In America we throw a lot of economic terms around when describing how our economy works. One of the most used, and I believe one of the most overused, terms is "Free Market". The term is used most often in news reports that try to draw a distinction between the US economy and that of other countries. It is also used in politics as a way to refer to the perception of American exceptionalism and our status as being the largest single country economy in the world. Think news reports that set American free markets against European socialism or Chinese communism where everyone on the news looks serious and nods their heads like they have any idea what they are talking about. Unfortunately, as the laws and regulations in our country have increased over the years, this distinction is becoming more and more muddied when you look at how we actually run our economy and the way the rest of the world runs theirs.
First thing that needs to be addressed is what is meant by the term "Free Market". A free market is one that is run without governmental interference. It is one that is literally free to do what it wants without external restraint. The power of the free market is that prices are set by the market. This means that the aggregate of all people's purchasing and selling decisions dovetails to an equilibrium between consumers' demand for a product and sellers' demand to make as money as they can. This is distinct from a regulated or controlled market where the government interferes with regulations to create a new equilibrium that it believes is more advantageous to its interests.
The advantages of free markets are that the use the power of people's consumer decisions to keep prices low and supplies of goods and services plentiful. Their negatives are that goods and services are not regulated and business practices that create them may not be the most socially responsible means available. Price is the prime mover here so it is the first and primary concern of both the consumer and the producer. Compare this to a regulated market where government intervenes to regulate safety, social responsibility and other relevant areas. The negative repercussions of this intervention in the market are higher prices and a less than plentiful supply of goods and services.
Given these above definitions, it should be pretty clear that our economy is not in fact a "Free Market" but is instead a regulated or controlled market. But how, you ask (assuming you have a Fox News mentality), may we distinguish ourselves from those Socialists in Europe or Communists in China? The answer is that we probably can't. First, because we regulate markets just as much as Europeans do, with the possible exception of the healthcare market. And secondly, because while China does in fact have a Communist Party, it has been deregulating its economy and loosening its control of markets for years to more fully integrate with Western economies. The end result of this has been unprecedented growth and economic expansion in China while we in the West have seen tepid growth and shrinking economic opportunities.
If you need further proof, try to come up with some market in the USA that is untouched by government intervention, regulation or taxing and spending incentives. I'm reasonably certain you will be unable to find one. The difference then between ourselves and the rest of the world is, at best, the degree to which we interfere with the natural functioning of market economies.
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