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How Is a Capitalist System Different Than a Free Market System?

Is Free Market the Same as Capitalism?

A capitalist economy and a free market economy are two types of economic systems. Often the terms are used interchangeably, especially in casual parlance. But, while they have overlapping qualities, the two are not quite the same thing.

Capitalist and free-market systems do spring from the same economic soil, so to speak: the law of supply and demand, which becomes the basis to determine the price and production of goods and services.

But they refer to different things. Capitalism is focused on the creation of wealth and ownership of capital and factors of production, whereas a free market system is focused on the exchange of wealth or goods and services.

Key Takeaways

  • The free market and capitalism are not identical economic systems, though they often go hand-in-hand.
  • Capitalism refers to the creation of wealth and ownership of capital, production, and distribution, whereas a free market system has to do with the exchange of wealth or goods and services.
  • Key features of capitalism include personal ownership of property, open competition, and individual incentives.
  • A free-market system is ruled entirely by demand and supply from buyers and sellers, with little or no government regulation.
  • Many capitalistic nations, including the U.S., actually have mixed economies: While elements of the free market reign, considerable state oversight, taxation, and regulations exist, especially in particular sectors.

Key Differences Between Capitalism and Free Market

Some key features of capitalism include the competition between companies and owners, private ownership, and motivation to generate a profit. In a capitalistic society, the production and pricing of goods and services are largely determined by supply and demand—the free market—but some government regulation and oversight may occur. And the profits of capitalist endeavors can be taxed heavily.

Also, the market may be free in name only: A private owner in a capitalist system can have a monopoly in a particular field or geographic area, preventing true competition.

In contrast, a free market system is ruled entirely by demand and supply, and there is little or no government regulation. In a free market system, a buyer and a seller transact freely and only when they voluntarily agree on the price of a good or service.

For example, suppose a seller wants to sell a toy for $5, and a buyer wants to buy that toy for $3. A transaction will occur when the buyer and the seller agree on a price. Because a free market system is based solely on supply and demand, it leads to free competition in the economy, without any intervention from outside forces.

  • Capitalism is a system of economic production: things are produced by workers who are hired by business owners (capitalists) in return for wages.
  • Markets are systems of economic distribution: who gets which things and how much of them?

Free Market Examples

Free markets are all around us, relatively speaking. Each country has free-market aspects, although there is no totally pure free market; it’s more a concept than a tangible reality. Most countries have a mixed economy or mixed economic system.

For example, the U.S. is often considered a highly capitalist country, its economy embodying the essence of a free market. However, economy-evaluating sources often don’t consider it 100% pure, because there are federal minimum wages and antitrust laws; regulations imposed by government agencies like the SEC; and corporate taxes, along with import and export tariffs.

For example, the conservative think tank Heritage Foundation’s 2022 Index of Economic Freedom, which ranks nations on a 100-point scale, gives the U.S. a score of 72.1, which places it in the second-tier “mostly free” category (the U.S. ranks 25th on the overall list).

The U.S. fares a little better in the “Economic Freedom of the World: 2021 Annual Report,” issued by the Fraser Institute of Canada, another think tank. Scoring 8.24 out of a possible 10, it comes in sixth place on the world rankings roster—squarely in the highest “most free” category (Hong Kong ranks as number one on the list overall).

On the other end of the spectrum, there are countries that are considered “repressed” (as the Heritage Foundation puts it). These countries have virtually no economic freedoms. The most repressed, according to the 2022 rankings, is North Korea (ranked 177th), with Venezuela (176th) and Cuba (175th) also at the bottom of the list.

In the Fraser Institute report, Venezuela ranks as the “least free”—ranking 165nd, the bottom of the list. Other low scorers include Algeria (162th), Libya (163th), and Sudan (164th).

Georgia, the small country that was previously part of the Soviet Union, has made great strides over the years when it comes to becoming more of a free market. Focusing on flat-tax rates and privatization, the country ranks 26th when it comes to economic freedoms with an overall freedom score of 71.8. Its score in 1998 was 47.9 and 69.2 in 2008.

