Is the free market free?

By Syed Mohammad Shahadatul Islam | February 18th, 2020

Is a lack of regulation conducive to economic growth?

A certain level of regulation can be healthy for the economy

What is a free market economy? Usually, it is supposed to be an economy that is free from of any kind of intervention or regulation by any authority. 

In economics language, however, free market economy is a concept where the allocation of resources, the level of production, and the prices are determined by the principles of supply and demand. 

The point at which the level of demand meets the level of supply is called the equilibrium price. Necessarily, scholars contrast the concept of free market economy with the concept of political economy, new institutional economies, economic sociology, and political science.

Now, according to the facts about free market economy, an economy that is regulated in any way by any authority cannot be called a free market economy. 

Economists insist that there is no such free market in the real world. The free market concept is more of a theoretical one, as governments always put some type of constraints in the allocation of resources and in the exchange of goods and services.

However, it is often argued that it is not always okay to equate the term “free” with the term “unregulated.” Many experts like to provide the example that businesses study consumers to get an insight into the marketplace, and customize their products offered or services rendered, according to the consumers’ demand. 

Hence, businesses are regulating the market to generate a good profit. Thus, if businesses can regulate the market to increase their profits and can still remain free, then what is wrong with governments regulating the market to enhance national output while still promoting free market economy?

Moreover, regulations may not always be bad. Sure, a well-planned-out, regulated free market is better than an entirely unregulated black market. 

Thus, regulations may not be an obstacle to free market operation as long as the regulation helps grow the overall economy. 

One problem with regulations, however, is that very often governments impose regulations on trade to fulfill their political interest, a kind of step that may not always bolster free market. 

Also, excessive regulations sometimes slows down business activities. 

Well, it has been argued many a time that in a free market environment, the abundance of poor quality products are sometimes very commonplace in the marketplace, as the producers are likely to go on serving majority of the consumers willing to buy products at low prices. 

Thus, to maximize profits, firms may pollute the environment or exploit workers in the absence of proper regulations.

Also, unless regulated, products or services that are very necessary but are not profitable are not likely to be produced or rendered in a free market. 

For instance, it might seem appropriate for businesses to disagree to produce an important drug that can cure cancers, just because the drug is produced from cheap materials and does not generate good profits for the firm.

Notably, in an entirely unregulated market — and when the barriers to entry for a new firm are high — large firms with immense power may have the potential to exploit the suppliers, on one hand, by squeezing the prices down, and to exploit the consumers, on the other hand, by charging higher prices for their products that the consumers otherwise could have bought at lower prices in a regulated environment.

Such scenarios are quite common to the industries where the raw materials for the final products are procured directly from the suppliers involved in direct farming. Also, in an unregulated environment, businesses tend to set a strong barrier to entry for a new firm by lobbying the governments or the trade unions.

Anyway, free market economy promotes innovations and research for new products to serve the hidden demands of the consumers. Individuals and firms taking part in these transactions have the liberty to enter, leave, and participate in the market as they choose. 

Thus, a fierce competition among firms is very common to a free market, allowing the world to enjoy quality products at fair prices.

The producers in a free market, to avoid losses that may result from plenty of stock surpluses or of stock shortages, usually produce what consumers want at a reasonable price, a condition that allows the resources of a society to be fully employed. 

Moreover, free market promotes entrepreneurship that employ the human resources of a country. Thus, it can be said that this concept plays a very pivotal role in employing the idle resources of any society in an organized way.

Thus, although argued that modern societies can only approach or approximate this ideal of efficient resource allocation, and that the free market can only be described along a spectrum ranging from low to high amount of regulations, perhaps the full potentiality of a free market operation can be made use of in a well-regulated environment.

It might be true that, if regulated, firms may profit less, but inherently, regulations may boost up free market in reality. 

When the government taxes our income, we receive less money, and thus the national output — when calculated on the basis of per capita income after paying taxes — of the country declines, but we get roads, hospitals, schools, and many other amenities. 

Sure, we cannot deny these services that help foster balanced development.

Thus, in a regulated environment, perhaps, the interventions are designed to make sure that the firms can do businesses fairly with no barrier to entry or to exit, that no firm can gain monopoly by skewing the market to its favor, and that no firm can create artificial scarcities for any product. 

Thus, more often than not, it seems likely that most regulations help encourage competitions — a very basic component of a free market economy — by allowing new firms and industries to grow. 

Hence, regulations may not be held responsible for curbing the beauty of free market economy.

Syed Mohammad Shahadatul Islam is a freelance contributor.