A market economy is an economy in which decisions regarding investment, production and distribution are based on supply and demand^[1] and the prices of goods and services are determined in a free price system.^[2] 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. Most existing market economies include a degree of economic planning or state-directed activity and are thus classified as mixed economies.

In the real world, market economies do not exist in pure form, as societies and governments regulate them to varying degrees rather than allow full self-regulation by market forces.^[3][4] The term free-market economy is sometimes used synonymously with market economy,^[5] but, as Ludwig Erhard once pointed out, this does not preclude an economy from providing various social welfare programs such as unemployment benefits, as in the case of the social market economy.

There are many variations of market socialism ranging from the cooperative model, where employee-owned enterprises based on self-management are coordinated by markets and output of final goods and services is based on market allocation,^[6] to those based on public ownership of the means of production.^[7]

The term used by itself can be somewhat misleading. For example, the United States constitutes a mixed economy (substantial market regulation, agricultural subsidies, extensive government-funded research and development, Medicare/Medicaid), yet at the same time it is foundational 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. This is evidenced by the current lack of consensus on issues such as central banking and welfare.^{[citation needed]}

  Capitalism

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Capitalism generally refers to economic system in which 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 pricing is determined by markets.

There are different variations of capitalism and these different variations have different relationships to markets. In free-market and Lassiez-faire forms of capitalism, markets are utilized most extensively with minimal or no regulation over the pricing mechanism. In interventionist, Keynesian 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, and the state relies 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^[who?] 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 are decided by 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.

  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 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.

  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. As a difference to the free market economy the state is not passive, but actively takes regulative measures.^[8] 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 theoretical fundamental is built on ordoliberalism, Catholic social teaching and Democratic Socialism.^[9]

  Market socialism

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Market socialism refers to various economic systems where the means of production or dominant economic institutions are either publicly-owned or cooperatively-owned but operated according to the rules of supply and demand.

In the Oskar Lange's model of market socialism, prices would be determined by a government planning board through a trial-and-error approach until they equaled the marginal cost of production as to achieve perfect competition and pareto optimality. In this model, firms would either be state-owned and managed by their employees.

A more contemporary model of market socialism is that put forth by John Roemer, where social ownership is achieved through public ownership of equity in a market economy.

The distinguishing feature between non-market socialism and market socialism is the existence of a market in the means of production and the criteria of profitability for enterprises. Profits derived from the public enterprises can either be used to reinvest in production or finance government and social services directly and/or be distributed to the workforce or public at large through a social dividend.

  Cooperative socialism

Libertarian socialists and left-anarchists often promote a form of market socialism in which enterprises are owned and managed cooperatively by the workers 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 would be mutualism.

  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 from a government planning agency. A similar system called "socialist-oriented market economy" has been implemented in Vietnam following the Doi Moi reforms in 1986.

However, this system is usually characterized as state capitalism instead of market socialism because there exists no meaningful degree of employee management in the firms, the state enterprises retain their profits instead of distributing them to the workforce or government, and many function as partial or de facto private enterprises.

  Criticisms

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)(...)".^{[citation needed]}

Albert states that even if everyone started out with a balanced job complex (doing a mix of roles of varying creativity, responsibility and empowerment) 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 (the model of market socialism David Schweickart has developed and refers to 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 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 (...)".^[10]

Therefore according to this critique class divisions would arise inevitably. But of course, this criticism assumes that class divisions are necessarily a bad thing. However, most individuals understand qualitative differences when deciding how to spend their money, and so it is natural for elites to emerge in every specific discipline. Individuals with more successful experiences are naturally regarded more highly than the inexperienced, and those with rare talents are valued more highly than those with common skills. Few would argue that changing this aspect of natural class division would improve things, except those motivated primarily by jealousy or envy, and/or those who are incurably intolerant of individual diversity.

  See also

• Free market
• Market
• Economic freedom
• Grey market
• Market socialism
• Mixed economy
• Planned economy
• Regulated market
• Controlled market

  References