In a market economy, also known as a free market economy, trade between businesses and customers is open. Governments serve primarily as regulators. This method has a long history, but there are also some areas of the world that embrace the concept more than others, although none 100 percent.
The U.S. economy incorporates an interesting blend of concepts, including a free market in which individuals control their own resources. Items are sold by businesses and purchased by customers who do so freely. In such a market, governments intervene only to set the rules and regulations necessary to protect consumers. A market economy may be called a free market, free economy or free market economy.
What Is a Market Economy?
A market economy is defined by the control that businesses and consumers have over trade. This type of economy assumes that supply and demand will drive the economy, with no need for the government to step in. But consumer protection is another important element of a market economy, since oversight is always necessary.
In a market economy, businesses, in theory, could set prices at the highest point they think customers would pay. However, a free market also encourages competition, since there’s no limit to the number of businesses that can sell a certain type of good or service. Market economies strive to avoid monopolies to keep that competition going.
History of the Market Economy
The market economy goes all the way back to the early days of humans trading with each other. This is thought to date back to between 9000 and 6000 B.C. Money wasn’t used in trade until 1000 B.C. when metallic coins were first manufactured in China. Before that, humans traded items like cattle for goods and services, without government entities overseeing the exchange.
Once currency became an integral part of trade, two types of economies began to emerge: the market economy and the command economy, which is defined by more socialist tendencies. Over time, though, most economies have adapted traits of each type, which means no economy is 100 percent market or command. They all operate somewhere between the two extremes.
Market Economy Examples
According to the 2018 Index of Economic Freedom, Hong Kong ranks as the freest economy in the world. Although regulatory authorities work hard to prevent corruption, free trade is encouraged, with a 2016 reduction in fees making it even easier to start a business there. Singapore’s economy is also praised for its free economy, with recent improvements in labor freedom and property rights boosting its score. However, the nation gets low marks for business freedom, due in part to recent crackdowns on foreign labor.
The U.S. falls at 18th place on the economic freedom index, ranking below the U.K., Canada and Australia. Although the labor market in the U.S. has improved, and tax reforms boost its score, the decline in rankings for government integrity has caused it to drop down the list. At the same time, other areas in the world are showing improvements that make it difficult for the U.S. to compete.