The degree of economic development is the best yardstick to judge the country’s overall well-being. And, the pace of development is always powered by the nature of economic system in operation. This article, “Market economy and process of evolution” explains how through the course of time, economic system changes according to the changes in its determinants…
Defining economic system
Simply, it is an interdependent system of production and distribution of goods and services, depending on the available resources and demands of people. With this, supply of money and the role of government is also essential.
Suppose, there is a country where agriculture is predominant occupation. There, all the activities would be focused on agriculture sector. For example, production and distribution of inputs or factors of production, including equipments, credit, market, and required training support.
In such system, government also directs its policy to advance agricultural sector, by promoting and safeguarding the interests of both producers and consumers. This is what we call system of economy.
What is mean by market economy ?
It is a type of economic system where demand of people and consequent supply of goods and services determine the nature and degree of production activities of a nation with minimum or no interventions by state.
In short, markets demand is considered to produce a goods to maximize profits. Hence, the clear motive of market economy is to maximize profit, by considering market demands and available resources.
To be called a market economy, there are certain conditions need to be fulfilled.
First, there should be a choice of production. In other words, the decision of which goods to be produced should be on the producers, instead directives of state.
Second, without the motive of profit maximization, we cannot imagine about such system. Here, profit is the driving force for producers.
Third, it is possible only in the absence of excessive government’s interventions. In case of government’s interventions, the motive of profit may be compromised.
‘For the layman’s understanding, it is a system driven by mutual interests of market forces to maximise profit and satisfaction with minimum external interventions.’
Now, there might be a picture in your mind about the nature of market economy. Isn’t it ? But, it isn’t so easy to reach any economy at this stage. Let’s see the course of evolution.
Evolution of market economy -stages..
It is also called planned economy. In such system, production activities are executed according to the needs of society instead profit of firms.
Accordingly, all the means of production are controlled by the state itself with no choice of production. In this way, State plays greater role in directing the forces of market.
In the world, nations with greater economic inequality and backwardness, adopt command or planned economiceconomic system as a means of development.
Mainly, socialistic countries are known to implement this system to advance the interests of people. North Korea, Cuba, and Soviet Union are some examples of command economy.
But, as time passes, it starts showing its shortcomings in the form of low productivity, higher opportunity costs, and loss of comparative advantage. Then eventually, due to higher unemployment and inflation, this system paves the way for reforms with mix of command and market.
In this system, government offers better role for private players in certain sectors. Even here, government controls the industries of strategic importance, citing the cause of national interests.
The motive behind this move is to power the pace of stagnated economic growth with employment opportunities.
No doubt, it proves instrumental in revitalizing the productivity, research and development, and base of productive activities. Hereafter, to unlock more growth potential, further reforms become compulsory.
And, the final stage is none other than market economic system to realize the total untapped potential.
In a nutshell
Simply, we can conclude that market economy is the last but not the absolute free from shortcomings. Unquestionably, rush for profit, plunder of resources, unethical means of production, plight of labours, and chrony capitalism are some of fallouts that a market economy precipitates over a period of time.
Therefore, no system in itself is ideal or wrong, but it depends on the prevailing conditions of that nation. Afterall, all are useful to ensure checks and balances over ambitions.