The market is not only an option to buy cheap clothes, but also the main part of one of the most common economic systems. We will talk about its signs and functioning mechanisms, as well as the problems provoked by the market in this article.
The definition of a market economy
A market economy is a system that is based on the personal belonging of each participant to it, as well as competition and free choice. First of all, it focuses on personal consumer preferences and interests, putting the role of public administration in a limited framework.
Consumer freedom in a market economy is the unlimited choice of goods and services in a market environment. She is also characterized by entrepreneurial freedom. The entrepreneur has the opportunity on an independent basis and in accordance with his own interests to carry out the distribution of resources, as well as the organization of production.
Market formula
The fundamentals of a market economy are established in a formula that is characteristic of only this type and consists of three questions that the individual who produces goods and services decides for himself:
- What to produce?
- How to produce?
- For whom to produce?
It is important that the signs of a market economy are precisely the answers, not the questions themselves, because they are asked when analyzing any economic system. Among other things, such an important market factor as price is determined independently by the manufacturer.
Competition in a Market Economy
The foundation of the economic system we are considering is the so-called “invisible hand of the market” (a definition coined by Adam Smith), or simply competition. Actually, the choice that is constantly made in the conditions of the market on a free basis forms the basis of competition in a market economy.
Private property
Also among the signs of a market economy is private property. This economic category is a guarantee of full compliance with already concluded agreements, and at the same time, non-interference of some third party. As a remark, we note that financial freedom (a concept directly related to private property) determines the personal freedom of each member of society and society as a whole.
Components of a market economy
The modern market economy is an incredibly complex, multi-component organism. It consists of an innumerable number of different financial, information, commercial and industrial structures. All these organizations operate against the backdrop of a complex system of business law that can be combined with the general concept of "market."
Definition of the term "market"
"Market" (as the market economy is otherwise called) is a term with many definitions. Its simplest definition sounds like this: this is the place where people look for and find each other in the role of buyers and sellers.
In the neoclassical economic doctrine, which is very widespread in modern society, the definition most often given is given by the famous economists Cournot and Marshall to this mechanism.
A market is not a specific market area on which items are sold and bought, but in general any area where the transactions of buyers and sellers with each other are so free that the prices of the same goods tend to easily and quickly equalize.
As a rule, market definitions differ in its criteria, which are declared as basic. In the above definition, such is free pricing and free exchange.
The English economic scientist Jevons as the main criterion declares the tightness of mutual relations among buyers and sellers. Moreover, Jevons believes that the market can be called absolutely any group of people who enter into fairly close business relations for some reason, as well as conclude certain commodity transactions.
The main drawback of these definitions is the fact that the content of a market economy and market is directly related only to the sphere of exchange.
Market today
In the foundations of a market economy today lies the concept of "market", which necessarily has a dual meaning:
- The first is its own meaning, which connects the market with sales in the field of exchange and circulation.
- In the second sense, the market is a system of economic relations of people who are able to cover the processes of both production and distribution, as well as exchange and consumption.
Thus, the market in the mechanisms of a market economy occupies a special place and is distinguished by its complex functioning due to the compilation of many components. It is directly based on the use of commodity-money ties, various forms of ownership, financial and credit state system.
We can distinguish some other market components:
- Exchange among joint ventures and foreign firms.
- Relations based on the lease of enterprises directly, as well as any other economic structures, in which the mutual relationship of the two entities occurs on a market basis.
- Credit relations that arise as part of obtaining loans for a specified percentage.
- Hiring and further exploitation (in the neutral sense of use) of labor through the labor exchange.
- Independent functioning of the market management structure (otherwise it can be called infrastructure), which includes currency, stock, commodity exchanges, and besides them, other elements.
The mechanism of functioning of the market system
The basic principles of market life in the country's economy:
- Freedom of choice of forms of activity and methods of its implementation.
- The inevitable penetration of market-type relations into all spheres of production activity (otherwise - the universality of the market).
- The absolute equality of market entities, regardless of the forms of ownership that they own.
- Self-regulation of the market, supplementing and completely or partially replacing the state management of the economy.
