Market economy

A market economy is a social system based on the division of labor where prices are determined in a free price system set by supply and demand rather than government intervention. 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 there 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 are regulated by society.

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

Capitalism

Main article: 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. 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 leads to lower prices.

Laissez-faire

Main article: 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.

Anarcho-capitalism

Main article: 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.

Market socialism

Main article: 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 its 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 called 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.

Market mechanisms

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.

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.

The Role of the State in a Market Economy

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. 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.

Labour in an market economy

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.