A free market is a type of economic system where the means of production are privately owned and the prices and distribution of goods are determined by supply and demand. Capitalism and free markets are intertwined, but capitalism refers more to the relationship between the employer and worker and the accumulation of individual wealth. Some of the main characteristics of capitalism include a price system, sometimes laissez-faire, competitive markets, and capital accumulation. The price mechanism is what determines price because it decides what goods and services are produced, the production methods, and product allocation. Laissez-faire is an important concept in capitalism because it is an environment where transactions are made without the regulation or interaction of the government.
The main ideas of capitalism are that capital is privately owned and labour is purchased for wages. Capitalism is the opposite of socialism because socialism entails social ownership of the means of production, and that goods and services are produced for their utility, not for capital accumulation.
This type of market system is also opposite to barter systems because money is the only measure of value and the only means of exchange. Decisions, in a market economy, are based on supply and demand and prices are determined in a free price system. However, a market economy is not the same as capitalism because although capitalism may function in markets, not all market systems are capitalist. What sets market economies apart from other economies is that investment decisions and the allocation of producer goods are determined within the market¹.
The United States is an example of an economy that is highly influenced by capitalism because of the competitive markets that exist and accumulation of capital for individuals. The public school system and other non-profit organizations that function within the United States show the non-capitalist processes that exist within the States¹.
The issue of ethics is tied to the topic of capitalism. Arguments against capitalism focus on labour exploitation, economic inequalities, monopolies, the division between the rich and poor. What many see as an advantage of capitalism is that the limited government invention provides individuals with the ability to decide how they want to spend their own money. Capitalism can also increase the growth of an economy and as well as production.
1. Paul M. Johnson (2005). "A Glossary of Political Economy Terms, Market Economy".