In a free market, the absence of physical force, compulsion, or coercion enables the price system to equilibrate supply and demand.  The price system relies solely on the concept of voluntary exchange: that buyers and sellers only participate in trade if each believes they benefit from doing so.  Prices, then, are the result of negotiations which establish mutual benefit.  Historically, the availability of supply and the degree of demand has driven negotiations in predictable ways.  Increased demand or reduced supply tends to increase cost, while reduced demand or increased supply tends to decrease cost.  In this way, prices in a free market force the system to equilibrium.

Price is important not only in establishing mutual benefit, but in transmitting information between producers and consumers. Products in low supply are more profitable to produce as a result of their high selling price, encouraging new producers to enter the market and existing producers to increase supply until the prices drop back down to match demand.  Likewise, the rising price of products in high demand provides negative feedback to sellers as sales drop off in response to excessive prices.  The same is true in reverse: products in high supply or low demand will experience a drop in selling price, transmitting the information to manufactures to curb or slow production.   Products in both high supply and low demand, such as candy the day after Halloween, experience a sharp drop in price and production until the existing product is cleared.  While products in short supply and high demand, such as ammunition during a war, experience a sharp increase in price and production until the system is once again in equilibrium.

Thus, prices communicate critical information between supply and demand.

It is important to note that supply and demand are not separate concepts as much as they are two sides of the same coin; for supply and demand are merely matters of perspective.  The grower of apples is typically considered the supplier because the majority of persons are consumers--and view the farmer as a supplier of their apples.  Yet the consumer often fails to realize that he himself is a supplier--of income--from the perspective of the farmer.

Prices then, are directly analogous to wages.  Where prices communicate the supply and demand for products and commodities, wages communicate the supply and demand for services or labor.  The above trends and relationships described for prices also hold for wages: if a laborer possesses a rare and useful skill, he will be able to command a high price for the service he provides―and others will eagerly seek training to obtain such skills--until the skill becomes commonplace.  As prices rise or fall across differing sectors in the marketplace, producers use this information to expand or contract supply.  Often, this corresponds to an expansion or contraction in the workforce; with incentives (high wages or benefits) being provided in times of rapid expansion and layoffs or salary cuts during times of rapid contraction.

Therefore, both prices and wages communicate critical information between supply and demand.  Prices and wages naturally drive supply and demand to a state of equilibrium where one perfectly balances the other.  The farther away one drifts from the other, the larger the force pushing it back to center.  The result is a natural stability in supply and demand, and a built-in protection against shortages or excesses.

What is the danger of regulation?

Perhaps the greatest potential for harm stems from the disconnect price and wage controls enforce on supply and demand.  When a price or wage is set to a static value or otherwise bounded at either the minimum or maximum, supply and demand are no longer allowed to communicate.  Producers no longer receive reliable information on what products to manufacture, or in what quantity.  Consumers, too, have a limited ability to communicate demand, or to provide the necessary incentives to mobilize production.  Price controls remove the built-in protection against shortages and excesses; and history can testify to the level of hardship experienced in the absence of such protection.

During the great depression, under the duress of severe food shortages and widespread famine, a method of price controls was implemented which sought to raise the price of crops―in order to help the livelihood of the farmers.  This plan, outlined in The Agricultural Adjustment Act of 1933, stipulated that prices were to be artificially raised above natural market values by reducing the supply.  This was done by destroying over 10 million acres of crops, slaughtering more than 6 million pigs, and leaving fruit to rot in the fields.  Rather than increasing supply, as a high demand would suggest, The Agricultural Adjustment Act of 1933 forcefully reduced supply, pushing the market even further away from equilibrium.  The result, of course, was even more widespread famine.

On the labor side, minimum wage laws have also been enacted which artificially set the price of wages higher than their natural market level.  At first glance, this seems positive, as the lowest paid workers will receive higher wages.  The reality, unfortunately, is much different.  Wages naturally rise in response to expansion of production, which is trigged by increased demand.  Minimum wage laws set the price of labor above natural market levels, in effect; they attempt to create demand out of thin air.

