Definition of a market economy

Market economy

A market economy is a type of economic system. Where individuals and establishments obtain freedom to exchange and transfer services and goods without any barriers, and resources are allocated through this system by relying on the market institution and the price mechanism linked to the equation of demand (consumption) and supply (production), without any interference from the state in the production process. The market economy is defined as an economic system based on granting freedoms to individuals. That is, they have the right to practice the economic activities they want, and it also depends on private ownership of the means used in production, and it is also called the free economy. Another definition of a market economy is a system in which economic decisions and prices of services and goods depend on interactions between individual companies in a country.

The emergence of a market economy

The origins of the market economy go back to the economist Friedrich Hayek. He sought to design this theory to confront Keynesian economics, which relies on government intervention to maintain market stability. Hayek rejected government interventions in markets, considering that the market is capable of self-correcting itself, with its ability to achieve well-being and freedom for all individuals away from any restrictions. Therefore, he considered that this type of economic system constitutes an ideal guarantee for capitalism that contributes to achieving prosperity for people.

Market economic theories

The market economy relies on theories that aim to study its content and performance. It also attempts to explain matters related to the exchange value of goods, or known as the prevailing price. The following is information about the main theories of the market economy:

• Traditional theory: It is an intellectual theory linked to economic thinkers Adam Smith, David Ricardo, and William Beatty. They were interested in studying the performance of the market economy, and according to this theory, the value of goods is determined based on the amount of work allocated to produce them, and is not applied in practice until after the exchange process is carried out, and the market price is reached, which is affected by fluctuations associated with changing conditions, and the nature of the behavior of both merchants and consumers, They are two forces that conflict with each other. When their interests come together, a market price is produced. Achieving balance in the exchange of goods is an important condition for producers to continue implementing the production process. The emergence of any changes in demand and supply also affects the price of the commodity, as it may decrease, increase, or be equal to its value.
• Marxist theory: It is an intellectual theory linked to the thinker Karl Marx. He used it to criticize the traditional theory (capitalism), and relied on it to explain the market economy by using the method of dialectical materialism to analyze this economy. He also agreed with the owners of the traditional trend about determining the value of a commodity by the time spent working on its production, but it is not an eternal relationship, but rather is subject to various changes. With the change in prevailing conditions in society, Marx was greatly concerned with the presence of capital in the hands of a few producers, their control in determining the value of goods within the markets, and the methods used to distribute wages; The largest share of income - in the form of profits - is owned by a group of the few owners of capital, and in return the majority of workers are content with obtaining the largest share of income in the form of wages.
• The marginal theory: It is an intellectual theory followed by new capitalist thinkers, such as: von Bavrk and Alfred Marshall. This theory believes that the market economy emerges as a result of a relationship between individuals and things. Meaning interest in focusing on the benefit of the commodity, and this benefit contributes to determining the value of the commodity. Because a person is constantly searching for a way to satisfy his needs and achieve the best profits, so he seeks to determine the value of a specific thing based on the marginal benefit that can be obtained from it. The marginal value expresses the relationship between the commodity and the human being. When the human need for a commodity increases, this leads to an increase in its value. Therefore, the market economy is concerned with achieving the best profits by relying on the production of tradable goods that contribute to meeting the desires and needs of individual consumers.

Principles of market economy

Economic theories contributed to developing a set of principles that led to the formation of the law on the market economy. Below is information about these principles:

• Private ownership of the means of production: It is the market economy system's requirement that the means of production be owned by individuals, and these means constitute the main capital adopted by this economy. Therefore, individuals obtain the right to ownership and control of these means, and to use them according to the things appropriate to their individual interests. They also have the right to trade products in the market with the aim of obtaining profit. Which leads to a group of individuals monopolizing the economic surplus compared to individuals who do not have these means and who are keen to work in exchange for a specific salary.
• Freedom of trade and production: It is the dependence of the market economy on spontaneous or automatic trading affected by the various forces of the market. Where capital owners are interested in managing their projects according to their own interests, they have the freedom to choose the method of commercial trading and production. Since the main goal is to reach the largest possible amount of profit.
• Formulating prices based on demand and supply: It is one of the basic axes that the market economy is concerned with. Where merchants and consumers meet together through the meeting of demand and supply for goods, prices also represent the central point of meeting between the parties of the market.
• Obtaining profits under monopoly and competition: It is one of the most important characteristics associated with the economic activity of a market economy. A profit in kind or material is obtained in the presence of perfect competition, and the absence of any restrictions determining the prices of goods. Capital owners also seek to gather together within monopolies that contribute to reducing the negative effects resulting from competition. associated with their projects, and the ultimate goal of these monopolies remains to confront competition within the markets