A free market economy is said to be free because market forces of demand and supply control it. There is little or no government intervention at all levels of the economy. Therefore, the equilibrium price of goods and service market is a mutually agreed price between the sellers and the buyers. The state doesn’t intervene by offering subsidies, imposing taxes or through any form of regulation. The free market is an ideal one that cannot exist in the real world. However, governments can deliberately reduce their influence in the market to shift from a command economy towards the free market economy. This paper describes ways that enable a state to make this move and borrows ideas from (Anand, 22).
The first requirement to make progress towards a free market economy is to ensure macro economy stabilization. The deregulated market faces a general increase in the price level as sellers seek to take advantage of the removal of price ceilings. The country will face declining real GDP that affects the government flow of revenue from taxes. To avoid this problem the government needs a macroeconomic strategy enacted by the central bank and government. The goal of the plan is to tame the erratic inflation and control aggregate demand. The stabilization will ensure that the economy operates at optimal level and unemployment. It is only the government that takes care of the macroeconomic issues. Self-interest motivates everyone else in the free market. Firms seek to get maximum returns on investment as households try to maximize their wages and salaries (Thoma, 1).
Government failure to stabilize the economy will prevent successful transition to free market economy because the country will experience a crisis like the sovereign debt default and crash of the stock market. Some of the stabilization policies include security reforms and overt legislation. These stabilization policies are responsible for the growth of the USA economy (Dunlop, 1).
The second requirement for moving towards free trade is the liberalization of commerce in a country. Liberalization of business operations reduces the levels of protective trading policies in the economy. The plan allows international trade to function effectively. In this case, the government minimizes restrictions on imports and exports. Relaxing restrictions on imports, such as tariffs and quotas results in an increase in competition in the domestic market and general fall in price and wages. If a country’s economy needs to thrive in the international market, the nation should adopt a credit policy that ensures availability of cheap capital for domestic investors. Further, to successfully liberalize market and maintain country’s competitiveness in international market the government should consider adopting a floating exchange rate (Mussa, 1). Finally, the government should take a restrained fiscal policy that can limit the danger of excessive budget deficit. The liberalization makes the country part of the internal trade, and the domestic industry can benefit by adopting the foreign advanced technology. The adoption of new technology decreases production cost, increases output and enables the country to sell output at a competitively low price.
The third requirement of moving towards free market is favoring privatization over the nationalization of firms. The move to privatize companies aims at improving general efficiency of the enterprises. Many state-owned resources are quite inefficient. This inefficiency occurs due to political interference that results in over staffing, poor quality goods, and lack of incentive to perform. The process of privatization makes the country to face the problem of the increase in unemployment in the short run. The Privatized firms will employ labor and factors of production at the market price, and this will make the cost of production fall. The output of the privatized companies also competes at same platform with multinational firms. Because competition is stiff, the privatized companies should adopt the most efficient production methods since the government will less likely legislate to give them exclusive access to the market. The private firms are free to organize the manufacturing process in a way that maximizes profit and sell the output at their market of choice. On the other hand, consumers purchase according to their needs to get the highest satisfaction from their budget (Thoma, 1).
The fourth requirement of moving towards free market economy is the deregulating price. The government should avoid imposing price floors and price ceilings in the service and commodity market. The prices of goods will increase if price caps change. In the short run, companies selling products without price limits will be motivated to increase production so as they enjoy high-profit margins. However, in the long-term, many entrepreneurs will be motivated to join the market. The new firms will increase competition and prices will fall. The increased competition will force businesses to raise efficiency so as to keep their market share by selling at a competitive price and export the extra output at a competitive international price. On the other hand, removing price floors will force firms to increase efficiency so as to break even. The scenario occurs because when the price levels are removed selling price falls as well as the contribution margin (Hubbard, 31).
The fifth requirement for the free market economy to operate successfully is social security. The government should put in place social security that cushions the public from the failures of the open market. The most common social security is retirement security. Many people suffer from moral hazards because they don’t like saving for their old age. They imagine that the society will offer them all they need after retirement. This wish is not realizable so the government should impose policies that require workers to contribute a given proportion of monthly income towards their retirement expenses.
The government needs to have some legislation that will ensure the free market thrives. These laws include restrictions on carbon emissions, controlling the labor markets, provision of information by financial institutions and controlling the economic and political power of large firms (Hubbard, 40).
In monitoring the carbon emission of enterprises, the government tries to solve externalities associated with privatization. The privately owned companies seek to increase production and returns. Excessive emission of carbon that harms the general public exhibits their selfishness. The emissions are not included as a cost of production so the government should make them pay to ensure the market price of their produce includes all the production costs. If the government fails to restrict the emission, many people in the society will suffer despite not enjoying the returns of the firms (Mittal, 33).
The other factor of ensuring sustainability of free market is interfering with the labor market. The employers have more bargaining power than the employees especially in the absence of unions. The government should offer some provisions on how employees should be compensated to avoid unnecessary industrial unrest and brain drain resulting from the exploitation of workers (Mittal, 16).
The provision of information to customers by the financial institution is crucial for a free market economy to operate because this sector faces information asymmetry. The government should provide policies that force financial institutions to provide information needed by investors to make quality financial decisions. Customers of financial institutions need knowledge on the financial health of all financial institutions to avoid runs on shadow banking systems. The primary information required regards bad assets in banks financial statements among other provisions. This information increases the confidence of customers in optimally functioning institutions. The efficient financial sector is critical to ensuring the security of customer’s savings and affordable credit to investors. Thus, the government should ensure that financial institutions are run professionally with a high level of transparency (Investopedia, 1).
Finally, the government should control the economic and political power of big businesses. These firms use their power to push the market away from the competitive free market. They prevent new businesses from joining their industry to avoid competition. The firms have monopolistic tendencies that restrict growth and diversification. In this situation, the government’s legislations are geared towards increasing competition, and this will lead to greater efficiency of the free market economy (Hubbard, 52).
Conclusion
It is possible for a country to transit to a free market economy. The transition requires the government to initiate the process by allowing, privatization, trade liberalization and avoiding price controls. The liberalization of commerce opens a country’s economy and allows companies to compete with multinationals in the international platform. These competition forces increase efficiency or risk closing down of the investments. Relaxing price control may allow industries to offer commodities at a price equal to the marginal cost while privatization gives room to managers to run firms without any political interference.
Works cited
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Hubbard, R. Glenn. Macro Economics. Frenchs Forest, N.S.W.: Pearson Prentice Hall, 2009. Print.
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Mittal, Abha. Macro Economics: For the Students of B.A and B.Com. New Delhi: S Chand, 2012. Print.
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Thoma, Mark. "7 Important Examples of How Markets Can Fail." The Fiscal Times. 18 June 2013. Web. 15
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