Is Free Market the Same as Capitalism?

A capitalist system and a free market system are both economic environments that are based on the law of supply and demand.

They both are involved in determining the price and production of goods and services. On one hand, 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.

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 determined by the free market, or supply and demand, however, some government regulation may occur. On the other hand, a private owner in a capitalist system can have a monopoly on the market and prevent free competition.

A free market system is an economic system based solely on 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.

History of Free Market Capitalism

Capitalism came about following feudalism, which took place during medieval Europe. Feudalism was a European system where military service is traded for land. This was the primary economic system in Europe in the 16th and 17th centuries.

Then came about the Dutch East India Company, which was founded in 1602. This was the first public company and marked a shift toward capitalism. The major economists that developed theories surrounding capitalism include Adam Smith and Karl Marx.

Adam Smith theorizes that capitalism is part of natural human behavior that is aligned in trade and commerce. Marxism says that capitalism is an unusual system that could be replaced with a superior system. Marx believes that capitalism is essentially powerful people taking control.

Free Market Examples

Free markets are all around us, relatively speaking. Each country has free market aspects, although there is no perfect free market. Many consider the U.S. a very capitalist country. However, according to the 2020 Heritage Foundation ranking, the U.S. is only “mostly free,” ranking 17th.

However, there are a few countries that are considered to have a “free” economy, including Singapore—ranked 1st in 2010 as the freest economy in the world. Singapore has a government that is pro-business and lax banking rules.

On the other end of the spectrum, there are countries that are considered “repressed.” These countries have virtually no economic freedoms. The most repressed according to the 2020 rankings is North Korea (ranked 180th), with Venezuela (179th) and Cuba (178th) also had the bottom of the rankings.

Georgia, the small country in Eurasia, has made great strides over the years when it comes to becoming more of a free market. The country was previously part of the Soviet Union and has focused on flat tax rates and privatization. The country ranks as 12th when it comes to economic freedoms with an overall freedom score of 77.1. Meanwhile, its score in 1998 was 52.5 and 69.8 in 2008.

The Perfect Free Market Economy

The country closest to a free market has been Hong Kong, which has been rated the first or second most “free” economy for more than two decades—per Heritage Foundation. Although no country is 100% unregulated, Hong Kong is as close as it comes.

Hong Kong has small government involvement and almost no tariffs. 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. Hong Kong also has strong access to global trade and property rights.

The map below shows the most economically free countries, as of 2019, according to the Heritage Foundation.