Difference Between Capitalism and Free market
Capitalism vs Free market
In simple terms, Capitalism is defined as an economic environment comprising basically of two sets of people, owners and workers. An essential feature of this kind of economic system is private ownership. The owner has full control of the means of production and profits are due to him. Production is determined by the free market, as well as the prices for goods and services, plus distribution.
A free market is one that is not regulated by government, but rather driven by demand and supply. The free market theory contends that an ideal free market is where entities are exchanged voluntarily after a seller and buyer mutually agree on a price, without any intervention from external influences.
Capitalism and Free market economy are somewhat entwined as one is an integral part of the other. However, in their true definitions they differ .While capitalism refers more to the production of wealth, the term free market dwells more on the exchange of wealth in various methods. Capital is an essential basic element for both capitalism and free market economies. However, free competition is not an essential element of capitalism but of ‘free markets’. This is because in capitalism, capital owners have a lot of dominance over the means of production and as such may yield unfair influence.
It is basic knowledge that land, labor and capital were largely considered to be the classic elements of production but with the growth of the industrial age, the importance of capital became a big determining factor in production because industrial capital gave increased productivity. It was thus feared that inevitably, capital owners would become so powerful that they would be able to profit from the unfair exchange terms they impose.
Free markets do not define capitalism, although they are an essential part of it. Because there’s minimal or no influence at all in a free market economy, capital is employed to optimal use. Whereas in capitalism, the free market will determine the price. The concentration of capital and means of production in a handful of individuals or companies distorts the supply side of the free market model.
Free market is mainly concerned with wealth exchange while capitalism leans more on wealth creation.
Free markets are a key component of capitalism although they do not fully define what capitalism is.
A free market is driven by ‘demand and supply’ leading to free competition without interference while in capitalism, capital owners can at times influence the terms of trade.
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