Difference Between Free Market and Capitalism | Definition and Characteristics

Main Difference – Free Market vs Capitalism

Capitalist system and free market system are economic environments where supply and demand are the main factors of price and production of goods and services. While the two economic systems, the Free Market and Capitalism, are based on the law of supply and demand, both systems have different characteristics. Capitalism is an economic system based on ownership of the factors of production and free market system is an economic system based especially on demand and supply. This is the main difference between free market and capitalism. The term “free market” is sometimes used as a synonym for laissez-faire capitalism. It is possible to have Capitalism without a free market and also possible to have a free market without capitalism.

Here, we will discuss,

1. What is Free Market? – Definition and Characteristics

2. What is Capitalism? – Definition and Characteristics

3. What is the difference between Free market and Capitalism?

What is Free Market

A free market is a system in which the prices of goods and services are determined by the buyers and sellers. It is solely based on demand and supply; in the free market system, there is little or no government intervention. In a free market system, buyers and sellers do their transactions freely according to the agreements based on the price of a good or a service. The supply and demand are not affected by laws or regulations of the government. Both buyers and sellers are agreed to the equilibrium price without government intervention.

What is Capitalism

Capitalism is an economic system based on the ownership of the factors of production. The competition between companies and owners is one of the key features in the capitalist economy system.  Private ownership, and motivation to generate a profit are another features of capitalism. In this type of system, production is privately owned. A wage is paid for the work of labors, and whole profit goes to the owners. A private owner in a capitalist system can have a monopoly on the market and prevent free competition.

Similarities Between Free Market and Capitalism

• Both markets depend on supply and demand in the market.

Difference Between Free Market and Capitalism

Definition

Free market is an economic system in which prices are determined by unrestricted competition between privately owned businesses.

Capitalism is an economic system in which a country’s trade and industry are controlled by private owners for profit, rather than by the state.

Focus

Free market is focused on the exchange of wealth, or goods and services.

Capitalism is focused on the creation of wealth and ownership of capital and factors of production.

Competition 

Capitalism can have a monopoly on the market and prevent free competition.

Free market leads to free competition in the economy.

Free Market vs Capitalism – Conclusion

Capitalism can be simply explained as ownership of factors of production by individuals such as labor, capital, and private property. Free market is an economic system where society does not actively restrict any trades. In other words, individuals are free to use their right to trade, provided as part of ownership. The common relation between capitalism and free markets is simply the right to trade.

A society can be capitalist and yet not have free markets; it can limit rights to trade for certain trades, but keep intact all other rights provided through ownership. A society can also have free markets and yet not be completely capitalist as they can extend the right to trade, without providing rights of ownership to individuals. The other rights may be extended to collections of individuals. In conclusion, a society can mix and match till they reach some mixture acceptable to the majority in the society.

Image Courtesy: 

“303434” (Public Domain) via Pixbay

“Graphic depiction of capitalism” by Rcragun – Own work (CC BY 3.0) via Commons Wikimedia