Voluntary exchange occurs when sellers and buyers engage in trade operations or in employment relationships willingly and freely and when both expect to benefit from the transaction. This assumption serves as the basis for the market economy as it explains the free choices that consumers make basing on their interests.
Explanation:
People regularly engage in economic activity, making decisions about what products or services they should buy. The examples that explain what voluntary exchange is can be found in everyday life. If you need a smartphone or any other device, you generally start with searching for the information about the available models. You compare different features and prices and finally choose a product that you think suits you best. Your choice is motivated by the idea that the benefits this specific phone gives you overweight the money that should be paid for it.
I this case, you are willing to pay the necessary sum and consider your purchase as gain, not a loss. The seller who has bought the given smartphone for 85% of the price you pay gets a 15% profit and also thinks that he or she is benefiting from the transaction. Your interaction with the seller of the phone is the example of voluntary exchange that takes place during market transactions.
Free markets have existed ever since the first acts of trade took place, and occurred naturally as the results of free will. Even without money people could trade one products for others or offer their labor for the material revenue. Although the definition of voluntary exchange in economics was first theorized by neoclassical economists, the term has no single author as the concept had existed for thousands of years before.
Mainstream economics supports voluntary exchange theory as a fundamental and efficient force driving the the free market. The importance of voluntary exchange lies in its natural origin that occurred organically from the desire of each participant to follow their interest. Such relationships and choices promote economic progress by enhancing economic freedom and fair competition.
Although voluntary exchange is a natural process it can be artificially restricted, so free market is the necessary condition for it to take place. Thus, voluntary exchange happens only in a market economy which is based on the principles that both participants of any interaction get mutual benefit from it. The exchange in this type of economy happens not because of governmental edicts but due to the free and willing choice of a seller and a buyer. Voluntary exchange definition plays a crucial role in understanding the market economy. It explains how economic decisions are made and how they affect the prices.
Despite its natural origin and mutual benefits that the parties get, voluntary exchange, along with the market economy, has always caused the debate and hostility. The opposition to the free market advocates centralized economic planning and extensive governmental interference in the interactions. Many economists, such as Karl Marx, argue that Capitalism, which is based on the free market theory, leads to economic inequality, monopolies, and labor exploitation.
The twentieth century has seen the popularity of such ideas, and many countries switched to increased state control over the economy. However, with the fall of fascism and communism around the world, the majority of them turned to the free market. Today, except for several countries, it can be said that the advocates for the free market have won.