Free market economics believes government intervention should be limited to the protection of private property. It is advocated by many economists especially in the Chicago, and Austrian school of Economics.
However, although free markets have advantages, such as greater efficiency, there are several criticisms levelled at purely free market economies.
Criticisms of free-market economics
- Inequality. The wealthy will tend to be able to accumulate greater wealth in a free market. This is due to:
- The ability to inherit wealth
- Wealthy can pay for better education for their children, giving certain groups of people a better start in life.
- People with wealth and assets can use profit and dividend to purchase more assets. The rich can accumulate more.
- The wealthy are likely to be able to create monopoly power, which exacerbates inequality.
- In a free market, there will be periods of unemployment, leaving some people with no income.
- Monopoly power. In a free market, firms with a high market share will be able to set higher prices for consumers
- Under-provision of public goods (e.g. defence and law and order – goods which are non-rivalry and non-excludable)
- Under-provision of merit goods like health and education – goods with positive externalities and services where people may under-estimate benefits of a good.
- Information failure – a lack of information about the best way to use resources, e.g. moral hazard in insurance.
- Private sector more inefficient in providing public services like health care. e.g. the US pays high admin costs for private health insurance.
- Instability of free markets. John Maynard Keynes argued capitalism has a tendency to boom and bust economic cycles – which leads to periods of mass unemployment. Hyman Minksy suggested that financial markets were inherently unstable due to forces of irrational exuberance. See: Financial instability.
- Over-production of negative externalities e.g. environmental pollution and congestion, which lower living standards.
- Over-consumption of demerit goods – goods where people may ignore or under-estimate costs, e.g. smoking, alcohol.
- Unsustainability. Free markets are concerned with the present moment but ignore implications for long-term ecological stability. For example, free markets may lead to the over-use of raw materials and
Economists critical of free-market economics
- Karl Marx – Marxist critique of exploitation of labour by capitalists.
- John Maynard Keynes – Keynes was critical of laissez-faire with regard to boom and bust cycles.
- John Atkinson Hobson – English economist supported social democracy and redistribution of income, an early critic of neo-classical views.
- Henry George (1839 – 1897) – American political economist popularised criticism of free-markets in Gilded Age. His Progress and Poverty (1879) investigated inequality and advocated land-tax and redistribution of wealth.
- Joseph Stiglitz – Critical of unregulated free-markets and consumer-led booms. In particular, he criticises the “market fundamentalism.” of Thatcher and Reagan years which assumes free markets are always the best solution.
- John Kenneth Galbraith
- Thomas Piketty – Capital in the Twenty-First Century Piketty’s premise is that wealth grows faster than economic output, thus concentrating capital (and the income it produces) in ever-fewer hands
- Kenneth Arrow – critical of the idea that free markets can solve the problem of health care. See: Uncertainty and welfare economics of healthcare
- Paul Krugman – Critical of ‘market fundamentalism’. Agrees with Arrow about limitations of free markets in areas such as healthcare see: Why markets can’t cure healthcare
- The free market fails – An essay looking at how free market economics precipitated the global credit crunch of 2008-09
- Pros and cons of capitalism
- Command economy – the opposite of a free market, where government control all aspects of the economy.
- Mixed economy – a combination of free market and government intervention.