A Market economy is an economy in which decisions
regarding investment, production and distribution
are based on supply and demand, and prices
of goods and services are determined in a
free price system.
The major defining characteristic of a market
economy is that decisions on investment and
the allocation of producer goods are mainly
made through markets.
This is contrasted with a planned economy,
where investment and production decisions
are embodied in a plan of production.
Market economies can range from hypothetical
laissez-faire and free market variants to
regulated markets and interventionist variants.
In reality market economies do not exist in
pure form, since societies and governments
regulate them to varying degrees.
Most existing market economies include a degree
of economic planning or state-directed activity,
and are thus classified as mixed economies.
The term free-market economy is sometimes
used synonymously with market economy, but
it may also refer to laissez-faire or Free-market
anarchism.
Market economies do not logically presuppose
the existence of private property in the means
of production; a market economy can consist
of various types of cooperatives, collectives
or autonomous state agencies that acquire
and exchange capital goods with each other
in a free price system.
There are many variations of market socialism,
some of which involve employee-owned enterprises
based on self-management; as well as models
that involve public ownership of the means
of production where capital goods are allocated
through markets.
The term market economy used by itself can
be somewhat misleading.
For example, the United States constitutes
a mixed economy, yet at the same time it is
rooted in a market economy.
Different perspectives exist as to how strong
a role the government should have in both
guiding the market economy and addressing
the inequalities the market produces.
Capitalism
Capitalism generally refers to economic system
where the means of production are largely
or entirely privately owned and operated for
a profit, structured on the process of capital
accumulation.
In general, investments, distribution, income,
and prices are determined by markets.
There are different variations of capitalism
with different relationships to markets.
In Laissez-faire and free market variations
of capitalism, markets are utilized most extensively
with minimal or no state intervention and
regulation over prices and the supply of goods
and services.
In interventionist, welfare capitalism and
mixed economies, markets continue to play
a dominant role but are regulated to some
extent by government in order to correct market
failures or to promote social welfare.
In state capitalist systems, markets are relied
upon the least, with the state relying heavily
on either indirect economic planning and/or
state-owned enterprises to accumulate capital.
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.
In capitalism, prices determine 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.
Anglo-Saxon model
Anglo-Saxon capitalism refers to the form
of capitalism predominant in Anglophone countries
and typified by the economy of the United
States.
It is contrasted with European models of capitalism
such as the continental Social market model
and the Nordic model.
Anglo-Saxon capitalism refers to a macroeconomic
policy regime and capital market structure
common to the Anglophone economies.
Among these characteristics are low rates
of taxation, more open financial markets,
lower labor market protections, and a less
generous welfare state eschewing collective
bargaining schemes found in the continental
and northern European models of capitalism.
East Asian model
The East Asian model of capitalism is based
on a strong role for state investment, and
in some cases, state-owned enterprises.
The state takes an active role in promoting
economic development through subsidies, facilitation
of "national champions", and an export-based
model of growth.
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 a classical liberal 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
and no taxes or tariffs other than what is
necessary for the government to provide protection
from coercion and theft, maintaining peace
and property rights, and providing for basic
public goods.
Right-libertarian advocates of anarcho-capitalism
see the state as morally illegitimate and
economically unnecessary and destructive.
Free-market economy
Free-market economy refers to a capitalist
economic system where prices for goods and
services are set freely by the forces of supply
and demand and are allowed to reach their
point of equilibrium without intervention
by government policy.
It typically entails support for highly competitive
markets, private ownership of productive enterprises.
Laissez-faire is a more extensive form of
free-market economy where the role of the
state is limited to protecting property rights.
Social market economy
This model was implemented by Alfred Müller-Armack
and Ludwig Erhard after World War II in West
Germany.
The social market economic model is based
upon the idea of realizing the benefits of
a free market economy, especially economic
performance and high supply of goods, while
avoiding disadvantages such as market failure,
destructive competition, concentration of
economic power and anti-social effects of
market processes.
The aim of the social market economy is to
realize greatest prosperity combined with
best possible social security.
One difference from the free market economy
is that the state is not passive, but takes
active regulatory measures.
The social policy objectives include employment,
housing and education policies, as well as
a socio-politically motivated balancing of
the distribution of income growth.
Characteristics of social market economies
are a strong competition policy and a contractionary
monetary policy.
The philosophical background is Neoliberalism
or Ordoliberalism
Market socialism
Market socialism refers to various types of
economic systems where the means of production
and the dominant economic institutions are
either publicly owned or cooperatively owned
but operated according to the rules of supply
and demand.
