Markets and Diversity of Market Economies

Economy and Society I

Evolution of the Concept of Markets and Diversity of Market Economies


This paper examines the evolution of views on the concept of market by the representatives of different economic schools of classical economics such as Smith A., Cournot A., Marshall and Keynes J., and also modern American economists - Kotler F. and Samuelson P. In today's economy there is an opinion that the market economy can not function effectively without government interference, so it is considered to be mixed. Depending on the extent of state regulation and its economic tasks there is a diversity of market economies. This paper explores the German, American, Japanese and Swedish models of market systems with their inherent characteristics and features that demonstrate the differences of economic activity between them.

Evolution of the concept of markets and diversity of market economies

Among the world's diverse economic systems the market economy is the most common and effective one at the turn of XX-XXI centuries. In the direction of the market economy the countries with both transitional economies and developing countries with traditional economies are developing. But it should be taken into account that the development and establishment of the market economy is not a short-term process. In the history of the economically developed countries this process took more than one century. Certain conditions and prerequisites are necessary for the market economy to appear and to be formed. The most important ones are the social division of labor and specialization, the development of private property, well-developed competition, self-interest of manufacturers and owners, free enterprise, and regulatory environment characteristic of a market economy. It should also be noted that without government intervention it is impossible to effectively develop market economy. Many scientists agree in opinion that there is no completely free market economy and the state to some extent takes part in management of economy. Each state selects the most appropriate ways to conduct economic policy in the country, has its own methods to regulate the economy and defines the features of the economy. Depending on the model of managing and regulating role of the state, there arises a diversity of market economies. This paper examines characteristics of the market economy at the example of German, American, Japanese and Swedish economic models. While analyzing the market economy the special attention is paid to the concept of the market. This paper analyzes the evolution of the concept of the market, which changes and becomes more complex with the development of the society, with the advent of the social division of labor and money.

The main element in the theory of market economy is the market. The concept of the market kept changing with the development of social production and exchange. The market appeared in the era of breakdown of primitive society and the ancient peoples had it in the form of barter processes. Only with the building and development of cities, crafts and trade, the concept of market starts to change while market relations start to expand. From the initial concept of "market area" or " bazaar" the market turns into the space - in the sphere of circulation of material and labor resources. With the appearance of social division of labor, with the advent of money and commodity-money relations, and with the development of commodity production, the evolution of the "market" concept takes place. Such scientists - economists as Adam Smith, Karl Marx, John Keynes, Antoine Cournot, Alfred Marshall, etc. were always interested in the concept of market. In sociological science the attempts were made to review and analyze the concept of the market, although not in such a broad perspective as in economic science. In classical political economy the concept of market is regarded as a geographical space, which is an important institution of capitalism, where the prices on products and commodities do not depend on supply and demand, the central place is assigned to production rather than the exchange and the market price may differ from natural price on the product (R. Swedberg, 1994). As Swedberg notes (1994):

Adam Smith saw as central to any analysis of the market: the relationship between the market and the division of labor, and how the market influences the price. In Adam Smith's view, the wealth of a community was the result of labor, and the productivity of labor was in turn determined by how advanced the division of labor was ( p. 258).

Money is organically linked with the division of labor, as in Adam Smith's concept money acted as a medium of exchange. He emphasized the spontaneous emergence of money as a specific commodity. The main mistake of Adam Smith was the assumption that the division of labor arose because of the exchange, but not vice versa. The concept of money, his interpretation of its origin as a result of natural forces of exchange, understanding of money as a commodity represents a major achievement of economic science of the reporting period. The drawback of the classical school was the fact that the main attention was paid to the production and producer rather than the consumer for whom the production was manufactured.

With the advent of the Marginalism at the end of the XIX century as a new direction in economic science the concept of the “market” gets a more complex interpretation, which is reflected in the global economic literature. Thus, the French economist - mathematician Cournot O. believes that the term "market" should be understood not as some market place, but in general, every area where the relations between the buyers and sellers are free, and prices are quickly and easily aligned (Swedberg, 1994). According to Swedberg (1994), the representatives of marginalism developed a new concept of the market and contributed the concept of “perfect market” to the economy which “was a very abstract market, characterized by perfect competition and perfect information” ( p. 259).

If in the XIX century the problems of the theory of value took the central place in the works of most bourgeois economists while analyzing the market, then the great economist and representative of the neoclassical school Marshall put forward the theory of prices in the first place, which studies a complex interaction of different price-making factors on the market through the changes in supply and demand. From the standpoint of the market subjects in his work Industry and Trade Marshall (1919) considered the market as a relationship between groups of people, where some want to get products, while others are able to offer these products.

As Swedberg notes (1994) unlike neoclassicists the representatives of the Austrian school consider the market as a process occurring spontaneously and as a result of historical development. Ludwig von Mises, the representative of the Austrian School, claims that “the market is not a place, a thing or a collective entity, it is a process actuated by the interplay of the actions of the various individuals cooperating under the division of labor” (as cited in Swedberg, 1994, p. 260).

