Market economies

A society may attempt to deal with the basic economic problems by allowing free play to what are known as market forces. The state plays little or no part in economic activity. Most of the people in the non-communist world earn and spend in societies which are still fundamentally market economies.

The market system of economic organization is also commonly described as a free enterprise or lais­sez-faire, or capitalist system. We shall use all these terms to stand for a market economy. Strictly speaking the pure market of laissez-faire system has never existed. Whenever there has been some form of political organization, the political authority has exercised some economic functions (e.g. controlling prices or levying taxation). It is useful, however, to consider the way in which a true market system would operate because it provides us with a simpli­fied model, and by making modifications to the model we can approach the more realistic situations step by step.

The framework of a market or capitalist system contains six essential features. They are:

- private property

- freedom of choice and enterprise

- self-interest as the dominating motive

- competition

- a reliance on the price system

- a very limited role for government.

1. Private property.

The institution of private property is a major feature of capitalism. It means that individuals have the right to own, control and dispose of land, buildings, machinery, and other natural and man-made resources. Man-made aids to production such as machines, factories, docks, oil refiner­ies and road networks are known as capital. Private proper­ty not only confirms the right to own and dispose of real assets, it provides the owners of property with the right to income from that property in the form of rent, interest and profits.

2. Freedom of choice and enterprise.

Freedom of enterprise means that individuals are free to buy and hire economic resources, to organize these resources for production, and to sell their products in the markets of their own choice. Persons who undertake these activities are known as entrepreneurs and such people are free to enter and leave the industry.

Freedom of choice means that owners of land and capi­tal may use these resources as they see fit. It also means that workers are free to enter (and leave) any occupations for which they are qualified. Finally it means that consumers are free to spend their incomes in any way they wish. The free­dom of consumer choice is usually held to be the most important of these economic 'freedoms'. In the models of capitalism, producers respond to consumers preferences — they produce whatever consumers demand.

3. Self-interest.

Since capitalism is based on the principle that individ­uals should be free, to do as they wish, it is not surprising to find that the motive for economic activity is self-inter­est. Each unit in the economy attempts to do what is best for itself. Firms will act in ways which, they believe, will lead to maximum profits (or minimum losses). Owners of land and capital will employ these assets so as to obtain the high­est possible rewards. Workers will tend to move to those occupations and locations which offer the highest wages. Consumers will spend their incomes on those things which yield the maximum satisfaction.

4. Competition.

Economic rivalry or competition is another essential feature of a free enterprise economy. Competition, as econ­omists see it, is essentially price competition. The model of the market economy envisages a situation where, in the market for each commodity, there are large numbers of buyers and sellers. Each buyer and seller accounts for an

insignificant share of the business transacted and hence has an influence on the market demand or market supply. It is the forces of total demand and total supply which determine the market price, and each participant, whether buyer or seller, must take this price as given since it is beyond his or her influence or control. In theory at least, competition is the regulatory mechanism of capitalism. It limits the use of economic power since no single firm or individual is large enough or strong enough to control a market and exploit the other buyers or sellers.

5. Markets and Prices.

Perhaps the most basic feature of the market economy is the use of the price mechanism for allocating resources to various uses. The price system is an elaborate system of communications in which innumerable free choices are aggregated and balanced against each other. The decisions of producers determine the supply of a commodi­ty; the decisions of buyers determine the price. Changes in demand and supply cause changes in market prices and it is these movements in market prices which bring about the changes in the ways in which society uses its economic resources.

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