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A market economy (aka free market economy and free enterprise economy) is an economic system in which the production and distribution of goods and services takes place through the mechanism of free markets guided by a free price system rather than by the state in a planned economy. [1] [2] Image File history File links Stop_hand. ... An economic system is a mechanism which deals with the production, distribution and consumption of goods and services in a particular society. ... A good in economics is any physical object (natural or man-made) or service that, upon consumption, increases utility, and therefore can be sold at a price in a market. ... In economics and marketing, a service is the non-material equivalent of a good. ... A free market is an idealized market, where all economic decisions and actions by individuals regarding transfer of money, goods, and services are voluntary, and are therefore devoid of coercion and theft (some definitions of coercion are inclusive of theft). Colloquially and loosely, a free market economy is an economy... A free price system (informally called the price system) is an economic mechanism that guides production and distribution of scarce resources by transmitting information on preferences between consumers and producers. ... A planned economy is an economic system in which decisions about the production, allocation and consumption of goods and services are planned ahead of time, usually in a centralized fashion, though some proposed systems favour decentralized planning. ...

A market economy has no central coordinator guiding its operation, yet theoretically self-organization emerges amidst the complex interplay of supply and demand and price regarding a multitude of goods and services. Supporters of a market economy generally hold that the pursuit of self-interest is actually in the best interest of society. Adam Smith says: A planned economy is an economic system in which economic decisions are made by centralized planners, who determine what sorts of goods and services to produce, and how they are to be priced and allocated. ... Self-organization refers to a process in which the internal organization of a system, normally an open system, increases automatically without being guided or managed by an outside source. ... The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ... Self-interest can refer to these articles: Egoism Selfishness Ethical egoism Psychological egoism Individualism Objectivist ethics Hedonism Happiness Epicureanism Utilitarianism This is a disambiguation page — a navigational aid which lists pages that might otherwise share the same title. ... Adam Smith, FRSE (baptised June 5, 1723 – July 17, 1790) was a Scottish political economist and moral philosopher. ...

"By pursuing his own interest [an individual] frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the [common] good." (Wealth of Nations)

There are a variety of critics of market as an organizing principle of an economy. These critics range from those who reject markets entirely, in favor of a planned economy, such as that advocated by socialism, to those who merely wish to see them regulated to various degrees, and they range from those who believe that greed is inherently immoral to those who raise practical objections. One prominent practical objection is the claim that markets wreak havoc through their externalities (things that the market price does not take into account), for example through environmental pollution. Another is the claim that through the creation of monopolies, markets sow the seeds of their own destruction. A planned economy is an economic system in which decisions about the production, allocation and consumption of goods and services are planned ahead of time, usually in a centralized fashion, though some proposed systems favour decentralized planning. ... Socialism is a social and economic system (or the political philosophy advocating such a system) in which the economic means of production are owned and controlled collectively by the people. ... Greed is often associated with death and disease. ... Morality, in the strictest sense of the word, deals with that which is regarded as right or wrong. ... An externality occurs in economics when a decision (for example, to pollute the atmosphere) causes costs or benefits to individuals or groups other than the person making the decision. ... In economics, a monopoly (from the Greek monos, one + polein, to sell) is defined as a persistent market situation where there is only one provider of a kind of product or service. ...

Some proponents of market economies believe that governments should not diminish market freedom because they disagree on what is a market externality and what are government created externalities, and disagree over what the appropriate level of intervention is necessary to solve market created externalities. Others believe that government should intervene to prevent market failure while preserving the general character of a market economy. In the model of a social market economy the state intervenes where the market does not fulfill the needs of the market participants. John Rawls is a prominent proponent of this idea. The Social market economy was the German and Austrian economic model during the Cold War era. ... John Rawls (February 21, 1921 – November 24, 2002) was an American philosopher, a professor of political philosophy at Harvard University and author of A Theory of Justice (1971), Political Liberalism, Justice as Fairness: A Restatement, and The Law of Peoples. ...

The economists' model of a free market is one in which there is no governmental intervention or other coercion. The theoretical model of a large-scale free market economy does not occur legally, however the underground economy may be seen as an actualized free market economy. A free market is an idealized market, where all economic decisions and actions by individuals regarding transfer of money, goods, and services are voluntary, and are therefore devoid of coercion and theft (some definitions of coercion are inclusive of theft). Colloquially and loosely, a free market economy is an economy... The underground economy consists of all trade that occurs without detection by government so that commerce and income are not taxed. ...