Manufacturers recognize this, and thus do not increase production―rather, two things happen:  First, they raise the prices of their goods, or suffer smaller a margin of profit which increases the risk of bankruptcy.  On average, an increased risk of bankruptcy reduces the availability (supply) of goods. Either way, the result is higher prices for everyone in the community, including the low-wage workers.  Second, as the price of labor has been artificially raised above natural levels, this presents a very difficult situation for workers with the lowest level of skill or education--often workers in the poorest or most dire situations.

Previously, the poorest workers had been paid with respect to their level of output, say $5 an hour.  But with minimum wage at, say $8 an hour, if they do not possess the skills to output labor at this higher price, they will be the first to lose their jobs―being replaced by higher skilled or better educated workers whose labor is worth $8 an hour.  Thus, the poorest individuals have gone from a meager, but respectable $5 an hour to unemployment and $0 an hour.

Before, low-skilled workers were free to work their way up to a salary of $8 an hour by receiving on-the-job training and work experience.  Under a system with minimum wage laws, they no longer have that option.  Instead of supporting themselves while gaining skills and education, they are forbidden from working altogether at their current skill level of $5 an hour.  With no income to pay for the necessary training or education, they are left out in the cold.  What started as a piece of legislation designed to help the poorest workers, has achieved the very opposite.  It has, in effect, stripped the people in the poorest and most dire situations of the right to exchange their labor for food and water--it has stripped them of their right to life, and forced upon them the life of a beggar.

In the following sections, analysis will be conducted in adherence to a single principle: a proper study of economics considers not only the immediate consequences of an economic policy, but of its long term, direct and indirect effects; not only on its intended groups, but on all groups, and the community as a whole.

Nowhere is this principle better illustrated than in the wildly persistent economic fallacy: the parable of the broken window; first described by Frédéric Bastiat in his 1850 essay, "That Which is Seen and That Which is Unseen":

"Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—'It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?'"

This fallacy, the idea that destruction is an economic stimulus permeates nearly every system of economic thought, and it results from the forsaking of unseen consequence.  At first glance it appears as though the crowd is on to something—if it wasn't for the broken glass, no business would have been created for the glazier.

What is hidden, however, is the shopkeeper whose business the glazier replaces.  If the glazier repairs the window for $100, James Goodfellow has lost $100 that he could have spent on another item, say a new suit.  While the glazier gains $100 in business in replacing the window, the tailor who would have created the new suit loses $100 in business.  Destruction has merely changed the destination of money; it has exchanged a window (which already existed) for a suit (which would have to be created).  Thus, rather than a window and a new suit, James Goodfellow has only a window—a window he had before the glass was broken.  The result is that the community as a whole is poorer by exactly one $100 suit.

It is through this process of uncovering the unseen, the process of tracing through secondary and tertiary effects which brings the full consequence of economy policy into the light of day.

In order to describe a market, both the participants and goods available for exchange must be defined.  These two definitions form the scope of a market.  In this manner, the environment of trade can be partitioned or subdivided by utilizing subsets of the total possible participants and goods, services, or information. 

The most common partitioning scheme is the subdivision of markets by country, as national law establishes a clear distinction between various subsets of participants and goods.   In such an example, the components number in the millions and the sheer magnitude of variables and interactions appears almost impossible to analyze.   However, this is only an abstraction.  The market could have been partitioned in any number of ways―either by expanding the scope to a global, galaxial, or universal markets, or by further restricting the scope to states, cities, and localities. Likewise, the scope of the market can be defined to include only certain subset of goods, services, or information.  Continuing in this vein, one arrives at the most basic market―the action of trade between a single buyer and a single seller exchanging a single item.

Thus, to answer the question of whether free markets exist, the proper scope need be attributed to the analysis.  By separating the environment of trade into its constituent parts, it is possible to find examples of free markets at various levels of abstraction.

For the simplest market, a single buyer and a single seller exchanging a single commodity, an example would be a teenager's weekly allowance in exchange for mowing the lawn.  For a local market, an example would be a neighborhood garage sale.  In both cases, all parties voluntary exchange goods or services in the absence of coercion or physical force, even if the parent is persuasive or the neighbor a convincing salesperson.  At the national level, citizens of a country are free to trade paper currency for hard currency and vice versa.  At the global level, language is arguable the most sucessfuly free market in human history: citizens of the world are free to voluntarily exchange information, ideas, alphabets, and the definitions of words which form language itself.

