Market economy

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A market economy is an economic system based on the division of labor in which the prices of goods and services are determined in a free price system set by supply and demand.[1] This is often contrasted with a planned economy, in which a central government determines the price of goods and services using a fixed price system. Market economies are contrasted with mixed economy where the price system is not entirely free but under some government control that is not extensive enough to constitute a planned economy. In the real world, market economies do not exist in pure form, as societies and governments regulate them to varying degrees rather than allow self-regulation by market forces.[2][3] The term free-market economy is sometimes used synonymously with market economy,[4] but, as Ludwig Erhard once pointed out, this does not preclude an economy from having socialist attributes opposed to a laissez-faire system.[5] Economist Ludwig von Mises also pointed out that a market economy is still a market economy even if the government intervenes in pricing.[6]

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.[7]

The term market economy is not identical to capitalism where a corporation hires workers as a labour commodity to produce material wealth and boost shareholder profits.[8] Market mechanisms have been utilized in a handful of socialist states, such as Yugoslavia and even Cuba to a very limited extent. The People's Republic of China is 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 independent producers, 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.[9]


[edit] Systems based on a market economy

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 with varying degrees of free market and planned economy traits. For example, in the United States there are more market economy traits than in the Western European countries.[10]

[edit] Capitalism (Liberal Market)

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 most 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. In capitalism,there is no central planning authority but the prices are decided by the demand-supply scale. For example, higher demand for certain goods and services lead to higher prices and lower demand for certain goods lead to lower prices.

[edit] Laissez-Faire

Laissez-faire is synonymous with what was referred to as strict capitalist 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] Anarcho-Capitalism

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.

[edit] Market Socialism

Market socialism refers to various economic systems in which the government owns the economic institutions or major industries but operates them according to the rules of supply and demand. In a traditional market socialist economy, prices would be determined by a government planning ministry, and enterprises would either be state-owned or cooperatively-owned and managed by their employees. Libertarian socialists and left-anarchists often promote a form of market socialism in which enterprises are owned and managed collectively by the workers, but compete with each other in the same way private companies compete in a capitalist market. The People's Republic of China currently has a form of market socialism referred to as the socialist market economy, in which most of the industry is state-owned, but prices are not set by the government. Within this model, the state-owned enterprises are free from excessive regulation and function more autonomously in a more decentralized fashion than in other socialist economic systems.

[edit] Social Market

The social market economic model is based upon the free market economy, combined with regulative measures from the state.[11] The theoretical fundament is build on the neoliberalism (in Germany also called ordoliberalism).[12] This model was implemented by Ludwig Erhard after World War II in West Germany. Characteristics of social market economies are a strong competition policy and a contractionary monetary policy.

[edit] Theory

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, Harcourt Brace Jovanovich, 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.[13][14]

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.

[edit] Criticism

Robin Hahnel and Michael Albert claim that markets inherently produce class division; divisions between conceptual and manual laborers, and ultimately managers and workers, and a de facto labor market for conceptual workers. Albert says that in a market economy, even if everyone started out with a balanced job complex (doing a mix of roles of varying creativity, responsibility and empowerment), class divisions would arise, as some workers will be more able than others to capture the benefits of economic gain: if one worker designs cars and another builds them, the designer will use his cognitive skills more frequently than the builder. In the long term, the designer will become more adept at conceptual work than the builder, giving the designer greater bargaining power in a firm over the distribution of income. A conceptual worker who is not satisfied with his income can threaten to work for a company that will pay him more, thus class divisions arise.[15]

[edit] See also

[edit] References

  1. ^ Altvater, E. (1993). The Future of the Market: An Essay on the Regulation of Money and Nature After the Collapse of "Actually Existing Socialism. Verso. pp. 57. 
  2. ^ Altvater, E. (1993). The Future of the Market: An Essay on the Regulation of Money and Nature After the Collapse of "Actually Existing Socialism. Verso. pp. 237–238. 
  3. ^ Tucker, Irvin B. p 491. Macroeconomics for Today. West Publishing. p. 491
  4. ^ "market economy", Merriam-Webster Unabridged Dictionary
  5. ^ F. A. Hayek, The Fatal Conceit: The Errors of Socialism (University of Chicago Press, 1991), p. 117.
  6. ^ "The system of interventionism or of the hampered market economy differs from the German pattern of socialism by the very fact that it is still a market economy." von Mises, Ludwig (1996), "The Government And The Market: The Intervention", Human Action, Irvington, NY: Foundation for Economic Education, pp. 718, 
  7. ^ Milton Friedman, Free to Choose
  8. ^ Altvater, E. (1993). The Future of the Market: An Essay on the Regulation of Money and Nature After the Collapse of "Actually Existing Socialism. Verso. pp. 58–59. 
  9. ^ "What is capitalism?". World Socialist Movement. 
  10. ^ McKinney, Michael L. Environmental Science: Systems and Solutions. Jones and Bartlett Publishers. 2003. p. 481
  11. ^ “Soziale Marktwirtschaft” Duden Wirtschaft von A bis Z. Grundlagenwissen für Schule und Studium, Beruf und Alltag. 2. Aufl. Mannheim: Bibliographisches Institut & F.A. Brockhaus 2004. Lizenzausgabe Bonn: Bundeszentrale für politische Bildung 2004.
  12. ^ Andersen, Uwe/Wichard Woyke (Hg.): Handwörterbuch des politischen Systems der Bundesrepublik Deutschland Grundlagen, Konzeption und Durchsetzung der Sozialen Marktwirtschaft, 5. aktual. Aufl. Opladen: Leske+Budrich 2003. Online: Lizenzausgabe Bonn: Bundeszentrale für politische Bildung 2003.
  13. ^ Heritage Foundation study
  14. ^ Economic Freedom of the World Report by the Frasier Institute
  15. ^ Weiss, Adam (2005-05-04). "A Comparison of Economic Democracy and Participatory Economics". ZMag. Retrieved on 2008-06-26. 

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