Free market economy

Main article: Free market

There is currently no state where all markets within its borders are absolutely free. However, the term is not usually used in such an absolutist sense. Few would prefer a free market in, say, biological weapons. Rather a free market economy, is one where government intervention is limited to protecting property rights and maintaining a peaceful environment for the market to function (otherwise known as laissez-faire). Many states which are said to have a capitalist system do not have the level of market freedom that some would prefer. Even the United States, which often represents capitalism worldwide, has restrictions upon the freedom of factors in the economy. Less market restrictions are found in other countries, such as in Hong Kong, according to the Index of Economic Freedom. Free markets are also conflated with anarchy as many people believe that free market implies an absence of government. Only a few free market scholars advocate the elimination of government, most including Adam Smith and Milton Friedman believed government had a role to play, albeit a limited one. And, even anarcho-capitalists believe in the rule of law (either natural or contract) being defended by voluntarily-funded institutions. Most free market scholars believe that governments should be limited to at least: operating a court system for the settlement of disputes, maintaining stable currency (combating inflation), protecting market competition and consumers, and protecting the country through national defense. These scholars debate and disagree with each other on whether or not governments are necessary to have government funded roads, schools, post offices, libraries, police stations, and fire stations, as some free market scholars believe the market can solve their externalities. A free market is an idealized market, where all economic decisions and actions by individuals regarding transfer of money, goods, and services are voluntary, and are therefore devoid of coercion and theft (some definitions of coercion are inclusive of theft). Colloquially and loosely, a free market economy is an economy... Laissez-faire is short for laissez faire, laissez passer, a French phrase meaning to let things alone, let them pass. First used by the eighteenth century Physiocrats as an injunction against government interference with trade, it is now used as a synonym for strict free market economics. ... The Index of Economic Freedom is an annual report published by The Wall Street Journal and the Heritage Foundation. ... Adam Smith, FRSE (baptised June 5, 1723 – July 17, 1790) was a Scottish political economist and moral philosopher. ... Milton Friedman Milton Friedman (born July 31, 1912) is a U.S. economist, known for his work on macroeconomics, microeconomics, economic history, statistics, and for his advocacy of laissez-faire capitalism. ... Anarcho-capitalism is a view that regards all forms of the state as unnecessary and harmful, particularly in matters of justice and self-defense, while being highly supportive of private property. ...

In order for an economy to be considered a true free market, the factors of labor, goods, services, and capital, must be free from government restrictions and trading barriers so they are able to move freely across borders

Adam Smith's theory

Adam Smith's Theory was that demand would always match need. For many years this was the case but modern advertising can easily create a huge demand for non-essential products.

Decisionmaking

The "economy" is usually associated with capitalism. Capitalism has been defined in various, but similar, ways by different theorists. ...

Generally market economies are bottom up in decisionmaking as consumers input information to producers through prices paid when purchasing products on the market. For a brief time during the 20th century even self described capitalist states engaged in top down market command where the government and or producers attempted to command and direct resources to valued uses. 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 sent, and sometimes wasted, producing products society may not value as much as a product that is, as a result of these restrictions, not being produced in many ways. A tariff is a tax placed on imported and/or exported goods, sometimes called a customs duty. ... A subsidy is generally a monetary grant given by government in support of an activity regarded as being in the public interest. ... Milton Friedman Milton Friedman (born July 31, 1912) is a U.S. economist, known for his work on macroeconomics, microeconomics, economic history, statistics, and for his advocacy of laissez-faire capitalism. ... Value as defined in economics is only a small subcategory of value in general, as defined in value theory or in the science of value. ...

Market externalities

Examples of market failures, or externalities, include negative externalities, monopolies, lack of provision of public goods, and social disparities such as extreme poverty. Market failures are the result of the market not receiving enough or appropriate information through singles such as prices. For example there is currently no way for the market to understand the cost or harm pollution causes to society. These failures are the reason some think have thought that limited government intervention is necessary. Market failure is a situation in which markets do not efficiently organize production or allocate goods and services to consumers (for example, a failure to allocate goods in a way some see as socially or morally preferable). ... An externality occurs in economics when a decision (for example, to pollute the atmosphere) causes costs or benefits to individuals or groups other than the person making the decision. ... In economics, a monopoly (from the Greek monos, one + polein, to sell) is defined as a persistent market situation where there is only one provider of a kind of product or service. ... In economics, a public good is a good that is hard or even impossible to produce for private profit, because the market fails to account for its large beneficial externalities. ... Human relationships within an ethnically diverse society For other uses, see Society (disambiguation). ... World map showing Life expectancy. ... Water pollution Pollution is the release of environmental contaminants. ... ...

