An approach to politico-economics in which prices are set by the actors in the market place is called a market system. According to theory, when the demand for a product rises, the price will rise. When the price gets high enough, more manufacturers will make the product, and the competition will cause prices to fall.
The market system can be offset by the presence of monopolies and monopsonies. A monopoly occurs when there is only one manufacturer of a product, although there is ample demand for more, so the manufacturer can set the prices of his product arbitrarily high. A monopsony is similar to a monopoly, but prices are set by a single buyer.
Monopolies discourage competition and product advancement. A monopoly-holding manufacturer can set prices high enough that it would be detrimental for new start-ups to enter the market. Product advancement suffers because if only one type of product is available and consumers are willing to pay for it, the manufacturer will probably not invest time and money into producing a better product.
A completely free market system will eventually cease to progress because the financial power will concentrate in the hands of monopolies and monopsonies. Financial power translates almost directly to political power. The nature of political power is that it will be used to maintain the financial power that funds the politicians.
One common misconception is that a capitalist economy is the same as a completely free market system. In a capitalist economy capital can be acquired and stored, then used to create new business. Without a monetary system, there is no way to store capital, hence no capital available to create a new business. In a pure free market system, new business will usually be put out of business by monopolies. To make a capitalist economy work well, policy makers must assure that they create a competitive environment, allowing for change.
An economy that has all prices set by a central authority is guaranteed to under-perform in a competitive economy. Planners in a centrally planned economy can find all sorts of reasons why a manufacturer should not be inconvenienced, and they will see to it that no one ever invents a product that would replace a similar product by denying funds or permits to anyone who would start such a business.
The largest economies at the beginning of the 21st century were all a marriage of a market system and regulation. Since the industrial revolution, the regulation that seems to work is that which increases competition and that which decreases the possibility of fraud. Fraud, if generalized, quickly becomes counter-productive. If a consumer has to spend hours researching a company and its products to discover whether he can reasonably expect to get what he is paying for, time is taken from him that he could have used to do something productive. On a global scale, it is easy to see how expensive it is for governments to allow a buyer beware attitude to exist in business.
