Market economy

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A market economy is a term proponents of capitalism use to describe a capitalist economy. It is meant to contrast to a planned economy, in which most production decisions occur as a result of planning by a central agency. In capitalism, most production decisions occur as a result of the planning decisions of corporate planners hired by capitalists. However, opponents of capitalism point out that the differences between capitalist economies and differently-planned economies are not in the marketplace but at the point of production. Therefore, they say the phrase market economy is a misnomer.

Although market economies are often identified with capitalism, it could be argued that the connection need not be very strong. It is possible for a market economy to have government intervention in the economy. The key difference between market economies and planned economies lies not with the degree of government influence but with how that influence is used. In a market economy, if the government wants more steel, it collects taxes and then buys the steel at market prices. In a planned economy, a government which wants more steel simply orders it to be produced.

The proper role for government in a market economy remains controversial. Most supporters of a market economy believe that government has a legitimate role in defining and enforcing the basic rules of the market. More controversial is the question of how strong a role the government should have in both guiding the economy and addressing the inequalities the market produces. For example, there is no universal agreement on issues such as protectionist tariffs, federal control of interest rates, and welfare programs.

In the 1980s, most of the planned economies in the world attempted to transform themselves into market economies, for various reasons and with varying degrees of success. In the Soviet Union, this process was known as perestroika while in China the creation of a "socialist market economy" was one element of Chinese economic reform.

"In a planned economy those with political power make up the plans, in a market economy those who have money make up the plans" is a common joke in Central European countries who have experienced planned economy and are now experiencing market economy.

Market economy

See also