A market economy is an economic system in which decisions regarding investment, production, and commerce (the distribution of goods and services) are guided by price signals resulting from the forces of supply and demand. A key characteristic of a market economy is the presence of factor markets, which play a major role in allocating capital and other factors of production such as labor and land.
Market economies exist along a spectrum, ranging from minimally regulated to highly regulated systems. At the least regulated end are free-market and laissez-faire systems, where government involvement is largely limited to providing public goods and services and protecting private property rights.
At the other end of the spectrum are interventionist market economies, where governments take a more active role in correcting market failures and promoting social welfare. In state-directed or dirigiste systems, the government guides the broader development of the economy through tools such as industrial policies or indicative planning. In these systems, the state influences economic direction without completely replacing market-based allocation, a structure often described as a mixed economy.
Market economies are contrasted with planned economies where investment and production decisions are embodied in an integrated economy-wide economic plan. In a centrally planned economy, economic planning is the principal allocation mechanism between firms rather than markets, with the economy's means of production being owned and operated by a single organizational body.
Characteristics Property rights For market economies to function efficiently, governments must establish clearly defined and enforceable property rights for assets and capital goods. However, property rights do not specifically mean private property rights and market economies do not logically presuppose the existence of private ownership of the means of production. Market economies can and often do include various types of cooperatives or autonomous state-owned enterprises that acquire capital goods and raw materials in capital markets. These enterprises utilize a market-determined free price system to allocate capital goods and labor. In addition, there are many variations of market socialism where the majority of capital assets are socially owned with markets allocating resources between socially owned firms. These models range from systems based on employee-owned enterprises based on self-management to a combination of public ownership of the means of production with factor markets.
Supply and demand Supply and demand work in tandem. The economic theory is that supply slopes upwards as people buy more and demand drops as prices rise and people buy less.
Market economies rely upon a price system to signal market actors to adjust production and investment. Price formation relies on the interaction of supply and demand to reach or approximate an equilibrium where the unit price for a particular good or service is at a point where the quantity demanded equals the quantity supplied.
The price data point where the supply and demand lines intersect is called the market-clearing price.
Governments can intervene by establishing price ceilings or price floors in specific markets (such as minimum wage laws in the labor market), or use fiscal policy to discourage certain consumer behavior or to address market externalities generated by certain transactions (Pigovian taxes). Different perspectives exist on the role of government in both regulating and guiding market economies and in addressing social inequalities produced by markets. Fundamentally, a market economy requires that a price system affected by supply and demand exists as the primary mechanism for allocating resources irrespective of the level of regulation.
Capitalism
Capitalism is an 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, in capitalist systems investment, distribution, income and prices are determined by markets, whether regulated or unregulated.
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 minimal or no 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 they are regulated to some extent by the 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 indicative planning and/or state-owned enterprises to accumulate capital.
Capitalism has been dominant in the Western world since the end of mercantilism. However, it is argued 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. Higher demand for certain goods and services leads to higher prices and lower demand for certain goods lead to lower prices, in relation to supply.
Free-market capitalism
A capitalist free-market economy is an economic system where prices for goods and services are set freely by the forces of supply and demand and are expected by its supporters 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 and enforcing contracts.
Laissez-faire
Laissez-faire is synonymous with what was referred to as strict 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 (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, 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. Although laissez-faire has been commonly associated with capitalism, there is a similar left-wing laissez-faire system called free-market anarchism, also known as free-market anti-capitalism and free-market socialism to distinguish it from laissez-faire capitalism.Chartier, Gary; Johnson, Charles W. (2011). Markets Not Capitalism: Individualist Anarchism Against Bosses, Inequality, Corporate Power, and Structural Poverty. Brooklyn, NY: Minor Compositions/Autonomedia"It introduces an eye-opening approach to radical social thought, rooted equally in libertarian socialism and market anarchism." Chartier, Gary; Johnson, Charles W. (2011). Markets Not Capitalism: Individualist Anarchism Against Bosses, Inequality, Corporate Power, and Structural Poverty. Brooklyn, NY: Minor Compositions/Autonomedia. p. back cover."But there has always been a market-oriented strand of libertarian socialism that emphasizes voluntary cooperation between producers. And markets, properly understood, have always been about cooperation. As a commenter at Reason magazine's Hit&Run blog, remarking on Jesse Walker's link to the Kelly article, put it: "every trade is a cooperative act." In fact, it's a fairly common observation among market anarchists that genuinely free markets have the most legitimate claim to the label "socialism." "Socialism: A Perfectly Good Word Rehabilitated" by Kevin Carson at website of Center for a Stateless Society. Thus, critics of laissez-faire as commonly understood argues that a truly laissez-faire system would be anti-capitalist and socialist.Nick Manley, "Brief Introduction To Left-Wing Laissez Faire Economic Theory: Part One" .Nick Manley, "Brief Introduction To Left-Wing Laissez Faire Economic Theory: Part Two" .
Welfare capitalism
Welfare capitalism is a capitalist economy that includes public policies favoring extensive provisions for social welfare services. The economic mechanism involves a free market and the predominance of privately owned enterprises in the economy, but public provision of universal welfare services aimed at enhancing individual autonomy and maximizing equality. Examples of contemporary welfare capitalism include the Nordic model of capitalism predominant in Northern Europe.
Regional models Anglo-Saxon model
Anglo-Saxon capitalism is 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 international 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.Anglo-Saxon capitalism, Business Dictionary on BusinessDictionary.com: http://www.businessdictionary.com/definition/Anglo-Saxon-capitalism.html
East Asian model
The East Asian model of capitalism involves a strong role for state investment and in some instances involves state-owned enterprises. The state takes an active role in promoting economic development through subsidies, the facilitation of "national champions" and an export-based model of growth. The actual practice of this model varies by country. This designation has been applied to the economies of China, Japan, Singapore, South Korea, Vietnam, and sometimes to those of Hong Kong and Taiwan.
A related concept in political science is the developmental state.
Social market economy
The social market economy was implemented by Alfred Müller-Armack and Ludwig Erhard after World War II in West Germany. The social market economic model, sometimes called Rhine capitalism, 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 the socially harmful 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 instead takes active regulatory measures.keyword "social market economy" = "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. 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.Duden Wirtschaft von A bis Z. "Eintrag: keyword "social market economy" = Soziale Marktwirtschaft" .
Socialism