Market economy

 

 

A market economy is an economic system in which the decisions regarding investment, production, and distribution are guided by the price signals created by the forces of supply and demand. The major characteristic of a market economy is the existence of factor markets that play a dominant role in the allocation of capital and the factors of production.
Market economies range from minimally regulated "free market" and laissez-faire systems┤where state activity is restricted to providing public goods and services and safeguarding private ownership to interventionist forms where the government plays an active role in correcting market failures and promoting social welfare. State-directed or dirigist economies are those where the state plays a directive role in guiding the overall development of the market through industrial policies or indicative planning┤which guides but does not substitute the market for economic planning┤a form sometimes referred to 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 by a single organizational body that owns and operates the economy«s means of production.
For market economies to function efficiently, governments must establish clearly defined and enforceable property rights for assets and capital goods. However, property rights does 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.
Capitalism generally refers to 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 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.
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 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.