Market economy

A market economy is an economy in which decisions

regarding investment, production, and distribution are
based on supply and demand,[1] and prices of goods and
services are determined in a free price system.[2] The major dening characteristic of a market economy is that investment decisions and the allocation of producer goods
are mainly made by negotiation through markets.[3] This
is contrasted with a planned economy, where investment
and production decisions are embodied in a plan of production.

variations of capitalism, markets are utilized most extensively with minimal or no state intervention and 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 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, with the
state relying heavily on either indirect economic planning
and/or state-owned enterprises to accumulate capital.

Market economies can range from hypothetical laissezfaire and free market variants to regulated markets and
interventionist variants. In reality, market economies do
not exist in pure form, since societies and governments
regulate them to varying degrees.[4][5] Dierent 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. Most existing market economies include a degree of economic planning or
state-directed activity, and are thus classied as mixed
economies. The term free-market economy is sometimes
used synonymously with market economy, but it may also
refer to laissez-faire or free-market anarchism.[6]

Capitalism has been dominant in the Western world since

the end of feudalism, but most feel 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. For example, higher demand for certain goods and services lead to higher prices
and lower demand for certain goods lead to lower prices.

1.1 Laissez-faire
Main articles: Laissez-faire and Economic liberalism

Market economies do not logically presuppose the existence of private property in the means of production.
A market economy can consist of various types of cooperatives, collectives or autonomous state agencies that
acquire and exchange capital goods in capital markets,
utilizing a free price system to allocate capital goods
and labor.[3] There are many variations of market socialism, some of which involve employee-owned enterprises
based on self-management; as well as models that involve
public ownership of the means of production where capital goods are allocated through markets.[7]

Laissez-faire is synonymous with what was referred to as

strict capitalist free market economy during the early and
mid-19th century as a classical liberal (right-libertarian)
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, articial price pressures,
and government-granted monopolies (usually classied
as coercive monopoly by free market advocates) and no
taxes or taris 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 anarchocapitalism see the state as morally illegitimate and economically unnecessary and destructive.

Capitalism

Main article: Capitalism

1.2 Free-market economy

Capitalism generally refers to economic system where

the means of production are largely or entirely privately
owned and operated for a prot, 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.

See also: Free market

Free-market economy refers to a capitalist economic system where prices for goods and services are set freely
There are dierent variations of capitalism with dierent by the forces of supply and demand and are allowed to
relationships to markets. In Laissez-faire and free market reach their point of equilibrium without intervention by
1

2 MARKET SOCIALISM

government policy. It typically entails support for highly 1.4.3 Social market economy
competitive markets, private ownership of productive enterprises. Laissez-faire is a more extensive form of free- Main article: Social market economy
market economy where the role of the state is limited to
protecting property rights.
This model was implemented by Alfred Mller-Armack
and Ludwig Erhard after World War II in West Germany.
The social market economic model (sometimes called
1.3 Welfare capitalism
Rhine capitalism) is based upon the idea of realizing the
benets of a free market economy, especially economic
Main article: Welfare capitalism
performance and high supply of goods, while avoiding
disadvantages such as market failure, destructive compeWelfare capitalism refers to a capitalist economy that in- tition, concentration of economic power and anti-social
cludes a public policies favoring extensive provisions for eects of market processes. The aim of the social marsocial welfare services. The economic mechanism in- ket economy is to realize greatest prosperity combined
volves a free market and the predominance of privately with best possible social security. One dierence from
owned enterprises in the economy, but public provision of the free market economy is that the state is not passive,
universal welfare services aimed at enhancing individual but takes active regulatory measures.[10] The social policy
autonomy and maximizing equality. Examples of con- objectives include employment, housing and education
temporary welfare capitalism include the Nordic model policies, as well as a socio-politically motivated balancing
of the distribution of income growth. Characteristics of
of capitalism predominant in Northern Europe.[8]
social market economies are a strong competition policy
and a contractionary monetary policy. The philosophical
background is Neoliberalism or Ordoliberalism[11]
1.4 Regional models
1.4.1

Anglo-Saxon model

Main article: Anglo-Saxon economy

2 Market socialism
Main article: Market socialism

Anglo-Saxon capitalism refers to the form of capitalism predominant in Anglophone countries and typied 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 nancial 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.[9]
1.4.2

East Asian model

Main article: East Asian model of capitalism

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 exportbased model of growth. The actual practice of this model
varies by country. This designation has been applied to
the economies of Singapore, Japan, Taiwan, South Korea
and the Peoples Republic of China.

