As economists have observed for years, countries that don’t have “market economies” tend to have severe economic and social problems, but outside of textbooks, and even inside them, there’s a problem defining exactly what a market economy is. The traditional economist’s definition of a “free market economy” is one where a willing buyer and a willing seller agree on the price of a good, the idea being that government stays out of setting the terms of the transaction.
There are at least two catches to this definition. First, the term “willing” is usually constrained by reality. So if the only food market in town charges 50% more than the market in the next town, and you don’t have transportation and don’t want to starve, you may pay the prices, but how “willing” are you? In practice, of course, except in times of disasters, the various price differentials aren’t that great, but they do exist.
The second catch lies on the seller’s side. In practice, a seller of a good has to price a good at a level that covers his cost of production or acquisition, as well as his costs of selling it, with enough of a profit to support himself or his business. What has been historically overlooked to a great degree, if less so today, is that many of the costs of production have historically been foisted off on others and not included in the final cost of the good or service. The most notable example of this is air, land, and water pollution, and the costs of cleaning up after industry have become so great that most industrial countries impose regulations on the producers of goods limiting or prohibiting the creation and emission of pollutants. Industry, of course, has historically protested that such regulations stifle a “free market.” That’s not quite accurate. What such regulations do is to give a cost-of-production advantage to those producers who make their products in places with less costly regulations, which is why many multinationals have off-shored their production facilities. What gets overlooked in this “economic” debate are the costs of clean-up and the added costs of health care incurred by those living around highly polluting facilities.
All of this leads to the proposition that a “true” or a “full” market economy is only possible if ALL costs of production are factored into the price of a good or service. Obviously, this isn’t possible, certainly not at present in a world of over 200 nations with differing environmental and other regulations, but it should be used as a standard against which economies should be measured as to the degree of their compliance with market principles.
The idea of the so-called “free market economy” has come to mean in practice the amount of freedom a producer has to foist off costs on the rest of society. The amount of such freedom a producer has is largely determined by two factors – the regulatory structure, or lack thereof, in which it operates, and the amount of financial resources, i.e., capital, it has, which affects its power to influence regulatory oversight. If people who work for a producer or seller of goods cannot live on what they are paid – and that includes not only food and shelter, but medical care and other necessities – and society deems that those workers and their families need assistance to live, in effect the producer has shifted some of his costs to society as a whole, and everyone is taxed to pay for that assistance.
So, in point of fact, goods producers who complain that government regulations hamper the “free market” because those regulations force them to clean up their toxic or unhealthful emissions or by-products or require a living wage are complaining that they’re not as free to impose costs on society as producers in other states or countries are.
And that’s why there is a difference between a “free market” [or capitalistic market] economy and a true market economy.