This type of market economy has its roots
in classical economics and in the works of
Adam Smith, the Ricardian socialists and Mutualist
philosophers.
The distinguishing feature between non-market
socialism and market socialism is the existence
of a market for factors of production and
the criteria of profitability for enterprises.
Profits derived from publicly owned enterprises
can variously be used to reinvest in further
production, to directly finance government
and social services, or be distributed to
the public at large through a social dividend
or basic income system.
Public ownership models
In Oskar Lange and Abba Lerner's model of
market socialism, the Lange theorem posits
that a public body can set prices through
a trial-and-error approach until they equaled
the marginal cost of production so to achieve
perfect competition and pareto optimality.
In this model of socialism, firms would be
state-owned and managed by their employees,
and the profits would be disbursed among the
population in a social dividend.
A more contemporary model of market socialism
is that put forth by the American economist
John Roemer, referred to as Economic democracy.
In this model, social ownership is achieved
through public ownership of equity in a market
economy.
A Bureau of Public Ownership would own controlling
shares in publicly listed firms, so that the
profits generated would be used for public
finance and the provision of a basic income.
Cooperative socialism
Libertarian socialists and left-anarchists
often promote a form of market socialism in
which enterprises are owned and managed cooperatively
by their workforce so that the profits directly
remunerate the employee-owners.
These cooperative enterprises would compete
with each other in the same way private companies
compete in a capitalist market.
An example of this economic model would be
mutualism.
Self-managed market socialism was promoted
in Yugoslavia by economists Branko Horvat
and Jaroslav Vanek.
In the self-managed model of socialism, firms
would be directly owned by their employees
and the management board would be elected
by employees.
These cooperative firms would compete with
each other in a market for both capital goods
and for selling consumer goods.
Socialist market economy
Following the 1978 reforms, the People's Republic
of China instituted what it calls a "socialist
market economy", in which most of the economy
is under state ownership, but the state enterprises
are reorganized into joint-stock companies
where various government agencies own controlling
shares through a shareholder system.
Prices are set by a largely free-price system
and the state-owned enterprises are not subjected
to micromanagement by a government planning
agency.
A similar system called "socialist-oriented
market economy" has been implemented in Vietnam
following the Đổi Mới reforms in 1986.
However, this system is usually characterized
as state capitalism instead of market socialism
because there is no meaningful degree of employee
self-management in firms, because the state
enterprises retain their profits instead of
distributing them to the workforce or government,
and many function as de facto private enterprises.
The profits neither finance a social dividend
to benefit the population at large, nor do
they accrue to their employees.
Early market economies
Criticisms
The economist Joseph Stiglitz argues that
markets suffer from informational inefficiency
and the presumed efficiency of markets stems
from the faulty assumptions of neoclassical
welfare economics, particularly the assumption
of perfect and costless information, and related
incentive problems.
Neoclassical economics assumes static equilibrium
and efficient markets require that there be
no convexities, even though convexities are
pervasive in modern economies.
Stiglitz's critique applies to both existing
models of capitalism and hypothetical models
of market socialism.
However, Stiglitz does not advocate replacing
markets, but states that there is a significant
role for government intervention to boost
the efficiency of markets.
Robin Hahnel and Michael Albert claim that
"markets inherently produce class division."
Albert states that even if everyone started
out with a balanced job complex in a market
economy, class divisions would arise.
"(...) Without taking the argument that far,
it is evident that in a market system with
uneven distribution of empowering work, such
as Economic Democracy, some workers will be
more able than others to capture the benefits
of economic gain.
For example, 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 former 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.
The effect is a class division between conceptual
and manual laborers, and ultimately managers
and workers, and a de facto labor market for
conceptual workers".
David McNally argues that the logic of the
market inherently produces inequitable outcomes
and leads to unequal exchanges, arguing that
Adam Smith's moral intent and moral philosophy
espousing equal exchange was undermined by
the practice of the free markets he championed.
The development of the market economy involved
coercion, exploitation and violence that Adam
Smith's moral philosophy could not countenance.
McNally also criticizes market socialists
for believing in the possibility of "fair"
markets based on equal exchanges to be achieved
by purging "parasitical" elements from the
market economy, such as private ownership
of the means of production.
McNally argues that market socialism is an
oxymoron when socialism is defined as an end
to wage-based labor.
See also
Economic freedom
Free market
Grey market
Market socialism
Market structure
Mixed economy
Neoclassical economics
Planned economy
Regulated market
Social market economy
Socialist market economy
References