If the representatives of classical and neoclassical schools considered the market as a self-regulating mechanism, in the opinion of the famous British economist John Maynard Keynes the market cannot operate independently. Analyzing the processes occurring in the market, Keynes concludes that the state intervention and regulation of the markets is necessary to avoid such negative consequences as unemployment on a labor market or appearance of some problems connected with an establishment of the prices on the actions on securities market (Swedberg, 1994). Thus, Keynes refutes the concept of self-regulating economy and offers a number of measures to credit, money and employment. He developed the idea of a psychological boost of demand and market preferences of individuals as a factor of state regulation of the economy.

In modern economic literature there are many definitions of the market. Many modern market definitions are similar in meaning, but different in treatment. For example, the modern American economist Cotler F. (2001) in the book Marketing basics defines the market as a set of buyers of goods, stressing the special role of buyers (Cotler , Armstrong, Sonders & Wong, 2001). Another well-known American economist, the Nobel laureate and author of the book Economics Paul Samuelson believes that a market is the place where producers and consumers cooperate, they determine prices and a volume of output (Samuelson & Nordhaus, 1992). The market has diverse functions. Nowadays, the market is not only a place of circulation of goods and services, but also a place of currency, i.e. it includes the elements both associated with the provision of production and material handling components - a modern securities market. According to Samuelson and Nordhaus (1992), the market economy is a mechanism where there is a relationship between people and firms through a system of prices and markets. In all countries with market economies the state plays a significant role in the economy and redistributes resources, provides a legal basis for economic agents to make decisions, conducts economic policies of the country, and in some cases organizes the production at state-owned enterprises. In this regard, it is believed that a modern market economy is a mixed economy, where together with the private sector the public sector operates, and market-economy mechanism operates along with the mechanism of state regulation of the economy. The need for interaction between market forces and government regulation has been repeatedly emphasized in the work of American scientists. Samuelson and Nordhaus (1992) affirm that "... In all industrialized countries, the market determines most of the individual prices on goods and the production output, while the government determines the course of economy through the adoption of programs of taxation, public expenditure and regulation ( p. 48). Most well-known scientists of the West including Samuelson and Nordhaus believe that in today's world there is no "pure" market economy and it has never existed before. According to them, the only exception here but with many limitations is the XIX century British economy (Samuеlsоn & Nordhaus, 1992). Harvard professor Mugrave R. and professor of University of California Musgrave P. (1989) claim that "... modern 'capitalist' economy is a mixed system in which public and private sectors interact with each other as integral parts. The economic system is not actually either public or private, but includes a mixture of both sectors"(p.4). Professor of University of Oxford Shonfield A. (1984) believes that the economy of European countries can be called a hybrid because the price and supply of goods and services depend on market processes, but the state intervenes in the economy if the market cannot automatically achieve certain goals, or is unable to promptly and effectively respond to the needs of the society.

Thus, basing on the views of contemporary economists, it is possible to conclude that the market in its pure form does not exist in any country. The market economy can not alone solve the socio-economic problems which include: provision of the national defense system, environmental issues, education and health, the order of a single energy system, etc. The state is responsible for the solution of these questions by funding them from the state budget through taxes and other payments. The economic system with a mixed mode of regulating economic processes, through market mechanism and government regulation is called a mixed economy.

Within a market economic system various models of market economies function in the modern world. The main factors determining the diversity of market economies are resource capabilities of the State, the culture and mentality of the nation, and the geopolitical characteristics of the State. Mainly the American, Japanese, Swedish, and German models of the economy are singled out. All models of economic systems mentioned above differ according to different economic characteristics and features of economic activities. The American model is built on the system of total encouragement of entrepreneurial activity, a high degree of market competition and the enrichment of the most active part of the population (Hall & Soskice, 2001). For disadvantaged groups the acceptable living standard is created at the expense of partial benefits and grants. The problem of social equity is generally not intended in this model; therefore, there is a high level of inequality in income (ibid.). The model is based on a high level of productivity and mass orientation on achieving personal success. According to Hall and Soskice (2001), depending on the economic ideology the American model is characterized by maintaining a liberal market economy, which is also implemented in such countries as England, Australia, Canada, New Zealand, Ireland, which is based on the principle of laissez-faire. State intervention in a national economy is limited, and also a low level of regulation and taxation is characteristic. But as Samuelson (1992) affirms: "... in American capitalism today… government provides services in an education and law enforcement, pollution control and regulate business activities" (p.21). The government regulates the economy through the legislature and monetary policy. Therefore it is impossible to speak about a total absence of the state intervention in an economic life of the country.

