Most countries of the world build a national economic model on market principles. Many states have managed to develop a powerful, competitive economy. Others are in the process of transition to it. How does the free market work? What is the role of the state in its development?
What is a free market?
According to a common definition, a free market is a system of relationships based on self-regulating processes between the entities that produce goods and services and those who buy them. Its main elements are cost, demand, supply. The ratio of the last two components determines the parameters for the first.
The market forms the corresponding type of economy, which is usually opposed to the planned system of organizing the national economy. In it, in turn, such parameters as price, supply and demand, are largely regulated by the state.
Pros and Cons of a Market Economy
What are the advantages and disadvantages of the market, as well as the corresponding economic system? The pros include:
- high efficiency in terms of distribution of public resources;
- adaptability of the economy to volatile external factors;
- the relevance of the implementation of scientific and technological developments;
- Opportunities for self-employment, entrepreneurship;
- economic response to the needs of society.
There are also disadvantages. Market disadvantages include:
- excessive in many cases the expenditure of natural resources;
- social risks (unemployment, crises);
- speculative bias of many firms.
However, with adequate government intervention, these disadvantages are largely nullified. In many countries, the above items are more likely to be nominally deficient in the market. The model in which power structures are involved in market processes is often referred to as a mixed economy. In practice, it is used in most modern states. Pure free market in no country in the world today, as analysts believe, is not present.
Market and State
Consider how the state can behave in a market economy. Intervention by the authorities can take place at two main levels. The first is institutional. Within the framework of it, the state mainly pursues a tax and monetary policy, which in many respects intersects with aspects of the international (which is practically in the exclusive prerogative of the authorities). The second level is government involvement in the spheres of economic activity. That is, when the authorities in one sphere or another “substitute” business for themselves. In what segments of the national economy does the state play the most significant role? Experts distinguish the following:
- credit market and banking;
- international trade;
- education, healthcare, public order.
In a market economy, the role of the state at the first level is reduced mainly to optimizing the distribution of capital. On the second - to stimulate the performance by economic entities of certain social functions, in some cases - to regulate supply and demand. How does all this happen in practice? Consider the relevant aspect.
The state as a regulator
At the institutional level, in the exclusive prerogative of the state are taxes (and related fees - duties, payments to social funds, etc.). Raising and lowering the corresponding rates, canceling them or introducing new ones, the authorities thereby regulate the distribution of capital between the private sphere and the budget.
Another area of absolute competence of the state is monetary policy. The authorities, mainly represented by the Central Bank and relevant executive bodies, are responsible for issues of issuing money, setting key credit rates, issuing bonds on the foreign market, etc. And this is also a mechanism for redistributing national capital.
The state as a business structure
The second mechanism is government participation in economic activity as if it was a business unit. Like private organizations, state-owned enterprises (those in which the government holds a predominant stake in shares or registered capital) produce goods, provide services, and pay taxes.
In a sense, government agencies are taking advantage of the market, such as, for example, the ability to compete with other business units. The practical significance of this mechanism may consist, as an option, in stimulating the desire of private enterprises to comply with social standards. A simple example is banking. It is known that the largest financial institutions in Russia based on the structure of their capital are state-owned. Accordingly, the government, applying certain standards in building its business policy, unwittingly encourages private banks to repeat them or offer competitive alternatives. How?
Social Standards of the State
This may concern, for example, the level of wages. If state-owned banks raise salaries for employees, then private credit institutions will be forced to do the same. Similarly, the level of service. If in a state bank a person will be served better than in a private one, he has no reason to apply in case of the second. As a result, the level of service will increase everywhere. We noted above that building the mechanism of social protection of citizens is one of the advantages of the market. In the case of state intervention, this aspect can be traced most clearly.
The structure of a market economy
What is the structure of a market economy? Basically, it is determined on the basis of the essence of the actors leading the activity in it, as well as the characteristics of the relationship between them. Consider both. The market economy in Russia and most other capitalist countries of the world is represented by the following set of entities:
- individual entrepreneurs and private organizations;
- state-owned businesses;
- employees who, in fact, sell their labor as a service;
- banks;
- consumers (households).
