U.S. ECONOMY > An Overview of the U.S. Economy > What is a Market Economy?

What is a Market Economy?

By Michael Watts

Introduction
Command and Market Economies
Consumers in a Market Economy
Business in a Market Economy
Workers in a Market Economy
A System of Markets
Finances in a Market Economy
Government in a Market Economy

INTRODUCTION

Throughout history every society has faced the fundamental economic problem of deciding what to produce, and for whom, in a world of limited resources. In the 20th century, two competing economic systems, broadly speaking, have provided very different answers: command economies directed by a centralized government, and market economies based on private enterprise. At the end of the 20th century, it is clear that, for people throughout the world, the central, command economy model has failed to sustain economic growth, to achieve a measure of prosperity, or even to provide economic security for its citizens.

Yet for many, the fundamental principles and mechanisms of the alternative, a market economy, remain unfamiliar or misunderstood -- despite its demonstrable successes in diverse societies from Western Europe to North America and Asia. In part, this is because the market economy is not an ideology but a set of time-tested practices and institutions about how individuals and societies can live and prosper economically. Market economies are, by their very nature, decentralized, flexible, practical and changeable. The central fact about market economies is that there is no center. Indeed, one of the founding metaphors for the private marketplace is that of the "invisible hand."

Market economies may be practical, but they also rest upon the fundamental principle of individual freedom: freedom as a consumer to choose among competing products and services; freedom as a producer to start or expand a business and share its risks and rewards; freedom as a worker to choose a job or career, join a labor union, or change employers.

It is this assertion of freedom, of risk and opportunity, that joins together modern market economies and political democracy.

Market economies are not without their inequities and abuses -- many of them serious -- but it is also undeniable that modern private enterprise and entrepreneurial spirit, coupled with political democracy, offers the best prospect for preserving freedom and providing the widest avenues for economic growth and prosperity for all.