The free-market system described an economy wherein people voluntary trade with one another and in which supply and demand for products and services lead to an "invisible hand" that creates order. A purely free market has little to no government intervention or regulation, and individuals and companies are free to do as they please (economically).

The market economy has existed in various forms ever since human beings began trading with one another. Free markets emerged as a natural process of social coordination, not unlike language. No single intellectual invented voluntary exchange or private property rights; no government developed the concept or implemented the first use of money as a means of exchange.

Key Takeaways

  • A free market is one where voluntary exchange and the laws of supply and demand provide the sole basis for the economic system, without government intervention.
  • A key feature of free markets is the absence of coerced (forced) transactions or conditions on transactions.
  • Nobody invented the free market; it arose organically as a social institution for trade and commerce.
  • While free trade advocates frown on government intervention and regulation, certain legal frames such as private property rights, limited liability, and bankruptcy laws have helped stimulate global free markets.

Where Did the Free Market Come From?

Even without money, human beings engaged in trade with one another. Evidence of this stretches back far longer than written history can explain. Trade was informal initially, but economic participants eventually realized that a monetary medium of exchange would help facilitate these beneficial transactions.

The oldest known media of exchange were agricultural—such as grain or cattle (or debts related to gran or cattle)—likely as far back as 9000 to 6000 B.C. It wasn't until around 1000 B.C. that metallic coins were minted in China and Mesopotamia and became the first known example of a good that functioned only as money.

While there is evidence of banking systems in early Mesopotamia, the concept wouldn't emerge again until the 15th century in Europe. This did not occur without significant resistance; the church initially condemned usury. Slowly thereafter, merchants and wealthy explorers began to change the notions of business and entrepreneurship.

Two Pillars

There are two pillars of the market economy: voluntary exchange and private property. It is possible for trade to occur without one or the other, but that wouldn't be a market economy—it would be a centralized one.

Private property has existed long before written history, but important intellectual arguments in favor of a private system of ownership of the means of production would not be made until John Locke in the 17th and 18th centuries.

Free Markets vs. Capitalism

It is important to distinguish free markets from capitalism. Capitalism is an economic system of how goods are produced—where business owners and investors (the capitalists) organize production in a centralized entity, such as a company or corporation or factory, and these capitalists own all of the tools and means of production, the real estate, the raw materials, the finished products, and the profits.

Capitalists, in turn, hire employees as labor in return for salaries or wages. Labor does not own any of the tools, raw materials, finished products, or profits—they only work for a wage.

A free market, on the other hand, is a system of economic distribution. It determines, through the laws of supply and demand, who gets what and how much of it in an economy.

Resistance to Markets

Most advances in free-market practices have been met with resistance by a central authority and existing cultural elites. The natural tendency toward specialization and division of labor ran counter to the caste system in feudal Europe and India.

Mass production and factory work were challenged by politically connected guildsmen. Technological change was famously attacked by Luddites between 1811 and 1817. Karl Marx believed that the state should take away all private ownership of the means of production.

Central authority and government planning have stood as the primary challengers to the market economy throughout history. In contemporary language, this is often presented as socialism versus capitalism. While technical distinctions can be drawn between common interpretations of these words and their actual meanings, they represent the modern manifestations of an age-old conflict: privately run, voluntary markets against state control.

Nearly all modern economists agree that the market economy is more productive and operates more efficiently than centrally planned governments. Even so, there is still considerable debate as to the correct balance between freedom and government control in economic affairs.