A market economy is a term used to describe an economy where economic decisions, such as pricing of goods and services, are made in a decentralized manner by the economy's participants and manifested by trade. This can be seen as a "bottom-up" approach to organizing an economy (self-organization). It is meant to contrast to a planned economy, where economic decisions are made by a central agency, which can be equated to a "top-down" approach.
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. An economy where both central planning and market mechanisms of production and distribution are present is known as a mixed economy.
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.
- Financial market
- Free market
- Command economy
- Gift economy
- Mixed economy
- Social market economy