The meaning of the term "free market" is very different from laissez-faire capitalism, which is what politicians usually mean when they talk about "free markets". As I understand it, a market is the sum of sales/purchases of a given type of product or service, and a market is free if the market price is completely defined by the laws of supply and demand. In order to accomplish this, several conditions must be met:

  • there must be enough buyers and sellers that no single buyer or seller can influence the market price
  • competition must be based purely on price
  • everyone must know all of the prices (i.e. what everyone's asking and paying)
  • there must not be any barriers to entering or leaving the market
  • transaction costs (i.e. fees for buying and selling) must be zero

Free markets should also be as efficient as possible. In labor markets, this should lead to full employment*. In the real world, there are two big problems preventing markets from achieving efficient outcomes. First, some markets either can't or shouldn't meet the above conditions for one reason or another (eg shipping companies, VLSI chip production, fighter jet production, hospitals, etc.).

Second, companies actively look for ways to break the free market. In fact, this pretty much defines the American way of doing business. Just look at sex in advertising, product differentiation, intellectual property law, mortgage broker fees, firms that are too big to fail, unpublished bargains, cellphone contracts, brand promotion, fees for closing bank accounts, software bundling, embrace and extend, etc.

One might ask (as at least one person has) why one should discuss free markets if they're too ideal to describe much of the real world. I think there are two good answers for this. The first is that term "free market" is constantly misused in political discourse. If more people realized what that term meant, they might be more inclined to challenge what politicians say about them. However, another good reason to discuss free markets is to provoke a discussion about how one might create free and nearly free markets, whether one might wish to do so and what it might require.

* Note: My link to the Wikipedia page on the Keynesian Revolution distinguishes Keynesian's ideas from the neoclassical theory of employment by its position on government intervention, which I'm (conveniently) avoiding.