As argue Allen (1994), for German model of market economy “ the financial system integrated with - and supportive of - export-oriented manufacturing, close coordination among private and public sectors (i.e. a ‘loose' corporatism), and a toleration - and acceptance of highly skilled and highly paid workers…” is intrinsic ( p. 3). According to him, the German economic model is characterized by its social orientation, i.e. government and business must serve the people and satisfy the interests of society, and also the sustainable development of all forms of farming, which were formed basing on the elimination of concerns of Nazi era (Allen, 1994). The main economic subjects in the market are small and medium enterprises and farms. Unlike the American model, the German model is characterized by greater state intervention in the economy. The state actively affects the prices, tariffs and technical standards. The German model is regarded as a basic example of coordinated market economy, where a large role is played by the interaction between economic agents (firms, enterprises) and non-market mechanisms (state, associations) (Soskice D, 1999). According to Hall and Soskice (2001) the coordinated market economy is maintained not only in Germany, but also in Japan, Sweden, Switzerland, the Netherlands, Belgium, Norway, Denmark, Austria and Finland. The main economic agents in the market along with the state and households are enterprises. Peter A. Hall and David Soskice (2001) in the book Varieties of Capitalism consider the main differences of the liberal and regulated market economy within functioning and relationships of companies with other agents of the market at the example of American and German models of the economy. They believe that “in liberal market economies, firms coordinate their activities primarily via hierarchies and competitive market arrangements. In coordinated market economies firms depend more heavily on non-market relationships to coordinate their endeavors with other actors and to construct their core competencies” (Hall & Soskice, 2001, p. 8).

The Japanese model is a model of corporate capitalism and is characterized by a lag in living standards (low wages and social protection) from the growth of labor productivity. Due to this production cost reduces which determines a high level of competing of Japanese products in the world market. Unlike the American model, which aims to achieve personal success, the Japanese model is inherent in the high level of national consciousness, the nation's interests above the interests of the individual and for the sake of achieving economic prosperity of the country the population is ready to materially sacrifice. Depending on how the coordination of economic activities is dealt with the Japanese model is also an example of coordinated market economy. But as Hall and Soskice (2001) claim: “one important axis of difference among CMEs runs between those that rely primarily on industry-based coordination… and those with institutional structures that foster group-based coordination of the sort found in Japan…” (p. 34). The industry- based coordination intrinsic for the German model of economy. If in Germany trade unions and business associations, organized along sectors, and coordinate the endeavors of firms by means of implementation vocational trainings, a system of wage coordination and corporate collaboration, by contrast, in Japan firms the business networks are built on keiretsu - “families of companies with dense interconnections cutting across sectors” (ibid.).

The Swedish model can serve as an example of modern market economy of the mixed type. According to Eklund Klas (1989), it is characterized by a strong social policies aimed at reducing income inequality through the redistribution of national income in favor of the poorest population groups. The main objective of the state policy of this model is to achieve full employment, and income equality, which depend on such tasks as economic growth, competitiveness and price stability (ibid.). Achieving full employment in Sweden is carried out through the implementation and realization of various government programs. Striving for equality is strongly developed in Sweden. Public property is an integral part of the structure of the mixed economy, along with various forms of private property. If the economy of Japan and the U.S. is characterized by a small proportion of public sector in key industries and manufacturing, in Sweden there is another system. The economy of Sweden is characterized by high proportion of public sector and the use of a large proportion of total resources of the country. Effective regulation of the labor market, maintaining of the people who have lost their jobs through social benefits, the implementation of programs to create new jobs is performed by the State and is part of state policy in Sweden (ibid.). Thus, the economic basis of the Swedish model of market is relations on competitive basis, a large share of government regulation and provision of a high standard of living of its citizens. Nowadays the market economy is the most effective and complete system of all systems that have ever existed. The transition to the market is a very long and complicated process, which is caused by the decision of many problems, identifying the key priorities at all levels of society and the economy. Much attention is paid to the study of the concept of the market both in classical and in modern economic science.

Meanwhile the views and definitions on the concept of the market are changing and becoming more complex from one economic school to another. There is an evolution of the concept of the market from the concept of "bazaar" to today's markets with competitive products and services. Modern economists believe that the market economy is a mixed economy, which is characterized by the state's adjusting the market mechanisms to avoid adverse effects that manifest themselves in external effects. As an example, we can say about the external effects associated with environmental pollution, depletion of natural resources caused by their increased involvement into the economy, imbalances in production and others which are regulated by the State. Thus, to mitigate or neutralize the weaknesses inherent to a market economy, the government intervention is necessary. This state regulation of the economy along with self-regulatory mechanisms of the market is characteristic for the most modern states. The economic systems of these countries are mainly concentrated in an intermediate position between two extremes - pure capitalism and command economies. But usually the country commits more to the principles of one certain economic system, although elements of other systems are present. The presence of different models of the economy can be explained by different capabilities and traditions of various countries. Depending on the regulatory role of the state and its economic problems several models of mixed economy in developed countries can be identified: the liberal or the American model, which is characterized by the principle of State interference; the German model, which is a socially-oriented model of regulated capitalism; the Japanese model which is a model of corporate controlled economy ; the Swedish model, which is characterized by a high proportion of public sector and an active policy of state intervention in the economy. Thus, the modern market economy of a mixed type is common for many economically developed countries. It is the best adapted one to the changing internal and external conditions, i.e. it is the most flexible one. It is impossible to imagine modern market economy without government intervention, but the state should not intervene in those areas of the market, where its regulatory mechanisms are sufficient. Otherwise it can cause the collapse of the market system and its transformation into a command - administrative one.


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