In turn, each of the above types of subjects is classified into a large number of subtypes. For example, entrepreneurs and private organizations, as well as state-owned businesses, operate in different segments:
- industry;
- trade;
- services.
In turn, each of the segments is also divided into specific areas.
What are the conditions under which the functions of a market economy can be fully implemented? Experts call the following.
Property Factor
The institution of private property is a criterion that many analysts recognize as key. Any product, trademark, brand (that is, that which, in fact, generates capital) must be in the possession of the entrepreneur. Only in this case will he be able to feel like a full-fledged player in the private market. An additional criterion related to property is the existence of legislative mechanisms for its protection. This is important in terms of the sustainability of the economic system. In some countries that have historically made the transition to a market economy, private property was present, but with mechanisms to protect it, things were not very good, due to poor-quality legislation. Actually, this is the following criterion.
Legal acts
The functions of a market economy can be fully realized only with adequate legislation. One of the aspects reflecting the significance of this criterion, we have identified above - the protection of private property is necessary. Another, requiring clear legislative regulation, is civil law relations.
Businesses conclude agreements with other enterprises, with citizens, with international players. The quality of cooperation depends on how comfortable the content of the relevant agreements based on the law can be for entrepreneurs. Security is also a significant factor (a businessman should feel that the other party’s fulfillment of the contract is supported by legislative requirements).
Market Infrastructure
The third component is market infrastructure. This is a fairly comprehensive concept. As a rule, experts include mechanisms such as, for example, the banking system, credit institution, and stock exchanges. That is, private enterprises should have equal access to infrastructure resources for the sale of goods and services.
All three of these criteria are far from a complete list. However, all of them at least have proved their applicability in historical aspect. Those countries that made the transition to a market economy, in particular those that were in the former social bloc, organized the corresponding transit from one system to another, working in these three directions.
Market and competition
One of the key features of a free economy is competition. It is she who, according to many economists, predetermines many of the advantages of the market, which we identified at the very beginning of the article. If there is competition in any segment, it is highly likely to determine fair prices for the corresponding goods and services, their quality, manufacturability, social orientation, etc. If it is not there, then it is quite possible that entrepreneurs will set monopoly prices for its products and services, which can also be of mediocre quality.
There is another interesting point of view regarding competition. She suggests that a low level of competition in certain segments is good. Why? The fact is that this gives businesses the opportunity to bring completely new products and services to the market. Not so much to occupy an empty niche, how much to stimulate the emergence of new ones that did not exist before. In highly competitive markets, in turn, businesses primarily care about lowering costs, profitability, and sustaining competition with opponents. And therefore not so high attention can be paid to the innovative aspect. If only because the company may not have the means to introduce some new developments.
There is such a term as "perfect competition". What it is? What are the advantages and disadvantages of the perfect competition market? Let's consider this aspect in more detail.
Perfect competition
Considering the advantages and disadvantages of the market, we raised such a question as a speculative emphasis in the activities of enterprises. What does it mean? The main thing is that firms do not seek to improve their business model, but to build mechanisms to increase capitalization, and moreover, in the shortest possible time, at any cost. With perfect competition, such an opportunity for entrepreneurs is practically reduced to zero. Why?
It is assumed that with perfect competition in the market at the same time there is a very large number of players in one segment. That is, producing the same goods or providing the same services. As a rule, the profitability of each of the businesses operating in such an environment is low. At the same time, it is quite easy for new entrepreneurs to enter such a market - it is “warmed up”, there is demand. However, there are practically no opportunities for speculation. In order to extract more profit, it will be necessary not only to improve the financial flow management model, but to work to improve the quality of goods and services, to improve interaction with suppliers and contractors in order to reduce costs.
Is there a limit to perfection in competition?
Perfect competition is not only the indicated advantages. And there are also disadvantages of the market, functioning within the framework of such mechanisms. They mainly affect the social aspect. If perfect competition is observed in one or another segment of the economy, then, firstly, it is highly likely to indicate sufficient saturation of the market in terms of jobs. People receiving a profession just recently claimed may have difficulty finding a job. Another factor is closely correlated with this factor - salary. With perfect competition, it usually does not grow. Just because companies do not have the ability to increase it - all available funds are allocated to improve the product or service.
