Introduction
Modern market economy is a complex social system of the division of labor under private ownership of the means of production that includes a large number of diverse industrial, commercial, financial and information structures that interact on the common legal principles. In this system every person acts for his own good; but everybody’s actions collaborate and are aimed at the satisfaction of other people’s wants and needs as well as at the satisfaction of own. Every individual serves and is being served by the others; all people are both means for production and consumers at the same time.
This system is steered by the only concept and it is the market. We can consider market as a place where people interact with each other by buying and selling goods or services, thus actually directing the individual’s activities into the idea of better serving the wants of the fellow men. There is no compulsion, nor should coercion in the operation of the market, as the state, the social apparatus of coercion and compulsion, should not be interfering with the market and with the citizens’ activities directed by the market. It protects the personal life, health, and property against violent or fraudulent aggression, in this way the state creates and preserves the safe environment in which the market economy can operate.
History
In modern neoclassical economics literature, the definition of the market, given by French economist Augustin Cournot (1801-1877) and English economist Alfred Marshall (1842-1924) is the one often used. It states, that market is not a particular market area, where various goods are bought and sold, but any area in general, where buyers and sellers can trade so easily that prices for the same goods will automatically adjust and align. Freedom of exchanged and price fixing are being the main determining criteria for this definition.
Another British economist William Jevons (1835-1882) described "closeness" in the buyer-seller relationship to be the main point in the definition of market. He believed that any group of people, which are in close business relations that make deals and transactions on any product, can represent market. The main drawback of these theories is that only the exchange part of the market is being covered.
A market economy is the type of economic system where supply and demand do the regulation of the economy, rather than government intervention. True free market economy implies that all of the resources are owned by individuals, and decisions about the destiny of those resources are made by the same individuals without any government intervention. In the market economy, the manufacturer gets to decide what to produce, how much to produce, what to charge customers for those goods, and what to pay employees. Such decisions in the free-market economy are done with the help and by the pressures of various factors. Unfortunately there are absolutely no completely "free-enterprise" or market economies in our modern world.
Role of the Limited Government
One of the most essential characteristics of the market economy, also called a free enterprise economy, is the role of a limited government, which implies that most of the economic decisions are made by consumers and sellers, rather than the government. A competitive market economy promotes efficient resource usage, with self-regulation and self-adjustment. Despite the fact that government does not play active role in decision making, a number of limitations and undesirable outcomes associated with the market system might result in an active, but nevertheless limited economic response from the government.
Motive of Self-Interest
A market economy is also partially driven by the motive of self-interest, with consumers have the motivation of getting the biggest benefits from the resources they have and entrepreneurs trying to get the highest profits for their businesses, and workers trying to get the highest possible wages and salaries. Owners of capital resources try to get the highest possible prices from the rent or sale of their resources. This "invisible hand" of self-interest is the driving force of a market economy.
Competition
Competition is another important characteristic of a market economy. Instead of government regulations, competition limits abuse of economic power by one business or individual against another. Each competitor tries to further his own self-interest. This economic rivalry means that buyers and sellers are free to enter or leave any market. It also means that buyers and sellers are acting independently in the marketplace. When businesses compete for customers, they want to sell their goods or services at the lowest possible price while still earning a profit for them. Consumers compete for goods and services. If the supply of a needed good or service is low, the consumer must pay a higher price. Consumers must compete to get goods or services by paying more or going out of their way to buy the products they need or want. A system of markets and prices working together are the structure of a market economy, not the central planning by government. A market brings buyers and sellers together. The wants of buyers and sellers are registered on the supply and demand sides of various markets. The outcome of these choices is a system of product and resource prices. Prices are the guideposts on which buyers and sellers make and revise their free choices in furthering their self-interests.
The Private Property System
One of the main features and factors that allow market economy to function is the private property system. This is a system in which all that is contained is only separable, and that means that the rights of ownership belong to only one individual, thus all of the benefits and costs from controlling and using a good are felt only by a single person. Non-separable goods are the goods that are either impossible or very difficult for a government to define private property rights for.
The private property system has two characteristics. First feature of the private property system is that every good and resource must have a particular individual as an owner. By saying good we mean a thing that can be used for satisfying needs, whereas a resource can be used to satisfy a need indirectly by helping to manufacture a final product. An owner of a resource or a good has full rights to control its use, moreover no one can benefit from using that good or resource until obtaining permission from the owner of it first. The owner also bares full responsibility for the costs of use, including those that are felt by someone else.
The second characteristic of the private property system is exchangeability. The owner of a right is allowed to exchange it by law. The exclusive ownership and exchangeability in the private property system gives individuals a chance to specialize, since the exchange among the producers is expected.
Specialization
Specialization means that different tasks performed to satisfy the needs of the community are usually done by different by different people or producers. Private property rights system encourages individuals to use their own special skills to produce goods or services that are exchangeable if needed, this specialization makes it possible for most of the products to be made with less human effort than it would be required in case if the same good or service would get produced by the person planning on using those. The private property system also gives people reasons for acquiring specialized abilities and enhancing those that they already possess, which makes higher standards of living and the support of larger populations with the same resources possible.
Money
With a private property system and specialization, each specialized producer must offer either his services or the goods produced in exchange. The manufacturer can obtain the wanted goods or resources only by agreeing to produce or exchange goods or services with others, most of the times both. In a barter economy, goods are being traded directly for those of other specialists; in the market economy, however, the exchange is being performed with the aid of money; for this reason, such an exchange/transaction is called indirect. Money is often used as a signal, a sign telling about one’s willingness to give up/to sell some good or service or to accept/to buy it in exchange. If there was no such particular item that was so widely accepted as money, no market economy would be possible. The same would be if money was absolutely unfamiliar to people, or if people did not know how to use it to calculate and signal their readiness.
Capital Accounting
Because people use money for transactions, they simply need to be able to carry out complex calculations of profits and losses, engaging themselves in capital accounting – the usage of the interest rates to compare and predict the expected revenues and costs. Capital accounting allows people to compare the alternative ways of using different resources, and to make more precise predictions about the prospects for earning profits from which revenues are expected. It also enables a consumer to easily compare different goods, as well as prospective employees to be able calculate the long-term benefits of a particular job, thus making different jobs comparison a lot easier. Finally, it helps to save money by enabling savers to compare various alternative investment opportunities, and choose the one that will guarantee the complete satisfaction of their future wants.
Free Enterprise
Free enterprise is defined with individuals being free from coercion, with some exceptions, to enter into any kind of deal they wish to enter, being able to apply for any kind of job they want, do any kind of transaction they need, and being able to make binding contracts. With free enterprise individuals have legal rights to use their own resources or the resources obtained from other individuals to manufacture and sell their products. Free enterprise allows people to make specific deals according to which they are required to perform specific services, to supply specific goods.
The free enterprise system determines every worker, producer or consumer faces a constant potential competition in exchange from other market players, thus allowing different sellers to enter the market to actually compete with each other; although the original seller is harmed by this, consumers will gain from this, and the consumer gain, in terms of money, is greater.
Conclusion
In theory, the market economy is probably the best economic system from the known today. It gives an absolute freedom of actions as to the consumers, as well as to the manufacturers, with limited or no government intervention at all. But unfortunately, the pure free market economy does not exist anywhere in our modern world.