Milton Friedman believes that many market failures can be solved not through government regulation of current information but through information disclosure. Information disclosure would be a requirement of government law but would not actually seriously regulate how businesses operate. Instead the disclosure of information would allow the market to react to their behavior by allowing consumers to vote with their dollars given better information about the companies they do business with. Milton Friedman Milton Friedman (born July 31, 1912) is a U.S. economist, known for his work on macroeconomics, microeconomics, economic history, statistics, and for his advocacy of laissez-faire capitalism. ... Information as a concept bears a diversity of meanings, from everyday usage to technical settings. ... Law (from the late Old English lagu of probable North Germanic origin) in politics and jurisprudence, is a set of rules or norms of conduct which mandate, proscribe or permit specified relationships among people and organizations, intended to provide methods for ensuring the impartial treatment of such people, and provide...

Friedman also argues for pollution permits to solve pollution externalities. By selling permits to the public, the public is now able to demonstrate a price for the harm or benefit caused by pollution. He believes that this type of government "regulation" allows better flowing information rather than the masking of current information to the market. If people really do value clean air, the information will be felt in the market and companies will react more quickly to be environmentally friendly. This power plant in New Mexico releases sulfur dioxide and particulate matter into the air. ...

Friedman believes governments have a role in fixing market externalities but only if the government is helping solve information transmission problems not masking current information.

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. Germany's social market economy was one of the better functioning mixed economies, as microeconomists note that it had relativily free prices compared to other more socialist countries like the United Kingdom for much of the later 20th century. A tax (also known as a dutyor Zakat in islamic economics) is a charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (e. ... A planned economy is an economic system in which economic decisions are made by centralized planners, who determine what sorts of goods and services to produce, and how they are to be priced and allocated. ... A mixed economy is an economy that combines capitalism and socialism [1]. Some sources prefer the use of command economy over socialism in defining a mixed economy (see external links below). ... The Social market economy was the German and Austrian economic model during the Cold War era. ...

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. Look up Controversy in Wiktionary, the free dictionary For other uses, see Controversy (disambiguation). ... Legitimacy in political science, is the popular acceptance of a governing regime or law as an authority. ... Protectionism is the economic policy of restraining trade between jurisdictions, through methods such as high tariffs on imported goods, restrictive quotas, and anti-dumping measures, in an attempt to protect producers in a particular locale from competition. ... A tariff is a tax on imported goods. ... Reserve Bank of India in Mumbai, India. ... An interest rate is the price a borrower pays for the use of money he does not own, and the return a lender receives for deferring his consumption, by lending to the borrower. ... ...

Milton Friedman, along with many microeconomists, believes that too much government intervention and regulation can result in hampering or stoping the transmission of information necessary to allow the market to operate, what results, he believes, are very serious government externalities that can lead to inflation, deflation, recesions, and depressions. Milton Friedman believes that the Great Depression was the result of a government created externalities and thus was responsible for the causes of the Great Depression. Milton Friedman Milton Friedman (born July 31, 1912) is a U.S. economist, known for his work on macroeconomics, microeconomics, economic history, statistics, and for his advocacy of laissez-faire capitalism. ... Dorothea Langes Migrant Mother depicts destitute pea pickers in California, centering on Florence Owens Thompson, a mother of seven children, age 32, in Nipomo, California, March 1936. ... To meet Wikipedias quality standards, this article or section may require cleanup. ...

Market freedom

Friedrich von Hayek and Milton Friedman stated that economic freedom is a necessary condition for the creation and sustainability of civil and political freedoms. They believe 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 prices and private property right]]s. They believe that the more economic freedom that is available the more civil and policical freedoms a society will enjoy. Friedrich von Hayek Friedrich August von Hayek (May 8, 1899 in Vienna – March 23, 1992 in Freiburg) was an economist and social scientist of the Austrian School, noted for his defense of liberal democracy and free-market capitalism against a rising tide of socialist and collectivist thought in the mid... Milton Friedman Milton Friedman (born July 31, 1912) is a U.S. economist, known for his work on macroeconomics, microeconomics, economic history, statistics, and for his advocacy of laissez-faire capitalism. ... Civil liberties are protections from the power of governments. ... Freedom is the right, or the capacity, of self-determination, as an expression of the individual will. ...

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 Free to Choose is both a book (ISBN 0156334607) and a ten-part television series. ...

