As it is with other types of markets and all fields of human endeavor, the free market economy presents both advantages and disadvantages to the individuals living in it, as well as the society in which this kind of market exists. Before we discuss the various disadvantages of a free market economy, let us look at what it means.
See also: Free Enterprise vs Capitalism Differences and Similarities
What is a free market economy?
A free market economy is an economic system that is not under the control of the government or an organized entity, unlike a controlled economy. Wherever free markets exist, it enables individuals to freely engage in buying and selling of goods and services. Thus the market is governed by the market forces of demand and supply as well as voluntary exchanges between producers and consumers.
Most properties and companies that exist in a free market economy are owned by private individuals. There is generally limited government intervention to influence the outcomes of market activities; economists refer to this lack of government interference as a laissez-faire approach. Free market economies tend to encourage capitalism as they are driven by profits and there are no limitations on the kinds of products and services that can be bought or sold in the market. Once there is a demand for a certain product or service, manufacturers will produce it provided it brings profit to them and gives them an edge over other companies within the same sector.
See also: Free market vs regulated market: similarities and differences
Disadvantages of free market economy
- Risk of market failure
- Poor working conditions
- Disregard for environmental safety
- Reduced social safety net programs
- Corruption may become prevalent
- Limited product choices
- Inequitable distribution of wealth and opportunities
- Promotes the idea of monopolization
- Encourages consumerism
- An increased barrier to entry
- Questionable priorities
- Exploitation of consumers
Risk of market failure
Part of the disadvantages of a free market economy is that the market can spin out of control leading to ongoing and severe economic consequences. A lot of these failures have been spurred by individuals seeking quick profits; leading to the increase of several get-rich-quick schemes. It has further been aided by highly-leveraged assets, minimal government interference in the market, cheap credit, and lax lending standards.
Good examples of market failures are seen in the Great Depression of the 1930s and the 2007-2008 Global financial crisis. These market failures have resulted in a lot of negative impacts on individuals and society. A lot of people lost their means of livelihood, incomes, savings, and their homes. These have further led to the loss of lives and assets. Hence, as long as short-term profits are sought by investors and companies in the free market, the risk of market failure will always be a disadvantage of the free market.
Poor working conditions
Employees in a free market economy often face dire working conditions; as the market is driven by profits, most companies are typically after increasing their bottom line. During periods of economic decline, salaries typically take the first hit as companies usually give employees the option of taking lesser pay or being laid off. Some companies in the bid to maximize their net income could even trigger an artificial decline in income as a means of reducing staff salaries. This often results in people having the same salary even after working for years which should have resulted in promotions and salary increases.
Furthermore, when labor is readily available, companies could decide not to pay for overtime work, pension funds, health insurance, and other extra benefits that are supposed to be enjoyed by workers as they can easily replace workers who are unwilling to work in such unfavorable conditions with others that want to be employed. They could also abstain from making provisions for proper protective clothing and other safety equipment that can lead to accidents, injuries, and sicknesses. All this become increasingly prevalent since the government and labor unions have no say in how companies are run in a free market economy.
The drive towards innovation in a free market economy could also mean workers become less needed in a lot of work processes, this can be seen in the advancement in technology which has led to robots taking over a lot of jobs that are very tedious and require a high level of precision as is clearly seen in the automotive industry. This can be a disadvantage of a free market economy as workers will have to work under poor conditions or lose their jobs altogether to robots.
Disregard for environmental safety
Due to the lack of organized employer associations in free market economies, there is an absence of standardized ethical standards that must be adhered to by companies. This has made it possible for a lot of companies to cut down on their expenses through compromising on quality, ethics, environmental, and other industry standards which are benchmarked in command economies. The overlooking of these standards could have detrimental effects on the environment as companies do not factor in environmental pollution or sustainability into their business model unless these drives up their profits.
One major disadvantage of the free market economy to the environment that has been reported in the United States can be seen in the Deepwater Horizon oil spill which occurred in 2010. The disaster occurred as a result of using sub-standard products in the drilling rig in a bid of cutting down costs. The explosion and sinking of the drilling rig resulted in the spilling of 4 million barrels of oil over an 87-day period. This is one among several instances of companies operating without adequate consideration of the dire environmental impact that their operations and cost-cutting measures have on the environment.