Market socialism refers to various types of economic

systems where the means of production and the dominant economic institutions are either publicly owned or
cooperatively owned but operated according to the rules
of supply and demand. This type of market economy
has its roots in classical economics and in the works
of Adam Smith, the Ricardian socialists and Mutualist
philosophers.[12]
The distinguishing feature between non-market socialism
and market socialism is the existence of a market for
factors of production and the criteria of protability for
enterprises. Prots derived from publicly owned enterprises can variously be used to reinvest in further production, to directly nance government and social services,
or be distributed to the public at large through a social
dividend or basic income system.[13]

2.1 Public ownership models

In the 1930s, the economists Oskar Lange and Abba

Lerner developed a model of socialism that posited that
a public body (dubbed the Central Planning Board)
can set prices through a trial-and-error approach until
they equaled the marginal cost of production in order to
achieve perfect competition and pareto optimality. In this
A related concept in political science is the developmental model of socialism, rms would be state-owned and manstate.
aged by their employees, and the prots would be dis-

3
bursed among the population in a social dividend. This
model came to be referred to as market socialism because it involved the use of money, a price system and
simulated capital markets, all of which are absent from
traditional non-market conceptions of socialism.

presented as a "preliminary stage of socialism" to explain

the dominance of capitalistic management practices and
forms of enterprise organization in both the state and nonstate sectors.

A more contemporary model of market socialism is that

put forth by the American economist John Roemer, re- 3 Early market economies
ferred to as Economic democracy. In this model, social
ownership is achieved through public ownership of eq4 Criticisms
uity in a market economy. A Bureau of Public Ownership (BPO) would own controlling shares in publicly
listed rms, so that the prots generated would be used The economist Joseph Stiglitz argues that markets suffer from informational ineciency and the presumed effor public nance and the provision of a basic income.
ciency of markets stems from the faulty assumptions of
neoclassical welfare economics, particularly the assumption of perfect and costless information, and related in2.2 Cooperative socialism
centive problems. Neoclassical economics assumes static
Libertarian socialists and left-anarchists often promote a equilibrium, and ecient markets require that there be
form of market socialism in which enterprises are owned no non-convexities, even though nonconvexities are perand managed cooperatively by their workforce so that the vasive in modern economies. Stiglitzs critique applies
prots directly remunerate the employee-owners. These to both existing models of capitalism and to hypotheticooperative enterprises would compete with each other cal models of market socialism. However, Stiglitz does
in the same way private companies compete with each not advocate replacing markets, but states that there is a
other in a capitalist market. The rst major elaboration of signicant role for government intervention to boost the
this type of market socialism was made by Pierre Joseph eciency of markets and to address the pervasive market
failures that exist in contemporary economies.[14]
Proudhon and was called "mutualism".
Self-managed market socialism was promoted in Yugoslavia by economists Branko Horvat and Jaroslav
Vanek. In the self-managed model of socialism, rms
would be directly owned by their employees and the management board would be elected by employees. These cooperative rms would compete with each other in a market for both capital goods and for selling consumer goods.

2.3

Socialist market economy

Following the 1978 reforms, the Peoples 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 organized as jointstock companies where various government agencies own
controlling shares through a shareholder system. Prices
are set by a largely free-price system and the stateowned enterprises are not subjected to micromanagement by a government planning agency. A similar system
called "socialist-oriented market economy" has emerged
in Vietnam following the i Mi reforms in 1986.
However, this system is usually characterized as state
capitalism instead of market socialism because there is
no meaningful degree of employee self-management in
rms, because the state enterprises retain their prots instead of distributing them to the workforce or government, and many function as de facto private enterprises.
The prots neither nance a social dividend to benet the
population at large, nor do they accrue to their employees.