Studies by the Canadian "conservative" free market oriented Fraser Institute, the American "conservative" 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.[3] [4] The Fraser Institute is a fiscally conservative Canadian think tank. ... The Heritage Foundation, a think tank located in Washington, D.C., is an influential public policy research institute whose stated mission is to formulate and promote conservative public policies based on the principles of free enterprise, limited government, individual freedom, traditional American values, and a strong national defense. ... The Wall Street Journal is an influential international daily newspaper published in New York City, New York with an average daily circulation of 1,800,607 (2002). ...

Markets and communist states

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. Poster showing Mikhail Gorbachev Perestroika ▶ (help· info) (Перестро́йка) is the Russian word (which passed into English) for the economic reforms introduced in June 1987 by the Soviet leader Mikhail Gorbachev. ... Market socialism is an attempt by a Soviet-style economy to introduce market elements into its economic system to improve economic growth. ... Economic reforms have triggered internal migrations within China. ...

Despite being the largest country whose ruling party refers to itself as communist, the People's Republic of China runs Special Economic Zones dedicated to capitalist enterprise, which are free from central government control. this is contrary to the communist theory proposed by Marx and Engels and later adapted by Lenin, Stalin, and Mao. After opening up trade to the world under Deng Xiaoping, the People's Republic of China runs some of the most economically free regions in the world, including Hong Kong, which is regarded by the Hoover Institute and the Wall Street Journal as the world's freest economy [5]. A Special Economic Zone (SEZ) is a geographical region that has economic laws different from a countrys typical economic laws. ... Deng Xiaoping Deng Xiaoping (help· info) (Simplified Chinese: 邓小平; Traditional Chinese: 鄧小平; Hanyu Pinyin: ; Wade-Giles: Teng Hsiao-ping; August 22, 1904–February 19, 1997) was a leader in the Communist Party of China (CPC). ...

These Special Economic Zones have few restrictions upon businesses, industries, imports and exports, including the elimination of duties, and a free price system. Since the opening of the Free Trade Zones China has maintained a growth rate of over 8%, and originally saw growth rates around 12%. These Special Economic Zones are different than the State Capitalism, as practiced in the Soviet Union, because the SEZs allow for capitalists to build and expand their industries and private property, free from the control of the central government. SEZ's operate under market economy rather than the state capitalist top down command economy approach. A Special Economic Zone (SEZ) is a geographical region that has economic laws different from a countrys typical economic laws. ... There are multiple definitions of the term state capitalism. ... A planned economy is an economic system in which economic decisions are made by centralized planners, who determine what sorts of goods and services to produce, and how they are to be priced and allocated. ...

According to China.org "After opening Shenzhen and other three coastal cities in South China as special economic regions and then dozens of economic and technological development zones in the 1980s, the country introduced free trade zones in the early 1990s in 15 coast cities, including Shanghai, Guangzhou, Shenzhen and Tianjin." [6]

In addition, China has recently declared private property to be a right and as also allowed the opening of foreign capitalist enterprises such as Wal-Mart to operate shopping centers in the Special Economic Zones.

Several other countries ruled by Communist Parties, such as Vietnam, have also made pro-market reforms in the last few decades.

Criticism of market economy

References

Further reading

• 2005 Index of Economic Freedom, Heritage Foundation and the Wall Street Journal
• De Soto, Hernando. The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere else, Basic Books, 2000.
• Economic Freedom of the World Report, The Frasier Institute
• Friedman, Milton. Capitalism and Freedom, University of Chicago Press, 1962.
• Friedman, Milton and Rose Friedman. Free to Choose: A Personal Statement, Harcort Brace Janovich, 1980.
• Hayek, F.A., The Road to Serfdom, University of Chicago Press, 1944.
• Hayek, F.A. The Constitution of Liberty, University of Chicago Press, 1960.
• Lindsey, Brink. Against the Dead Hand: The Uncertain Struggle for Global Capitalism, Wiley, 2001.
• Przeworski, Adam. Democracy and the Market (New York: Cambridge University Press, 1991.
• Reed, Robert, Max Schanzenbach, "Prices and Information: A Simple Framework for Understanding Economics"
• Schumpeter, Joseph. Capitalism, Socialism and Democracy. Harper Perennial, 1962.
• Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations, 1776.
• Yergin, Daniel, and Joseph Stanislaw. The Commanding Heights: the Battle for the World Economy, Simon and Schuster, 1998

See also

• Social market economy
• Participatory economy
• Mixed economy
• Market
• Barter
• Capitalism
• Financial markets
• Free market
• Command economy
• Gift economy
• Inclusive Democracy
• Self-organization
• Neoliberalism
• Minarchism
• Microeconomics
• Macroeconomics