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The term describes an economy where goods and services are traded. As things are being traded, rather than freely given, these things have exchange value. That is, what is being offered has a value in terms of being able induce one to part with something of value in exchange. What exchange value something has may be subject to any number of criteria.
It is associated with the concept of entrepreneurship and private ownership of capital. Individual market participants, such as privately owned businesses, agencies controlled by the state and consumers buy and sell their products on markets. The price is determined by supply and demand.
Entrepreneurship implies that business owners make decisions about their activities in such a way as they deem fit to make profit. According to the theoretical model of Adam Smith, if every individual market participant acts selfishly, this would benefit the economy as a whole. However, it is often said that "market failure" is a frequent occurrence in a market economy. Some believe government should intervene to prevent market failure, while others believe that government's should not diminish market freedom to remedy what some regard as market failure. The theoretical model of a large-scale free market economy does not occur in reality, however free market transactions may take place in the underground economy.
In the model of a social market economy the state intervenes where the market does not fulfill the needs of the market participants. This concept is based on the ideas of John Rawls.
Market economies are normally always linked to capitalism. But not in all cases. It is a very strong way for new countries to florish and earn a good trade representation for them selves.
Free market economy
- Main article: Free market economy
Adam Smith's theory
Max Weber's theory of rational action
Social market economy
- Main article: Social market economy
Mixed Economy
- Main article: Mixed economy
Decisionmaking
The term market economy describes an economy where economic decisions are determined by individuals (and businesses) trading, bargaining, cooperating, and competing with each other, as opposed to an economy where a state authority overrides this decentralized decision-making process by decree (see statism). Prices, for example, are determined by trades that occur as a result of price agreement between buyers and sellers, rather than being ordained by government. "Market economy" is usually associated with capitalism.
Market Failure
Government Intervention
It is possible 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. 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. An economy where both central planning and market mechanisms of production and distribution are present is known as a mixed economy.
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. More controversial is the question of 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 protectionist tariffs, federal control of interest rates, and welfare programs.
Comparison to planned economies
In the 1980s, most of the planned economies in the world attempted to transform themselves into market economies, for various reasons and with varying degrees of success. In the Soviet Union, this process was known as perestroika while in China the creation of a "socialist market economy" was one element of Chinese economic reform.
"In a planned economy those with political power make up the plans, in a market economy those who have money make up the plans" is a common joke in Central European countries who have experienced planned economy and are now experiencing market economy.
Criticism of market economy
See also
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