Market economy

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A market economy or free market economy is an economic system in which the production and distribution of goods and services take place through the mechanism of free markets guided by a free price system.[1][2] In a market economy, businesses and consumers decide of their own volition what they will purchase and produce, and in which decisions about the allocation of those resources are without government intervention.[3] In theory this means that the producer gets to decide what to produce, how much to produce, what to charge customers for those goods, what to pay employees, etc., and not the government. These decisions in a market economy are influenced by the pressures of competition, supply and demand. This is often contrasted with a planned economy, in which a central government decides what will be produced and in what quantities.[4] Market economy is also contrasted with mixed economy where there are market operations though the markets system is not entirely free but under some government control that is not extensive enough to constitute a planned economy. In the real world, there is no nation that has a pure market economy.[5]

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[edit] Examples of market economic varieties

Although no country has ever had within its border an economy in which all markets were absolutely free, the term typically is not used in an absolute sense. Many states which are said to have a market economy have a high level of market freedom, even if it is less than some parts of the population would prefer. Thus, almost all economies in the world today are mixed economies which varying degrees of free market and command economy traits. For example, in the United States there are more market economy traits than in Western European countries.[6]

[edit] Free market heritage in Islam

Qur'an which strongly defends the market economy. The endorsement of voluntary trade is a keystone of the Qur'an's attitude towards economic life, and is proclaimed in this early passage:

O ye who believe!

Eat not up your property

Amongst yourselves in vanities.

But let there be amongst you

Traffic and trade

By mutual consent (Qur'an, 4:29)

The Qur'an defends, amongst other things, private property, contract law, and profit through trade. It prohibits fraud. Muhammad himself prohibited price-fixing.

[edit] Capitalism

Capitalism generally refers to an economic system in which the means of production are all or mostly privately owned and operated for profit, and in which investments, distribution, income, production and pricing of goods and services are determined through the operation of a market economy. It is usually considered to involve the right of individuals and groups of individuals acting as "legal persons" or corporations to trade capital goods, labor, land and money. Capitalism has been dominant in the Western world since the end of feudalism, but some feel that the term "mixed economies" more precisely describes most contemporary economies, due to their containing both private-owned and state-owned enterprises, combining elements of capitalism and socialism, or mixing the characteristics of market economies and planned economies.

[edit] Laissez-faire

Laissez-faire is synonymous with what was referred to as strict free market economy during the early and mid-19th century as an ideal to achieve. It is generally understood that the necessary components for the functioning of an idealized free market include the complete absence of government regulation, subsidies, artificial price pressures and government-granted monopolies (usually classified as coercive monopoly by free market advocates) and no taxes or tariffs other than what is necessary for the government to provide protection from coercion and theft and maintaining peace, and property rights.

[edit] Market anarchism

Anarcho-capitalism, market anarchism or individualist anarchism advocates a true free market like laissez-faire and in addition the complete elimination of the state apparatus; the provision of law enforcement, courts, national defense, and all other security services by voluntarily-funded competitors in a free market rather than through compulsory taxation; the complete deregulation of nonintrusive personal and economic activities; and a self-regulated market. Anarcho-capitalists argue for a society based in voluntary trade of private property (including money, consumer goods, land, and capital goods) and services in order to maximize individual liberty and prosperity. There is a branch of market anarchism, sometimes known as mutualism, that does not recognize ownership of land if it is not being used.

[edit] Market mechanisms

[edit] Freedom

Milton Friedman and Friedrich Hayek stated that economic freedom is a necessary condition for the creation and sustainability of civil and political freedoms. They believed that this economic freedom can only be achieved in a market-oriented economy, specifically a free market economy. They do believe, however, that sufficient economic freedom can be achieved in economies with functioning markets through price mechanisms and private property rights. They believe that the more economic freedom that is available the more civil and political freedoms a society will enjoy.

Friedman states:

  • "Economic freedom is simply a requisite for political freedom. By enabling people to cooperate with one another without coercion or central direction it reduces the area over which political power is exercised"Friedman, Milton and Rose Friedman, Free to Choose: A Personal Statement, Harcort Brace Janovich, 1980, p. 2-3
  • "Capitalism is a necessary condition for political freedom" Capitalism and freedom

Studies by the Canadian free market-oriented Fraser Institute, the American free market-oriented Heritage Foundation, and the Wall Street Journal state that there is a relationship between economic freedom and political and civil freedoms to the extent claimed by Friedrich von Hayek. They agree with Hayek that those countries which restrict economic freedom ultimately restrict civil and political freedoms.[7][8]

[edit] Decision making

Generally market economies are bottom-up in decision-making as consumers convey information to producers through prices paid in market transactions. All states today have some form of control over the market that removes the free and unrestricted direction of resources from consumers and prices such as tariffs and corporate subsidies. Milton Friedman and many other microeconomists believe that these forms of intervention provide incentives for resources to be misused and wasted, producing products society may not value as much as a product that is valued as a result of these restrictions.

However, the term "market economy" is not exclusive to traditional capitalist ownership where a corporation hires workers as a labour commodity to produce material wealth and boost shareholder profits. Market mechanisms have been utilized in a handful of socialist states, such as Yugoslavia and even Cuba to a very limited extent. China's government is still run by the Communist Party, but its economy involves considerable private enterprise and market forces in both private and public sectors. It is also possible to envision an economic system based on cooperative, democratic worker ownership and market allocation of final goods and services; the labour-managed market economy is one of several proposed forms of market socialism.

[edit] Government intervention

It is possible according to some interpretations for a market economy to have government intervention in the economy. The key difference between market economies and planned economies lies not with the degree of government influence but whether that influence is used to coercively preclude private decision.[original research?] In a market economy, if the government wants more steel, it collects taxes and then buys the steel at market prices. In a planned economy, a government which wants more steel simply orders it to be produced and sets the price by decree.

The proper role for government in a market economy remains controversial. Most supporters of a market economy believe that government has a legitimate role in defining and enforcing the basic rules of the market. Different perspectives exist as to how strong a role the government should have in both guiding the economy and addressing the inequalities the market produces. For example, there is no universal agreement on issues such as central banking, and welfare. However, most economists oppose protectionist tariffs.[9]

[edit] References

  1. ^ "market economy", The New Dictionary of Cultural Literacy, Third Edition. 2002.
  2. ^ "market economy", Merriam-Webster Unabridged Dictionary
  3. ^ Susan Grant, Chris Vidler. Economics in Context. Harcourt Heinemann. (2000) p. 19
  4. ^ Gorman, Tom. The Complete Idiots Guide to Economics, Alpha Books (2003), p. 9
  5. ^ Tucker, Irvin B. p 491. Macroeconomics for Today. West Publishing. p. 491
  6. ^ McKinney, Michael L. Environmental Science: Systems and Solutions. Jones and Bartlett Publishers. 2003. p. 481
  7. ^ Heritage Foundation study
  8. ^ Economic Freedom of the World Report by the Frasier Institute
  9. ^ Milton Freidman, Free to Choose