What Is a Free Market Economy?

Government highly control some economies. In planned economies, or command economies, the government controls the means of production and the distribution of wealth, dictating the prices of goods and services and the wages workers receive. In a free market economy, the law of supply and demand, rather than a central government, regulates production and labor. 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. A purely capitalist economy is a free market economy; the profit motive drives all commerce and forces businesses to operate as efficiently as possible to avoid losing market share to competitors.

Key Takeaways:

  • A free market economy is one where supply and demand regulate production and labor as opposed to the government.
  • Most countries' economies contain elements of both free market and command economies.
  • Hong Kong's economy is considered the most free, followed by New Zealand while Algeria and Timor-Leste were the least free in 2019, according to the 2019 Index of Economic Freedom.

Understanding Free Market Economies

Free market economies and command economies exist more as concepts than as tangible realities; almost all of the world's economies feature elements of both systems and are classified as mixed economies. For example, although the United States allows companies to set prices and workers to negotiate wages, the government establishes parameters such as minimum wages and antitrust laws that must be followed. Additionally, most countries have some type of taxation and impose import and export tariffs.

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What are Free Market Economies?

The countries with the greatest economic freedom tend to be those that encourage entreprenuerialism and protect private property. These policies encourage laissez-faire economics, another term for a free market structure.

Based on Statista's 2019 Index of Economic Freedom, Hong Kong, with its extremely low tax rates, minimal regulations on businesses, and highly capitalist system of economics, ranks as 90.2.% economically free, which is the highest in the world. Singapore ranks second and is 89.4% free. The country imposes no tariffs, and there are few restrictions on investments. Singapore also features strong private property rights.

New Zealand, which ranks third at 84.4% free, also has low tariffs and strong private property rights. The government provides businesses with lots of flexibility and does not constrict them with overly complicated regulations or licensing procedures.

Switzerland and Australia round out the 2019 top five, having 81.9% and 80.9% free economies, respectively.

The United States, with the world's most advanced financial markets, is 76.8% economically free, as of 2019. This number had decreased in recent years but is was up 1% over 2018. While certain U.S. industries generate more government scrutiny than others, private companies rather than the government control most sectors. The country also practices free trade with much of the world.

The five countries with the least-free market economies, according to the 2019 Index of Economic Freedom, are Zimbabwe, Equatorial Guinea, Bolivia, Timor-Leste, and Algeria.