By Noriah Katungwe
For the past ten decades, the economic world has been engaged in a great intellectual debate over the control of economic decisions. One polar end are economists advocating for centralized state to control economic decisions. The other extreme are economists who advocate for economic system based on free markets, where economic decisions are left to the principles of demand and supply, the “invisible hand” as coined by Adam Smith. Most literature on this debate, have resolved that free market economies induce economic development evidenced from the newly developed countries like Singapore and Switzerland. Economic development is generally understood to mean an increase in national output that result in increase in average per capita gross national product. Although free market economy leads to employment creation, free trade and industrialization, critics of this system believe it leads to market failures and income equality which prolong poverty levels of majority of the people, and then calls for a state intervention. This essay is then of the views that, despite its critics, free market system produces sustainable economic growth than any other system.
Free market economy entails free movement of goods, services, people and capital (Lawson, 2014). In this economy, decisions on how, when and what to produce are made by unhindered interaction between buyers and sellers. The French translation of free market as given by Case and Fair (2012), is “laissez-faire” meaning “allow to do”. This implies that in a free market, people have the freedom to pursue economic objectives without regulation of the central government.
Free markets induce development firstly through efficient production of goods and services. The first advocates of free economies, like Adam Smith, J.S Mill and Friedman staged for deregulation, tax cuts and privatization of state owned companies (Lawson,2008). Managers in private companies are profit maximizers and efficient users of the available resources. Free markets are highly competitive which permit producers to supply high quality goods that are demanded on the market with no quantity constraints (Field, 1997). A nation characterized by profit and efficient driven companies is likely to develop as surpluses are either exported or re-invested.
Free markets also hasten economic development through promotion of industrialization (Zupan, 2010). Privatization and reduced industrial licensing increases incentives of opening more industries. Emergence of more manufacturing industries increases the national growth which spillover to other sectors like employment and education. Gwartney and Lawson (1996) add that in industrialized nations people are liberated from dependency on government for subsidies and give in their best efforts to meet their needs.
Free markets encourage marketing and trade which are vital for a sustainable economic growth (Ifezue, 2005). In a competitive trade world, there is effective marketing between the producers and consumers. Producers are able to diversify and use comparative advantage suitable for their available resources. Free economy encourages free trade with reduced tariffs and tax bases which stimulates international investment and financial services. Open trade acts as a source of strength to trading countries in a globalized world amenable to changes. Most industrialized countries are involved in trade agreements, for instance European Union which promotes free trade through flow of information and removal of tariffs and quotas.
Despite the above pros, Lawson (2014) notes that some scholars like Karl Max opted for controlled economy arguing that free markets lead to market failures, income inequality and environmental degradation. Max argues that in free market, economy is controlled by few elites who own companies and monopolize some industries. Such industries lead to unemployment as they consider machine power more efficient than human labour increasing the gap between the business mongers and the poor. In response Zupan (2010) points that such happens as a result of unwillingness and risk averse behaviour of people to venture into their own business. Market failures and externalities emerge through uncontrollable use of resources and failure to provide merit goods (Field,1997. Facing such critic, free market has been revised to include private legal system to enforce and manage property rights. Free market system within itself has innovations which work towards provision of solutions like environmental friendly technologies, aid and donations and private provision of public goods.
In a nutshell, following above arguments, free markets have proved to be the best source of economic development. Such development arises from production efficiency, industrialization and free trade. Consistent legal system, property rights will lead to a successful free market economy with sustainable growth