- The basis of all economic relations on contractual principles.
- Free for entities providing market supply, pricing.
- Self-financing and self-sustainability of economic entities.
- Economic independence and transfer of control "from the center."
- The provocation of liability through economic means - by using the principle of self-compensation of damage by individuals or organizations guilty of it.
- Partial state regulation (the ideal formula is the state as a “night watchman”).
- Competition as the main factor in increasing the economic efficiency of the market.
- Various methods of social protection being introduced everywhere.
Market Economy Models
The evolution of the market type of management provokes the formation of diversity among the types of market economy. It should be understood that despite the differences, they develop, firstly, under the conditions of an identical economic system and, moreover, within the framework of one technical basis. There are many ways to classify models of a market economy, differing from one another in the methods and forms of state regulation, in the areas within which the market and the state operate or interact, and the like.
Currently, it is customary to distinguish the following types of market economies:
- Western European It is characterized by active government intervention and a large share of the public sector (Italy, France, Portugal, Spain adhere to it).
- Saxon. The main sign of it is unrestricted by anyone and nothing entrepreneurial freedom (adhere to Canada, USA, UK).
- Scandinavian. In this case, equal participation of private and state capital in the economy is distinguished, the social economic orientation is very pronounced (adhere to Norway, Denmark, Sweden).
- Socially oriented. In it, more than in the previous type, focuses on the social orientation of the state economy (adhere to Austria, Germany, the Netherlands).
- Paternalistic. In such an economy, a clearly enhanced influence of the state is observed, following some traditional elements in modern improved production (only one country adheres to - Japan).
Market problems today
The foundation of any economic system is the action of economic regulators. In the development of a market economy, it is spontaneous, which invariably affects the instability of the financial sector. Imbalances within the system are far from eliminated immediately. Moreover, the full restoration of the economic equilibrium often goes through the stages of crises and other deep shocks.
With complete lack of control within the market environment, monopolies will necessarily arise. As we understand, this format is completely inconsistent with the market, as it directly limits competition. It is funny, but it turns out that the direct consequence of an inefficiently functioning market system is its absolute eradication.
The spontaneous market mechanism does not organize the economy around the satisfaction of many needs of society. This is, first of all, registration of decent pensions, scholarships and social benefits, improvement of health care and education systems, the fields of science, sports, culture, and art are also affected. Finally, the market is not able to provide constant full employment of the population, which means that it does not guarantee income. Each member of the society should independently improve their economic situation. This leads to social differentiation and the emergence of two extremes: the poor and the rich. The level of social tension is growing .
Among the main problems of a market economy today, they single out the central one - comprehensive support for the country's economic growth. However, as everyone knows, without clearly defined rules and their consistent implementation, it is impossible to solve a single problem, and even less so on an economic plan. So, everyone should understand that it is impossible to provide support to socially vulnerable groups of the population in the conditions when tax revenues do not appear in the state budget in the proper amount. In the same way, it is impossible to build a market in a civilized manner when the country is inside a deep corruption pit. That is, if the official depends on the material component and capital, economic growth and economic progress will be absolutely impossible.
Separately, we say that the modern market system, in principle, is not able to exist completely autonomously. Nevertheless, the participation of the state in managing it may become another problem for the market. There is a border that cannot be crossed in this matter so as not to provoke irreversible negative changes in market processes. That is, even government intervention, which, in theory, should be aimed at maintaining and stabilizing the economy, can lead to a sharp and deep decline in production efficiency.
One of the areas of concern for a market economy is agriculture. Moreover, in this case, paradoxically, it is a question of states developed from an economic point of view. Its essence lies in the fact that in the countries of the advanced echelon of modernization the number of manufactured products is many times greater than the volumes that fully satisfy the needs of the population. The reason for this is the high level and pace of labor productivity.
Way out
Be that as it may, one should not panic, since a market economy is a market imperfection that can be effectively mitigated by pursuing a reasonable policy in the economic sphere. In this case, we should talk about the need for partial government intervention related to the redistribution of material resources in favor of areas that, for objective reasons, cannot exist in a market based on self-sufficiency. We also include social policy.