Robin Hahnel and Michael Albert claim that markets

inherently produce class division.[15] 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, some workers will be
more able than others to capture the benets
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 former greater
bargaining power in a rm over the distribution
of income. A conceptual worker who is not
satised with his income can threaten to work
for a company that will pay him more. The effect is a class division between conceptual and
manual laborers, and ultimately managers and
workers, and a de facto labor market for conceptual workers (...)".[15]

David McNally argues that the logic of the market inherently produces inequitable outcomes and leads to unequal
exchanges, arguing that Adam Smith's moral intent and
moral philosophy espousing equal exchange was underIn the Peoples Republic of China, this economic model is mined by the practice of the free markets he championed.

The development of the market economy involved coercion, exploitation and violence that Adam Smiths moral
philosophy could not countenance. McNally also criticizes market socialists for believing in the possibility of
fair markets based on equal exchanges to be achieved
by purging parasitical elements from the market economy, such as private ownership of the means of production. McNally argues that market socialism is an oxymoron when socialism is dened as an end to wage-based
labor.[16]

See also
Economic freedom
Economic liberalism
Free market
Grey market
Market socialism
Market structure
Mixed economy
Neoclassical economics
Planned economy
Price system
Regulated market
Social market economy
Socialist market economy

References

[1] Gregory and Stuart, Paul and Robert (2004). Comparing Economic Systems in the Twenty-First Century, Seventh
Edition. George Homan. p. 538. ISBN 0-618-261818. Market Economy: Economy in which fundamentals
of supply also demand provide signals regarding resource
utilization.
[2] Altvater, E. (1993). The Future of the Market: An Essay
on the Regulation of Money and Nature After the Collapse
of Actually Existing Socialism. Verso. p. 57.
[3] Paul M. Johnson (2005). A Glossary of Political Economy Terms, Market economy. Auburn University. Retrieved 28 December 2012.
[4] Altvater, E. (1993). The Future of the Market: An Essay
on the Regulation of Money and Nature After the Collapse
of Actually Existing Socialism. Verso. pp. 237238.
[5] Tucker, Irvin B. p 491. Macroeconomics for Today. West
Publishing. p. 491

REFERENCES

[6] market economy, Merriam-Webster Unabridged Dictionary

[7] Bock man, Johanna (2011). Markets in the name of Socialism: The Left-Wing origins of Neoliberalism. Stanford
University Press. ISBN 978-0-8047-7566-3.
[8] The surprising ingredients of Swedish success - free markets and social cohesion (PDF). Institute of Economic Affairs. June 25, 2013. Retrieved January 15, 2014.
[9] Anglo-Saxon capitalism, Business Dictionary on BusinessDictionary.com:
http://www.businessdictionary.
com/definition/Anglo-Saxon-capitalism.html
[10] keyword social market economy = Soziale Marktwirtschaft Duden Wirtschaft von A bis Z. Grundlagenwissen fr Schule und Studium, Beruf und Alltag. 2. Au.
Mannheim: Bibliographisches Institut & F.A. Brockhaus
2004. Lizenzausgabe Bonn: Bundeszentrale fr politische
Bildung 2004.
[11] Duden Wirtschaft von A bis Z: Eintrag: keyword social
market economy = Soziale Marktwirtschaft
[12] McNally, David (1993). Against the Market: Political
economy, market socialism and the Marxist critique. Verso.
p. 44. ISBN 978-0-86091-606-2. ...by the 1820s,
'Smithian' apologists for industrial capitalism confronted
'Smithian' socialists in a vigorous, and often venomous,
debate over political economy.
[13] Social Dividend versus Basic Income Guarantee in Market
Socialism, by Marangos, John. 2004. International Journal of Political Economy, vol. 34, no. 3, Fall 2004.
[14] Michie, Jonathan (January 1, 2001). Readers Guide to
the Social Sciences. Routledge. p. 1012. ISBN 9781579580919. Stiglitz criticizes the rst and second welfare theorems for being based on the assumptions of complete markets (including a full set of futures and risk markets) and perfect and costless information, which are simply not true. Incentives are dubious too. Thus, capitalist
markets are also not ecient and there is some role for
government intervention. The ability to decentralize using
the price system requires that there be no nonconvexities,
but nonconvexities are pervasive.
[15] Weiss, Adam (2005-05-04). A Comparison of Economic Democracy and Participatory Economics. ZMag.
Retrieved 2008-06-26.
[16] McNally, David (1993). Against the Market: Political
economy, market socialism and the Marxist critique. Verso.
ISBN 978-0-86091-606-2.

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