Market economy
A market economy is an economic system in which the decisions regarding investment, production, and distribution to the consumers are guided by the price signals created by the forces of supply and demand.
For market economies to function efficiently, governments must establish clearly defined and enforceable property rights for assets and capital goods.
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.
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.
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 is synonymous with what was referred to as strict free-market economy during the early and mid-19th century[citation needed] 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.
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.
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 social market economy was implemented by Alfred Müller-Armack and Ludwig Erhard after World War II in West Germany.
Instead, he contends that the class differences and inequalities in income and power that result from private ownership enable the interests of the dominant class to skew the market to their favor, either in the form of monopoly and market power, or by utilizing their wealth and resources to legislate government policies that benefit their specific business interests.
[20] Market socialism traces its roots to classical economics and the works of Adam Smith, the Ricardian socialists and mutualist philosophers.
[21] 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) could 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.
Some anarchists and libertarian socialists promote a form of market socialism in which enterprises are owned and managed cooperatively by their workforce so that the profits directly remunerate the employee-owners.
In China, this economic model is 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 non-state sectors.
Chief Rabbi Lord Sacks of the United Synagogue draws a correlation between modern capitalism and the Jewish image of the Golden Calf.
Neoclassical economics assumes static equilibrium and efficient markets require that there be no non-convexities, even though nonconvexities are pervasive in modern economies.
[27] 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, arguing: 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 benefits of economic gain.
In the long term, the designer will become more adept at conceptual work than the builder, giving the former greater bargaining power in a firm over the distribution of income.
[29] Prices play an extremely vital role in market economies by providing important information about commodity and service availability.
External factors, including shifting technological standards, new government laws, and natural catastrophes can have a substantial impact on supply and demand.
Natural disasters have the ability to severely disrupt supply chains, creating shortages of key items that increase costs while simultaneously decreasing demand.
Supply and demand play an indispensable role in any market economy by ensuring prices reflect market forces accurately, adapting accordingly as conditions shift between supply and demand situations, while producers adjust production according to price signals from consumers, fulfilling customers' requests while giving individuals freedom in making purchasing choices based on personal preferences or financial constraints.
Tax incentives, carbon trading programs, and environmental requirements are just a few ways government rules and policies encourage enterprises to adopt sustainable practices.
At the same time, consumer demand for eco-friendly goods and services and understanding of these issues may influence market dynamics to favour more sustainable options.
[32] A sustainable market economy may encourage innovation, provide green employment, and guarantee the welfare of future generations by incorporating environmental factors into economic decision-making.
