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8 Reasons Why Free Markets Work More Efficiently

In the economic world, it’s clear that free markets are the most efficient system possible for both short-term functionality and long-term durability and growth. Despite that, free markets still face ongoing criticism and deliberate attempts to restrict their power through regulations and government control.

What is it that makes free markets so efficient? And why are so many people still so eager to mitigate those advantages?

The Advantages of Free Markets

Let’s take a look at some of the reasons why free market economies are more efficient:

  1.       Seamless entry. The lack of strict rules and regulations from governments and other authorities sets a stage for seamless entry. It’s ridiculously easy for enterprising young people to start businesses of their own. Rather than being forced to jump through hoops, purchasing permits, getting licensed, and establishing infrastructure, anyone with a good idea can create a new company (and create new jobs in the process).
  2.       Consumer demand response. Economies rely heavily on consumer demand to function. If an economy makes 10,000 units of a product that nobody wants and only 10 units of a product that everybody wants, that market isn’t operating efficiently; it experiences wasted effort and a shortage of in-demand products. Free markets solve this because consumer demand is the exclusive driver of production. When demand exists, someone will step up to fill it. When demand doesn’t exist, companies and producers begin to dwindle.
  3.       Competition and innovation. One of the most important features of a free market is that it encourages competition. No business is guaranteed to survive; it must contend with other, similar businesses if it wants to remain profitable. Because of this, older, established businesses must continue to innovate and keep their prices low. And younger, newer business owners are encouraged to innovate and come up with better breakthroughs to stand a better chance against their long-established counterparts. Over time, this allows a society to become more productive, more efficient, and more prosperous with the help of new technologies.
  4.       Survival of the fittest. If a business isn’t working efficiently, a free market allows it to fail. If it doesn’t provide good customer service, if its product is obsolete, or if its inefficient methods of production lead to higher prices, there are no lingering aftereffects – it simply dissolves away, allowing newer, more efficient businesses to thrive in its place.
  5.       Opportunities for investors. Let’s also remember that free markets allow participation from all sides; investors can easily volunteer some of their capital in exchange for a stake in a promising new enterprise or in a piece of potentially lucrative property. With the help of investing consultants, property management companies, and other individuals and institutions, almost any individual can make smarter investing decisions and end up building wealth of their own.
  6.       Better matchmaking. Free market systems offer a brilliant solution for purchaser and provider matchmaking: third parties. If it’s hard for buyers to find a home for sale and hard for sellers to find a buyer for homes, a new industry is created – in this case, real estate agents, marketing, and advertising all play a role in bringing these two parties together.
  7.       Price signals and balancing. Free market societies are held in more stable, harmonious balance over the long term because of price signals and balancing. High consumer demand and low supply yields higher prices. In turn, higher prices attract more talent and more entrepreneurship – and therefore more competition. This increase in supply and competition leads to more innovation and lower prices, ultimately correcting the imbalance.
  8.       Individual liberty. Finally, we must remember that free markets are the only economic system that preserves the full power of individual liberty. Under this system, people are free to start whatever businesses they want, operate those businesses however they want, and choose to spend their money in any way they want.

Why Fight Back?

These advantages illustrate free markets as a near-perfect economic system, but to be fair, there are also disadvantages. Otherwise, it would be totally irrational for economists, politicians, and everyday people to rail against the endless bounty of capitalism. In free market systems, people and businesses are vulnerable to failure, and some people may face greater hardships than they would in an alternative system. In some cases, unrestricted capitalism can lead to the development of monopolies – though there are also counterarguments that “true” monopolies can’t exist for long in free market conditions.

Still, the alternative remedies to address the problems with free markets often yield far greater problems of their own. Crony capitalism, inefficient prices, and the stifling of innovation are just a few of the destructive effects. Overall, free market systems are better for everyone, at all levels and in all industries.