Reduced social safety net programs
Free economies usually do not provide anything to individuals unless it is seen to be profitable. Thus, another disadvantage of the free market economy is that social safety net programs are very few if not nonexistent. This means that children, the disabled, the elderly, and anyone who cannot actively participate in the market will not be able to live well in this economy unless they have well-to-do parents, relatives, or children respectively who can adequately provide for their needs.
The scarce social safety net programs also mean that competition is high among individuals to become part of the beneficiaries. Hence only very few individuals are taken care of by the system while the majority are left to fend for themselves despite their vulnerable state.
Corruption may become prevalent
One of the negative effects of the free market economy is that corruption may become prevalent over time, this can be driven by the high level of competition which exists in the economy. As companies compete with each other to sell the most products, provide the most services, and carry out several contracts, corruption can ensure. Companies could present low-quality products in a bid to offer competitive prices.
They could also give bribes in order to secure contracts and further present padded budgets in order to get back the monies spent as bribes as well as increase their profit on the contracts. Since there are no regulatory bodies in a free market economy, this behavior can continue occurring making corruption become part of the economic activities that occur in the market.
Limited product choices
Although the free market economy is driven by market forces of demand and supply, the disadvantage of customers having limited product choices may arise. Since companies in this type of economy mainly pursue research and development for products and services that are profitable to the business, products, and services that are deemed unprofitable will not be produced. Hence, limiting the range of choices available to consumers for certain products and services. For example, if the operating cost and the cost of making certain products and services reduce the profits made by a company, they may decide to stop producing such goods or offering such services.
Additionally, communities in which the majority of individuals have limited disposable income are bound to suffer this con of the free market economy. This is because companies will not want to be established in such communities and will also not want to take their products or services there since the individuals may not be able to purchase them. Hence, the products and services available to people in these disadvantaged communities become increasingly limited as they miss out on more innovative and diverse products due to their low purchasing power.
Inequitable distribution of wealth and opportunities
A major drawback of the free market economy is that there is an inequitable distribution of wealth and opportunities. The individuals in this economy may be predisposed to certain levels of wealth and opportunity based on the economic background of the families in which they are born. Individuals born to wealthy families will generally have more opportunities available to them and better prospects of also becoming wealthy since they are more like to inherit considerable amounts from their parents as well as family businesses and a good reputation due to their family name and influence.
Hence, these individuals are more able to achieve their dreams and be engaged in the production sector of the market where they amass more wealth through the profits they make. Disadvantaged individuals who get born to poor parents or the middle class have to continually struggle to make ends meet. As most of them have fewer chances of becoming wealthy and lesser opportunities to better their economic lot. Some individuals only get one chance of breaking out of poverty and impoverishment while others have numerous opportunities and are automatically rewarded with success due to the family or friendship ties they have. Therefore, although free markets encourage equality, it does not translate to equal opportunities and wealth.
Promotes the idea of monopolization
Although the bane of free economies is the competition that exists among producers in the market, there is a high tendency for monopolies to arise. This is especially true when certain businesses provide a majority of the products and services that are needed by consumers. When this happens, these companies become the primary drivers of the economy and the economic development of society, thus, they become too big to fail which results in their becoming monopolies.
Additionally, due to their large sizes and the consequent amount of funds available to them, these companies have comparative advantages over smaller companies within the same industry as they can carry out more research and development. Due to this, they can then create newer products and services for which they can charge higher prices and make more profits. This further makes their position as monopolies stronger, hence, in the long run, they can reduce innovation while maintaining their high prices due to the elimination of most of their competitors from the market.
This negative effect of the free market economy is further strengthened because if any of these large companies were to become bankrupt or fold, the ripple effects will include a large loss of jobs as well as a major decline in economic activities. These might further contribute to the collapse of the entire economy. Hence, the free market economy promotes the rise of monopolies in the long run.
Since the free market economy depends on market forces of demand and supply to continue existing, it means that buying and selling must continually take place if the market is to keep functioning. Households and individuals must continue buying products and services while companies must also continue to keep up production of these products and services. As a result of these, consumerism becomes highly encouraged in the free economy.
Generally, households that are wealthy owing to their family wealth or high-income levels are able to easily meet their needs without worrying about income shortages, hence consumerism does not pose a challenge to them. However, poor households with a low-income level get thrown into debt and more poverty due to the consumerism that is prevalent in free economies. This disadvantage of the free market economy further concentrates wealth in the hands of fewer individuals within societies that practice this economic system.
