Characteristics of a Free Market Economy

In a pure free market economy, the three economic questions would be answered by the individual buyers and sellers acting independently in the market place.  In order for this system to function, the following principles must be present:

The above ideas were first articulated by Adam Smith.  Adam smith was a Scottish philosopher in the 18th century.  He wrote a famous book entitled, An Enquiry Into the Nature and Causes of the Wealth of Nations.  The book was published in 1776, the year of the American Revolution against England.  

Smith agreed with the Americans that the British economic system of mercantilism was wrong.  This was an economic system in which empires placed heavy controls on the economies of their people and colonies abroad.   Adam Smith believed that an economic system worked best if people had the right to choose what they bought and sold.  He believed that when people looked out for their own self interests, without government interference, the economy would work itself out to everyone's benefit.  Consumers would look for the best possible prices.  Producers would look for consumers' needs and for the most efficient methods of production.  If people wanted or needed something, somebody would be sure to make it in order to profit.  The producer would have to sell it at a reasonable price or nobody would buy it.  The consumer would be willing to pay a reasonable price or nobody would make it.  Left alone, the desire to make and save money would regulate the economy like an "invisible hand"

The Americans were the first country to accept Adam Smith's ideas.  If you can picture yourself living back in the days of empires, you might better understand Smith's ideas.  In Adam Smith's time, the economy was dominated by small firms or individual proprietors.  He could not have foreseen our modern economy, dominated by large corporations whose many owners are not legally accountable for the corporation's actions.  Adam Smith also did not foresee the production of goods that would be harmful to the society.  He felt that society would always benefit if people were left alone--economically.  Finally, Smith assumed that demand for a product was based on a need.  He also assumed people would be able to decide what they most wanted and needed.  H could not have foreseen the effects that modern communications and advertising would have on consumers.  For example: Did you know that studies show that the exact same perfume sells better if it is given a brand name and priced at $40 a bottle than if given another name and priced at $2 a bottle? Adam Smith is rolling in his grave!

Further Reading