Furthermore, as the environment of trade is the sum action of its the individiuals and goods which participate in trade, each exchange forms a sort of sub-market in and of itself.   Any such sub-markets which exist in the absence of  physical force, compulsion, or coercion can properly be labeled a free market.  Despite complicated (and often regulated) supply chains, as all transactions ultimately end at an individual consumer, the majority of worldwide exchange takes place in such sub-markets.  

Thus, free markets not only exist, they are prevalent in modern economies. 

The right to trade with other individuals in the absence of physical force, compulsion, or coercion is based on the concept of individual rights, specifically "the right to life".

The "right to life" is derived from the law of identity: X is X. In other words, a living being is a living being. Living beings exist only as long as they remain alive, or have life. As such, living beings must constantly sustain their own life through self-generated action.

A "right" is a moral principle defining and sanctioning an individual's freedom of action in a social context.  Social interaction exists only through living beings.  As such, social interaction is possible if and only if living beings have the freedom to engage in self-sustained, self-generated action.  This right, the freedom to engage in self-sustained, self-generated action, exists only for individuals in a social context--and is what I term "the right to life."

Thus, "the right to life" is the most fundamental right of an individual.  In a social context, freedom of action is violated only by means of physical compulsion, coercion or interference by other men.  So, for every individual, "the right to life" specifies the freedom to think and act, to pursue one's own ends through voluntary, uncoerced action.  To pursue the property which enables one to sustain their life, and the happiness which makes life worthwhile.  Consequently, an individual's "right to life" imposes no restrictions or obligations on the actions of other individuals, only to abstain from violating their "right to life."

Many corollaries stem from an individual's right to life, one of which is "the right to property."  Living beings, in a social context, possess the freedom to sustain their own life.  Life is sustained, through self-generated action, by obtaining and consuming objects such as food and water, or by producing and utilizing objects such as clothing and shelter. The freedom of action to consume, utilize, or dispense of objects requires ownership.  Property consists of the objects under one's ownership.  Thus, individuals with "the right to life" must also have the freedom of action to consume, utilize, or dispense of objects under their possession--that is, they must have "the right to property."

A free market is the consequence of individuals exercising their "right to property" by voluntarily exchanging (dispensing of) objects under their possession.  Individuals are motivated to engage in voluntary trade and cooperation because each believes they gain the ability to better sustain their life in comparison to the alternative.  This simple fact assures that trade will occur if and only if all parties perceive a benefit from the terms of exchange.  For instance, if a baker desires meat to supplement his bread and a butcher desires bread to supplement his meat, each is free to exchange one for the other, or to use an intermediate currency.  The baker likely has neither the time nor money to butcher meat, so he benefits from baking a little extra bread to obtain the meat he desires, and vice versa.

In the absence of third party interference, individuals are free to abstain from trade just as they are free to engage in it.  Thus, trade will persist only as long as both parties perceive a benefit.   If the butcher demands too much in exchange for his meat, or the baker too much in exchange for his bread--neither has any recourse to force the exchange.  Each will suffer from a reduced availability of goods until the terms once again become mutually beneficial.

In conclusion, the philosophical basis for a free market is individual rights--not any perceived economic benefit.  Any economic benefits which result from the restriction of physical force or coercion in the trade between individuals should be regarded as secondary.

A market is an environment in which the action of trade between a buyer (consumer) and seller (producer) occurs.  Trade is the exchange of goods, services, or ideas, and in modern times is often executed via an intermediate store of value such as currency.

A free market is an environment, absent of physical force, compulsion, or coercion, in which the action of trade between a buyer (consumer) and seller (producer) occurs.  Such force is often applied in subtle ways, but results in interference in the terms of trade. The source of such interference is the action of other individuals--typically other buyers, sellers or governmental officials--including those participating in the trade.  Thus, trade in a free market is strictly voluntary, and occurs only as mutual cooperation amongst individuals.

Note that the restriction of force in the definition of a free market does not establish the legality of such action, nor does it set into law any terms of enforcement.  This is the province of law and is established independently through political systems of governing.  Coercion and physical force can take many forms: assault, murder, theft, fraud, or vandalism—but the legality of such actions is enforced by a system of law, not a system of economics.

This single distinction--the restriction on the use of physical force, compulsion, or coercion--forms the only fundamental difference between a market, and a free market.