The No. 1 Free Market Economy

For years, Hong Kong was often cited as the country closest to a completely free-market economy. It was rated no. 1 or no. 2, heading the “free” category (the highest level), for more than two decades on the Heritage Foundation’s list. It still tops the Fraser Economic Freedom of the World Index.

However, one could argue that Hong Kong, under China’s control since the mid-1990s, isn’t truly an independent nation—especially given the Chinese government’s increasing interventions in its economy in 2019-20. For that reason, it’s not on the Heritage Foundation 2021 list at all.

Instead, the Heritage top spot goes to Singapore; with a score of 84.4, it’s been has been ranked the freest in the world for the third year in a row. Singapore occupies the no. 2 spot on the Fraser index.

Though no country is 100% unregulated, Singapore is as close as it comes. The government is very pro-business and open to global investment; legislation is lax, and the corporate tax rate is a low 17%.

The people there are living long lives and seeing a consistent rise in wages—having a gross domestic product (GDP) per capita that’s among the highest in the world, which helps propagate economic freedoms. Singapore also has strong access to global trade and property rights.

The opposite of a free market economy is a planned, controlled, or command economy. The government controls the means of production and the distribution of wealth, dictating the prices of goods and services and the wages workers receive.

What Does Free Market Capitalism Mean?

Any economy is capitalist as long as private individuals control the factors of production. A purely capitalist economy is also a free market economy, meaning the law of supply and demand, rather than a central government, regulates production, labor, and the marketplace. Companies sell goods and services at the highest price consumers are willing to pay while workers earn the highest wages companies are willing to pay for their services. The profit motive drives all commerce and forces businesses to operate as efficiently as possible to avoid losing market share to competitors.

Can You Have a Free Market Without Capitalism?

Yes, a free market can exist without capitalism. It can exist under socialism, as long as there is an absence of coerced (forced) transactions or conditions on transactions, or in other sorts of communal/mutualistic societies, such as those that Native American tribes had.

That said, most free markets tend to coincide with countries and societies that value private property and capitalism and shy away from state ownership and regulations. Free markets are more likely to grow and thrive in a system where property rights are well protected and individuals have an incentive to invest, acquire, build, and pursue profits.

What Is a Capitalist Economy Example?

New Zealand is a prime example of a capitalist economy. This wealthy country in the Asian Pacific region has systemically deregulated and privatized many industrial and professional sectors since the 1980s. Its judicial system recognizes and enforces private property interests and contracts. Government subsidies are low, and an open, liberal attitude to global trade and investment is well-established. Tariffs are low on imports and exports, which comprise around 50% of New Zealand’s GDP.

Is the U.S. a Free Market?

Yes, the U.S. is largely—but not completely—a free market. Although it is primarily capitalistic—that is, private ownership of property and production predominates—and the laws of supply and demand largely rule the economy, it has some socialistic elements: The government does play a role in economic affairs and financial policies.

The U.S., strictly speaking, is considered to have a mixed economy: Some aspects of it are free and unfettered, while others are state-controlled or highly regulated.

Is Free Market Capitalism Good?

Whether free-market capitalism is good or bad has long been a source of debate, dating back to the mid-1800s, when capitalism began to flourish in developed nations—along with criticisms of it by proponents of alternative systems, like communism.

Advocates of free-market capitalism argue that private ownership and open, unregulated exchange of goods and services is the fairest and most efficient path to economic growth and progress. Nothing can replace the motivational power of personal incentives, individual freedom, and open competition, they say.

Critics counter that free-market capitalism promotes inequality, concentrating and keeping power in the hands of a minority, who then exploit the majority. It prioritizes individual profit above society’s well-being, dividing people into “haves” and “have-nots.”

Proponents note that many of the most prosperous and advanced countries in the world practice free-market capitalism, making them a model for developing nations. But skeptics note these systems aren’t always pure—they possess strong socialist characteristics and elements of controlled economies as well.

For example, one could argue that the U.S.—widely seen as one of the avatars of a free market capitalist system—achieved its 20th-century heights of power and prosperity only after the expansion of government controls, social programs, and oversight/intervention agencies via the New Deal of the 1930s and the Great Society of the 1960s.

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