What is a Free Market?

What Is a
Free Market Anyway?

You’ve
probably heard the term “free market” tossed around a lot—on the news, in
political debates, and maybe even at the kitchen table. But what does it
actually mean? And why does it matter when we talk about prices, inflation, and
the economy?

Let’s start
with the basics.

A Free
Market Is About Choice

At its core,
a free market is a system where prices are determined by voluntary interactions
between buyers and sellers. You decide what to spend your money on, and
businesses compete to earn it. The government’s role is limited—mainly to
enforcing contracts, protecting property rights, and ensuring transparency and
fairness.

In a truly
free market, success is earned by offering better quality, better service, or
better prices—not by political connections or government subsidies. Businesses
that can’t compete eventually go away, and new, innovative ones take their
place. That’s how capitalism renews itself and drives progress.

Prices
Are Signals

In a free
market, prices serve as signals. If something is scarce or in high demand,
prices go up. That motivates businesses to make more of it—or for customers to
find alternatives. It’s not a perfect system, but it’s remarkably efficient
over time.

What
disrupts this balance? Policies that distort prices—like printing too much
money, handing out subsidies without strings attached, or placing unnecessary
regulations on production and labor.

Inflation
Isn’t a Free Market Problem

Over the
last few years, many Americans have felt the pain of rising costs—at the
grocery store, at the gas pump, and in housing. It’s tempting to point fingers
at “corporate greed” or capitalism itself, but the truth is more nuanced.

Some
inflation was expected after COVID-19 shutdowns, but policy decisions made it
worse. Massive government spending—like the American Rescue Plan and the
Inflation Reduction Act—pumped trillions of dollars into the economy, adding
demand at a time when supply chains were already under strain.

On top of
that, ongoing student loan forgiveness programs and extended payment freezes
increased the amount of disposable income circulating in the economy. While
these moves may have provided short-term relief for borrowers, they also added
more fuel to the inflation fire—essentially injecting more money into the
system without a corresponding increase in productivity. When more dollars
chase the same (or fewer) goods, prices naturally rise.

At the same
time, added regulations, energy restrictions, and labor market disincentives
have made it more expensive and difficult for businesses to produce and deliver
what we all need. In other words, we’re not seeing runaway prices because the
market failed—we’re seeing them because the market has been restrained.

Capitalism
Needs Guardrails, Not Handcuffs

That doesn’t
mean we shouldn’t have any rules. We need guardrails to keep things fair and
honest. But there’s a difference between smart oversight and overreach.

When the
government tries to play a larger role in picking winners and losers—whether
it’s through subsidies, price controls, or burdensome regulation—it creates
unintended consequences. The market becomes less dynamic, innovation slows, and
consumers end up paying more in the long run.

Final
Thoughts

Understanding
how the free market works helps you become a more informed consumer and
investor. If you’re concerned about inflation or how policy changes might
affect your financial plan, now’s a smart time to talk. I meet with clients
regularly to help them adapt, reduce taxes, and stay on course.

If you’d
like to review your own strategy, let’s connect.

Kent Pendleton, AAMS®

Financial Advisor, RJFS

Pendle Hill Advisors LLC

14375 Liberty St, Ste 109 | Montgomery, TX 77356

T 936-297-8267

Kent.Pendleton@raymondjames.com | www.raymondjames.com/pendlehilladvisors

Securities offered through
Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory
services are offered through Raymond James Financial Services Advisors, Inc.
Pendle Hill Advisors is not registered broker dealers and is independent of
Raymond James Financial Services.

Opinions expressed in the attached article are those of the
author/speaker and are not necessarily those of Raymond James. All opinions are
as of this date and are subject to change without notice. Every investor’s
situation is unique and you should consider your investment goals, risk
tolerance and time horizon before making any investment. The forgoing is not a
recommendation to buy or sell any individual asset or security. The information
contained in this report does not purport to be a complete description of the
markets or developments referred to in this material.