Our discussion here shall focus on the importance of the free market as it relates to the benefits it brings to the individuals and societies in which free markets exist. The buying and selling of goods and services generally occur within the constructs of markets, one such market is the free market. A free market is one where buyers and sellers voluntarily carry out exchanges of goods and services for a fee.
The means of production in such a market are usually privately owned and the government does not interfere in the market. The price of goods and services in a free market is determined by market forces of demand and supply. Let us now consider some of the importance of free markets.
Spurs innovation and consumer satisfaction
One major importance of the free market is that it spurs innovations that bring about consumer satisfaction. It is the presence of free markets that has engineered the creation of various innovations from which we benefit currently. The light bulb, the telephone, the steam engine, airplanes, photography, electricity, etc. are inventions that have greatly benefited mankind. All these inventions were made by individuals without coercion from the government.
Further improvements have also been made to these inventions through the years which further makes everyday living easier for us today. The patents and copyrights that inventors have over their inventions bring great economic rewards to inventors who are forward-thinking and are able to create products or services that are needed by people.
Oftentimes, people might not even be aware that they need some of these products or services until an individual or group of individuals offer their brainchild to be bought by the public. Some products that have been hitherto unknown, but which were developed to solve the pain points of different individuals have come to gain wide acceptance with their manufacturers reaping the economic benefits.
Some of these inventive products include fitness trackers, virtual assistants, automated security and fire alarm systems, etc.
Pricing is based on demand and supply
The price signal is an important part of all free markets since the price of goods and services is generally determined by the extent of demand and supply for the products or services. A short supply and an increasing demand usually result in higher prices whereas an increased supply and a declining demand result in a price decrease. This goes to show that price signals are effective as they show businesses and service providers which products or services have good demand and patronage in the market and which ones are failing.
Consumers daily vote through their purchases, the products, and services that continue to bloom in the market and withhold their money from purchasing goods and services that do not meet their demand. Free markets hence supply products and services that are demanded by consumers. The market adjusts to meet the demand as efficiently and inexpensively as possible. The economic judgment of consumers also aids in determining businesses than continue existing and those that have to shut down.
This is clearly important as the closing down of those businesses that do not meet consumer needs frees up resources that can be efficiently redeployed in the creation of products and services that consumers desire.
Income raises are common
Unlike a controlled economy where wages are usually determined through cooperative decisions of trade unions and employers associations and income raises have to go through long procedures, income raises in a free market are less stringent. As is the case with the pricing of goods and services, the wages of workers are also determined by the availability or scarcity of particular skill sets.
The shortage of workers in a particular line of work is usually signaled to the labor market by an increase in the wages advertised by companies in that sector. This aids individuals in better channeling their skills in high-demand sectors. For instance, the increased globalization of the world has led to a surge in the demand for workers within the communications and information technology sector.
This high demand has led to individuals honing their skills in areas such as cyber security, computer science, data analysis, computer programming, coding, and other technology-driven skill sets. Similarly, falling wages signal what sectors should have a reduction in production as well as manpower. This can be seen in the reduction in the production of vehicles and other machines that require fossil fuels to run as societies get more concerned about sustainability and increasing efforts towards tackling issues of global warming.
Hence although free markets are mostly unregulated, demand and supply serve as good regulatory factors. The rising wages workers enjoy are thanks to a free labor market where companies have to compete for workers by offering competitive wages. This becomes increasingly necessary as workers are more willing to work in businesses that offer the best compensation not only in wages but in promotions, overtime, health insurance, and other work perks.
Aids economic growth
Free trade zones allow people to exploit the comparative advantages that exist in the market. Since competition is an inherent characteristic of the free market, different companies get involved in the production of a wide variety of goods and services. This is done to meet the ever-increasing demand for different kinds of products and services. In order to effectively meet individual differences in preferences, talents, tastes, and resources, more companies get established.
The establishment of more companies also means employment for more people which consequently leads to a raise in their household income level. The ripple effects enjoyed further aid the economic growth of such societies; this is one of the importance of free markets. Additionally, people get to save more in free markets as they are offered a variety of similar goods at competitive prices.
This means they can buy products and services at cheaper prices with better quality. Companies also benefit from free markets as they also get raw materials from suppliers at competitive prices. This goes to show that the more free markets are made available, the more money is being saved and made in the long run.
Supports individual and societal freedom
An importance of free markets is the freedom enjoyed by individuals and society as a whole. This means that fundamental human rights are established as individuals have freedom of speech, and decide on where and what kind of work or business to do. They can also shop freely, worship as they want, and have several other freedoms enjoyed in a free society. Without free markets, individuals and businesses will have no say in the market; The products and services produced will be dictated to the companies.
Individuals will also have no choice about where or in what sector they want to work, instead, they will be matched to jobs irrespective of whether they want the job or not. Free markets let companies decide the products and services they will offer for sale, the quantity of production, and where to sell them. Consumers decide the products or services to spend their money on, the quantities they will buy, and from which retailer or manufacturer to buy. Furthermore, free societies have been found to enjoy more economic prosperity when compared to controlled economies.
Free markets match producers and consumers
Free markets pair up buyers with sellers automatically. Producers rarely have to personally know the individuals that purchase the products they manufacture and consumers are also rarely concerned about the manufacturers of the products. What is important is for producers to make what consumers want and for consumers to find the products worthy of their money. In diverse sectors of the economy, go-between exits to ensure that sellers reach buyers.
Retailers usually stand as the go-between between producers and consumers. Real estate agents stand between property owners and tenants or individuals seeking to buy property. Banks stand between savers and borrowers. Stockbrokers stand between companies and investors. The continuously expanding reach of the internet has further aided in matching up producers with consumers as consumers can easily make purchases online.
This matching of buyers and sellers is another important aspect of free markets which aids their efficient running.
Low prices due to competition
As companies compete to gain comparative advantages over their competitors, the prices of goods and services are generally kept low while the products and services offered are often of good quality. The competition makes companies reluctant to increase the prices of the products and services they offer so as not to lose out to their competitors.
Instead, businesses are always on the lookout for cost-effective and innovative ways of lowering costs, driving up efficiency, and increasing their profitability while meeting the needs of consumers. This further ensures that there is efficient allocation and utilization of resources by companies.
Read about: Laissez-faire capitalism
The importance of free markets to individuals and society cannot be overlooked even as people keep debating on the merits and demerits of the free market. Free markets have aided in raising individuals and by extension communities out of poverty through the freedoms it bestows as well as the need for efficient utilization of resources that result from competition.
This market protects the various freedoms people enjoy, leads to better production processes to meet the needs of greater numbers of people, and lets people get voluntarily involved in economic activities with each other.
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