An increased barrier to entry
One of the disadvantages that are common in a free market is an increased barrier to entry. Even though the free market economy encourages innovation and entrepreneurship, barriers exist for new individuals or entrepreneurs to break into the market especially those who do not have readily available funds to compete favorably with already existing businesses. New businesses might offer better products and services than existing companies but because they are not well known and they do not have the funds to market their products and services widely, it could lead to poor patronage. Additionally, they may not be able to produce in large quantities due to smaller facilities and production plants.
Furthermore, investors and financial institutions may also be skeptical about investing in or lending money to these otherwise unknown entrepreneurs. These further contribute to stifling the rate of influx of new businesses into the market. Hence the most popular products and services in a free market are often not the best but rather, those made by companies that are well-funded.
The priorities of companies in a free economy are often questionable as most of them focus more on their bottom line when creating products and services. For instance, instead of focusing on research and development in areas that are a necessity to the survival of the society such as health, electricity, water, infrastructure, etc. Most companies in a free market are more likely to focus on the production of luxury items such as sports cars, haute couture clothing, yachts, wines, etc. since these are usually priced higher and bring more money to the company.
Furthermore, investors and financial institutions in a free economy tend to invest in and lend money to organizations that pay them the highest dividends and can pay back their loans within the shortest possible time respectively. Hence they are likely to put their money on areas that have immediate gains such as concerts and movies. They do this based on market trends and the fact that fans of musicians and actors are usually willing to pay whatever they are charged for concert tickets, movie premieres, recordings, and movies. This further leads to inequitable income ranges within society with rock stars and actors usually earning better than people in the military or teaching profession.
Hence, the issue of questionable production motives arises in the free market economy. The market produces and rewards the production of what people want and not necessarily what they need.
Exploitation of consumers
A significant con of a free market economy is that the prices of products and services might be driven up through the creation of artificial scarcity by producers. When this happens, consumers get exploited as they have to struggle to have access to basic necessities and more often than not, at higher prices. Since the prices of goods and services in a free market are usually determined by demand and supply, it means that the prices of products and services will increase when demand is higher than supply.
Additionally, due to an increase in purchases during certain periods of the year such as at Christmas, producers could hike the prices of goods and services during such periods since they know that people will still buy the products and services irrespective of the increased prices. As a result of these, consumers get exploited by manufacturers who provide the goods and services they need.
What are the disadvantages of a free market economy?
The common disadvantages of a free market economy include the risk of market failure, poor working conditions for employees, disregard for environmental safety, reduced social safety net programs, the prevalence of corruption, limited product choices for consumers, the creation of monopolies, the prevalence of consumerism, an increased barrier to entry, questionable priorities at production, exploitation of consumers, and inequitable distribution of wealth and opportunities.
Any economic system that is in existence has inherent disadvantages that are associated with it and the free market economy is not exempt from this. The negative impacts that arise from the production processes are often not detrimental to the company as an entity, instead, it is the workers and society that often suffer the consequences. For instance, when employees of a company get involved in an accident in the course of production due to a lack of property protective clothing, as is often the case with companies trying to cut down costs while maximizing profits, the company can carry on with their business by simply employing a new worker to replace the old one.
The employee, on the other hand, has lost their source of income which might have further negative effects on their family. The fact that trade unions have little or no influence in the free market economy further leaves the employees in a dire situation of suffering. Additionally, adverse effects of production that lead to the pollution of air, water, and land could also have a lot of ripple effects on society as was seen in the Deepwater Horizon oil spill that led to the death of 11 workers and one of the largest oil spills in the United States history.
When critical sectors such as national defense, pharmaceuticals, electricity, water supply, food processing, hospitals, and other industries where safety and quality have to be of topmost concern before profits, they may not function well in a free economy since producers are more concerned about creating products and services with the least possible cost while driving the most profits. Hence, one cannot find the ideal free market economy in existence anywhere in the world.
Instead, the free markets that are in existence have some form of government interference in order to curtail certain excesses that may arise without some rules and regulations in the market. They also protect important sectors such as national defense and other critical sectors from the exploitations that may arise if these sectors are left unchecked.
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