non-Tariff Barriers: Measures other than tariffs that discriminate against imports without direct tax levels and are beyond the scope of international regulations.
Export Quotas: Barriers to free trade agreed to by two trading states to protect their domestic producers.
Global South: A term now often used instead of the Third World to designate the less developed countries located primarily in the Southern Hemisphere.
Modernization: A view of development popular in the Global North's liberal democracies that wealth is created through efficient production, free enterprise, and free trade and that countries relative wealth depends on technological innovation and education more than on natural endowments such as climate.
North American Free Trade Agreement (NAFTA): An agreement that brings Mexico into the free trade zone linking Canada and the US.
Macroeconomics: The study of aggregate economic indicators such as GDP, the money supply, and the balance of trade that governments monitor to measure changes in national and global economies such as the rates of economic growth and inflation or the level of unemployment.
Absolute Advantage: The liberal economic concept that a state should specialize in the production of goods in which the costs of production are lowest compared with those of other countries.
Most-Favored-Nation Principle (MFN): the central GATT principle of unconditional nondiscriminatory treatment in trade between contracting parties underscoring the WTO's rule requiring any advantage given by one WTO member to also extend it to all other WTO members.
Globalization of Production: Trans nationalization of the productive process, in which finished goods rely on inputs from multiple countries outside of their final market.
Gross National Product (GNP): A measure of the production of goods and services within a given period that is used to delimit the geographic scope of production. GNI measures production by a state’s citizens or companies regardless of where the production occurs.
Floating Exchange Rates: An unmanaged process in which governments neither establish an official rate for their currencies nor intervene to affect the values of their currencies and instead allow market forces and private investors to influence the relative rate of exchange for currencies between countries.
Developing Countries: A category used by the World Bank to identify low-income Global South countries with a 2009 GNI per capita below $935 and middle-income countries with a GNI per capita of more than $935 but less than $11,456.
Global East: The rapidly growing economies of East and South Asia that have made those countries competitors with the traditionally dominant countries of the Global North.
Globally Integrated Enterprises: MNCs organized horizontally with management in production located in plants in numerous states for the same products they market.
Liberalism: A paradigm predicated on the hope that the application of reason and universal ethics international relations can lead to a more orderly, just, and cooperative world. liberalism assumes that anarchy and war can be policed by institutional reforms that empower international organizations and law.
Trade Integration: The difference between gross rates in trade and gross domestic product.
Commercial Liberalism: An economic theory advocating free markets and the removal of barriers to the flow of trade and capital as a locomotive for prosperity.
Human Development Index (HDI): An index that uses life expectancy literacy, the average number of years of schooling, and income to assess a country’s performance in providing for its people’s welfare and security.
Official Development Assistance: Grants or loans to countries from donor countries are now usually channeled through such as the World Bank for the primary purpose of promoting economic development and welfare.
Third World: A Cold War term to describe the less-developed countries of Africa, Asia, The Caribbean, and Latin America.
Monetary System: The processes for determining the rate at which each state's currency is valued against every other state, so that purchasers and sellers can calculate the costs of financial transactions across borders such as foreign investments, trade, and cross-border travel.
Developed Countries: A category used by the World Bank (WDI2009) to identify Global North countries, with a GNI per capita of $11,456 or more annually.
International Monetary System: The financial procedures used to calculate the value of currencies and credits when capital is transferred across borders through trade, investment, foreign aid, and loans.
Marxist-Leninism: Communism theory as derived from the writings of Karl Marx, Vladimir Lenin, and their successors, which criticizes capitalism as a cause of the class struggle, the exploitation of workers, colonialism, and war.
New International Economic Order (NIEO): The 1974 policy resolution in the UN that called for a North-South dialogue to open the way for the less-developed countries of the Global South to participate more fully in the making of international economic policy.
Import Quotas: Numerical limit on the number of particular products that can be imported.
World-System Theory: A body of theory that treats the capitalistic world economy originating in the sixteenth century as an interconnected unit of analysis encompassing the entire globe.
Opportunity Cost: The sacrifices that sometimes result when the decision to select one option means that the opportunity to realize gains from other options is lost.
Classical Liberal Economic Theory: A body of thought based on Adam Smith’s ideas about the forces of supply and demand in the marketplace, emphasizing the benefits of minimal government regulation of the economy and trade.
Foreign Direct Investment (FDI): A cross-border investment through which a person or corporation based in one country purchases or constructs an asset such as a factory or bank in another country so that a long–term relationship and control of an enterprise by nonresidents results.
Global Commons: The physical and organic characteristics and resources of the entire planet- the air in the atmosphere in conditions on land and sea- on which is the common heritage of all humanity.
International Monetary Fund: A financial agency now affiliated with the UN established in 1944 to promote international monetary cooperation, free trade exchange rate stability, and democratic rule by providing financial assistance and loans to countries facing financial crises.
Global North: A term used to refer to the world`s wealthy, industrialized countries located primarily in the Northern hemisphere.
Newly Industrialized Countries (NICs): The most prosperous members of the global South which have become more important exporters of manufactured goods as well as important markets for the major industrialized countries that export capital goods.
Multinational Corporations (MNCs): Business enterprises headquartered in one state that invest and operate extensively in many other states,
Neomercantilism: A contemporary version of classical mercantilism that advocates promoting domestic production and a balance of payment surplus by subsidizing exports and using tariffs and non-tariff barriers to reduce imports.
Political Economy: A field of study that focuses on the intersection of politics and economics in international relations.
Fixed Exchange Rates: A system in which a government sets the value of its currency at a fixed rate for exchange about another country's currency so that the exchange value is not free to fluctuate in the global money market.
Long Cycle Theory: A theory that focuses on the rise and fall of the leading global power as the central political process of the modern world system.
Collective Good: A public good, such as safe drinking water, from which everyone benefits.
Exchange Rates: The rate at which one state's currency is exchanged for another state's currency in the global marketplace.
Infant Industry: Newly established industries (infants) that are not yet strong enough to compete against mature foreign producers in the global marketplace until in time they develop and can then compete.
Monetary policy: The decisions made by state central banks to change the country's money supply to manage the national economy and control inflation using fiscal policies such as changing the money supply and interest rate.
Virtual Corporations: Agreements between otherwise competitive MNCs are often temporary to join forces and skills to coproduce and export particular products in the borderless global marketplace.
Orderly Market Arrangements: Voluntary export restrictions through government-to-government agreements to follow specific trading rules.