Factors of Market Economy

Topics: Supply and demand, Economics, Market economy Pages: 12 (3472 words) Published: April 20, 2013
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest” Adam Smith
1 Introduction
“We want water, we need water!” The Bolivian farmer is out of his mind; many like-minded citizens are staying next to him, yelling the same. What is the reason for his anger? And what has happened to him and many other Bolivians? In an article with the title “The drop on the hot market” the German author Jens Müller-Bauseneik explains the consequences of the privatization of the water supply in Bolivia in the year 1999, which went utterly wrong. The private company Bechtel Enterprise Holding tried to realize more profit. In today’s world nearly every country’s system is the market economy – but why has this economic system achieved the leading role in our global world? It’s my concern to explain “What factors constitute the basis of the market economy?” by investigating various trustworthy sources. Economy is dealing with the “satisfaction of human needs”. Natural limitation of resources and goods, called “scarce resources”, lead to a tension between unlimited demand and limited availability. Every nation has to decide on a system for “allocating and its resources among its citizens, both individuals and organizations.” But who owns and controls these resources? To answer this question, every nation has to make a decision about their national economic system. Market economy is characterized “an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services”. It’s defined as a “liberal economic order which guarantees economic subjects freedom of contract and private property.” Why do companies exist? Why is the state’s government requested to mainly observe and protect the market and not to intervene? And what are the perfect market and perfect competition? To comprehend why the market economy is that successful in the global world it’s most integral to know which factors constitute its basis. 2 Main Part

2.1 Adam Smith and the invisible hand
To examine the factors, help of experts and specialists of that subject is highly needed. These people, called economists, are scientists employing the scientific method – “the dispassionate and objective development and testing of theories.” Through the contemporary history economics have observed elementary events on the market, developed theories and collected data to test their theories. As one precondition to understand the basis of the market economy it’s important to take a step back to Adam Smith’s great publication “The wealth of nation” of the year 1776. His emphazise on the invisible hand “provides the intellectual basis of the market economy”. By looking at the human character, Smith recognizes that individuals motivated by the invisible hand of self-interest are able to promote general economic wealth. His thoughts created the “homo economicus”; Comparing humans with “animals, seeking after individual advantages” Smith’s hypothesis assumes the leading impulse of human beings is to get personal wealth. So by giving the fictitious homo economicus the freedom of promoting his own goals, he will serve the society’s welfare most efficiently. In 1914 Eduard Spranger summarizes “The economic man in the common way prefixes in every situation his personal advantage.” Adam Smith’s hypothesis is still working in the modern market economy. “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” Businesses decide what to produce and what price to charge, while consumers decide what to buy and how much to pay. Therefore, based on the principle of supply and demand, companies and corporations need to fulfill the customers’ requirements to realize profit. This also explains why the system of planned economy in former communist...
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