Both capitalism and the free market are interrelated concepts and actual structures that have directed the economic systems of most modern economies around the world. These two have also received commendations and criticisms due to their positive and negative impacts. However, although both often appear in tandem, there are stark conceptual and practical differences between the two.
Explaining Capitalism vs The Free Market: What is the Difference
There are some similarities between capitalism and the free market. Both are based on the principle of voluntary exchange in which economic transactions between parties or economic actors are made through mutual agreement and for mutual benefit in the absence of force or coercion. Profits are the main driving force behind the participation in these transactions. However, because participation in economic transactions can bring profits, competition influences how economic actors approach each transaction and how profits can be earned. These are the shared principles of capitalism and the free market. The following are the differences:
Scope
Capitalism is generally an economic system. The free market is an economic environment. The private ownership of the means of production by individuals or businesses is the central tenet of capitalism. The central tenet of the free market is that supply and demand determine the prices of products or goods and services without significant government intervention.
Furthermore, because capitalism is an economic system, it provides the structure for shaping and encouraging economic activity. This means that private individuals or businesses utilize the means of production like real properties, machinery, or intellectual properties for productive use with the ultimate goal of earning profits and accumulating capital.
A free market is not a standalone concept. It is an economic environment that only exists within a particular economic system. A free market economic environment specifically focuses on how the resulting outputs or products of economic activity or productive pursuits are priced based on the forces of supply and demand as expressed by producers and consumers.
The aforementioned are the traditional definitions of capitalism and free market based on the traditional understanding of economic systems. Modern economic systems are founded on two domains. These are the ownership structure or property regime, in which capitalism falls, and the resource allocation mechanism, in which the free market falls.
Existence
Both capitalism and the free market often appear in tandem. However, in a lot of cases, capitalism exists without a completely free market. It is important to note that many capitalist economies operate as mixed economies in which the government regulates the market to a certain extent. Examples include the economies of the United States, the European Union, and China.
A free market could theoretically exist outside a capitalist economic system. However, because capitalism protects private ownership and promotes profit incentives, it provides a more realistic and effective economic system for the free market to exist and thrive. There are still several theoretical systems and ownership frameworks that can support a free market.
Theoretical systems like libertarian socialism could allow the operation of a free market in which goods and services could be exchanged based on supply and demand despite the fact that the means of production would be collectively owned. Small communities that depend on barter systems also demonstrate voluntary exchange of products based on supply and demand.
Early proponents of socialists like Pierre-Joseph Proudhon and Benjamin Tucker also argued that a true free market cannot exist in capitalism because capitalistic ideologies are exploitative. They proposed that a free market economic environment can best exist in worker cooperative ownership structures like a mutualist system or unregulated state-owned enterprises.
Difference Between Capitalism and The Free Market in a Nutshell
Capitalism is one of the three major types of a traditional economic system alongside socialism or and mixed economy. It is based on the private ownership of the factors or means of production and the use of these means of production to generate profits. This means that it is also an ownership structure or property rights regime that runs in direct contrast with socialism. Capitalism is also considered an economic ideology that promotes and protects private ownership and the right of individuals to keep profits and accumulate capital.
A free market is generally not considered a complete economic system on its own. It is more of a mechanism or economic environment within which the allocation of resources takes place. Free market specifically describes an environment in which economic decisions are made primarily by buyers and sellers or producers and consumers in the absence of government intervention. These decisions include investment, production, and distribution which are guided by price signals created by the forces of supply and demand.
However, in a more practical sense, and in consideration of the extent of what an economic system means in modern usage, capitalism and free market fall under two different domains. Economic systems are commonly segmented by ownership structure or property regime and resource allocation mechanism. Capitalism falls under the property regime domain while the free market falls under the resource allocation mechanism domain. A modern economic system is thereby defined by its property regime and resource allocation mechanism.