Market economy

A market economy is an economic system where decisions regarding investment, production, and distribution are based on the interplay of supply and demand, [1] which determines the prices of goods and services. [2] The major defining characteristic of a market economy is that investment decisions, or the allocation of producer good, are primarily made through capital and financial markets. [3] This is contrasted with a planned economy, where investment and production decisions are embodied in an integrated plan of production established by a state or other organizational body that controls the factors of production.

Market economies can range from free market systems to regulated markets and various forms of interventionist variants. In reality, free markets do not exist in pure form, since societies and governments all regulate them to varying degrees. [4] [5] Different perspectives exist as to how strong a role the government should have in both guiding and regulating market economies and addressing the inequalities the market naturally produces. Most existing market economies include a degree of state-directed activity or economic planning, and are thus classified as mixed economies. The term free-market economy is sometimes used synonymously with market economy. [6]

Market economies do not logically presuppose the existence of private ownership of the means of production. A market economy can and often does include various types of cooperatives, collectives, or autonomous state agencies that acquire and exchange capital goods in capital markets. These all utilize a market-determined free price system to allocate capital goods and labor. [3] In addition, there are many variations of market socialism, some of which involve employee-owned enterprises based on self-management; as well as models that involve the combination of public ownership of the means of production with factor markets. [7]


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 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.


Laissez-faire is synonymous with what was referred to as strict capitalist free market economy during the early and mid-19th century[ citation needed] 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, 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. Right-libertarian advocates of anarcho-capitalism see the state as morally illegitimate and economically unnecessary and destructive.

Free-market economy

Free-market economy refers to an economic system where prices for goods and services are set freely by the forces of supply and demand and are allowed to reach their point of equilibrium without intervention by government policy. It typically entails support for highly competitive markets, private ownership of productive enterprises. Laissez-faire is a more extensive form of free-market economy where the role of the state is limited to protecting property rights.

Welfare capitalism

Welfare capitalism refers to a capitalist economy that includes public policies favoring extensive provisions for social welfare services. 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. Examples of contemporary welfare capitalism include the Nordic model of capitalism predominant in Northern Europe. [8]

Regional models

Anglo-Saxon model

Anglo-Saxon capitalism refers to the form of capitalism predominant in Anglophone countries and typified 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 financial 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]

East Asian model

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 export-based 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 People's Republic of China.

A related concept in political science is the developmental state.

Social market economy

This model was implemented by Alfred Müller-Armack and Ludwig Erhard after World War II in West Germany. The social market economic model (sometimes called "Rhine capitalism") is based upon the idea of realizing the benefits of a free market economy, especially economic performance and high supply of goods, while avoiding disadvantages such as market failure, destructive competition, concentration of economic power and the socially harmful effects of market processes. The aim of the social market economy is to realize greatest prosperity combined with best possible social security. One difference from the free market economy is that the state is not passive, but takes active regulatory measures. [10] The social policy objectives include employment, housing and education policies, as well as a socio-politically motivated balancing of the distribution of income growth. Characteristics of social market economies are a strong competition policy and a contractionary monetary policy. The philosophical background is Neoliberalism or Ordoliberalism [11]

Other Languages
Afrikaans: Vryemarkekonomie
العربية: اقتصاد السوق
azərbaycanca: Bazar iqtisadiyyatı
Esperanto: Merkata ekonomio
한국어: 시장 경제
Bahasa Indonesia: Ekonomi pasar
latviešu: Tirgus ekonomika
lietuvių: Rinkos ekonomika
македонски: Пазарна економија
Nederlands: Markteconomie
日本語: 市場経済
norsk nynorsk: Marknadsøkonomi
oʻzbekcha/ўзбекча: Bozor iqtisodiyoti
Simple English: Market economy
slovenčina: Trhová ekonomika
українська: Ринкова економіка
粵語: 市場經濟
中文: 市场经济