Market economy: principles, history, functions and criticisms

The term market economy first appeared in German national economics in the early 1930s: in the circle of the Freiburg School (Hans Ritschl, 1931, and Franz Böhm, 1933) and the historical school (Arthur Spiethoff, 1934). It is more recent than the synonymous term "transport economy", which can already be found in Max Weber's work Economy and Society and which Walter Eucken continued to use.

According to Walter Eucken, there are two fundamentally contrasting styles of thinking in the analysis of economic systems, which he calls "thinking in orders" and "thinking in historical developments". According to Egon Tuchtfeldt, the question of which approach is better suited to the overall problems of economic systems is still open today. In fact, thinking in terms of historical developments and thinking in terms of orders need by no means be mutually exclusive. Correctly understood, both approaches would rather form a necessary and fruitful complement.

As an early economist, the Scottish moral philosopher Adam Smith, in his major work The Wealth of Nations, described the market as an incentive and sanction mechanism that coordinates the self-interested behavior of people engaged in economic activity based on the division of labor so that the needs of the individual are satisfied in the best possible way.

Walter Eucken understood market economy (transport economy) as a pure ideal type that could be found "in all epochs of human history". For Eucken, ideal types served to understand reality. A pure market economy, on the other hand, does not occur in reality, according to Eucken.

In the 1980s, Franz-Xaver Kaufmann summarised the discussion in economic sociology in such a way that the "prevailing economic theory" neglects the historical and "socio-cultural conditionality of the modern economic system". From a historical point of view, the market economy, as a relatively autonomous economic system, represents a special case with certain conditions and limits that cannot be taken for granted. The prosperity of a society, however, depends not only on factors such as the level of education, the degree of industrialisation or the endowment with natural resources, but is also based on the institutional framework of the economy, which consists of explicit and unwritten rules. In economics, the importance of institutions as "rules of the game" for the market economy is emphasized above all by Douglass North, who, together with Robert Fogel, was awarded the Nobel Prize in 1993 for studies in economic history.

A preoccupation with the historical and social preconditions of the market economy (or "transport economy") can already be found in Max Weber and other classics of economic sociology. Weber characterizes the market community as an impersonal, practical relationship that contrasts with tribal affiliations or kinship. According to Weber, a market socialization of economic activity presupposes appropriation and market freedom, such as the absence of estates monopolies.

The economic historian Karl Polanyi challenged Smith and Spencer's thesis that early forms of economy were based on barter. In doing so, he drew on studies in economic anthropology, especially by Bronislaw Malinowski, Marcel Mauss and Raymond Firth, who examined special forms of economy based on generalised reciprocity in tribal societies (see, for example, gift economy). Polanyi was able to identify elements of reciprocity, redistribution and direct exchange in all the economies he studied historically. Following on from this, cultural anthropology today also distinguishes the market economy as a real type from other forms of economic activity, especially the subsistence economy.

In his 1944 work "The Great Transformation" Polanyi used a narrow concept of market economy ("actual market economy") for a self-regulating market. He limited its existence in real history to the historical period from 1834 to the end of the 19th century. He traced its beginnings to the development of the labour market. Only the reform of the English Poor Law of 1834, which abolished all monetary support for the unemployed but able-bodied needy ("human labour power had to be made into a commodity"), would have released the logic of the market system and thus made "society an appendage of the market", i.e. a "market society". Already the social laws and the recognition of trade unions at the end of the 19th century would have counteracted the market mechanism again, although "the idea of self-regulation remained dominant". From the limited historical perspective of 1944, for Polanyi the state regulations of the social democratic, communist, and fascist regulations between the two world wars marked the end of the market economy proper, the "decisive departure from the idea or 'myth' of a self-regulating market." Politically, Polanyi favored the social-democratic regulations, while rejecting the communist and fascist ones as a threat to liberty.

According to Fernand Braudel, on the other hand, the market economy developed "step by step" in the European area.

While for Polanyi the market economy is synonymous with capitalism, Braudel differentiates between the market economy and capitalism.

Similar to Weber before him, who - in a different terminology - had distinguished between a profit economy and a demand economy, Niklas Luhmann sees the market economy not in contrast to the planned economy, but in contrast to the subsistence economy. In the latter, there is usually no money as a control medium and the economic system has not yet differentiated itself as an independent subsystem of society (see autopoiesis).

Models

Free market economy

In the free market model, the market alone determines what is produced and consumed, in what quantity and at what price. According to George Nikolaus Halm, a free market economy exists when:

1. the factors of production (labour, land, capital) are in private hands and production takes place on the initiative of private enterprises (i.e. private ownership of the means of production and free competition)
2. income is generated only by services and the profits of private companies
3. there is no planned economy
4. there is no government control or market regulation
5. market participants have freedom of choice with regard to consumption, occupation, saving and investment (i.e. free pricing, freedom of trade and freedom of consumption)
6. the free pricing of a wide range of companies, especially in the real estate sector.

A completely free market economy, however, is only an abstraction. In economic policy practice, there is more or less state regulation of the market in all countries.

The ideas propagated by Adam Smith in his book The Wealth of Nations do not mean that the state is deprived of any right to exist. On the contrary, it is responsible for other important functions. These include guaranteeing external security, protecting citizens from injustice and oppression by fellow citizens, providing public facilities for which no private investor can be found, and counteracting monopolies. According to some authors, Adam Smith's doctrine was developed "unilaterally" and combined with the myth of the "invisible hand" into the idea of a free market economy. Even in a free market economy, regulatory functions are attributed to the state. If these are limited to a minimum, one also speaks of a "night watchman state" in reference to an ironic expression of the workers' leader Ferdinand Lassalle.

Social market economy

The idea of the guiding principle of the social market economy, designed by Alfred Müller-Armack and Ludwig Erhard, is to realize the advantages of a free market economy, in particular economic efficiency and a high supply of goods, while at the same time avoiding disadvantages such as destructive competition, the concentration of economic power and the antisocial effects of market processes. The goal of the social market economy is the greatest possible prosperity with the best possible social security. Unlike in the free market economy, the state does not behave passively, but actively intervenes in economic activity, "e.g. through economic policy, competition policy and social policy measures."

For Ludwig Erhard, the term social market economy was a pleonasm, because for him the market was social in itself. He concretized this idea by emphasizing that the freer the economy, the more social it was. In contrast, Müller-Armack saw the social market economy as an "irenic formula" that "attempts to bring the ideals of justice, freedom and economic growth into a reasonable balance".

Socialist market economy

A socialist market economy is characterized by the coordination principle of decentralized planning and the property system of common ownership of the means of production. This contrasts with the capitalist market economy with private ownership of the means of production and socialist central administrative economy with central planning.

More models

There are a number of other theoretical models with which various authors claim to further develop the social market economy, for example the eco-social market economy, as well as the sustainable market economy (Michael von Hauff), the humane market economy (Erwin Nießlein) and the ethical market economy (Hans Ruh). Another variant is the civilized market economy of the St. Gallen business ethicist Peter Ulrich; according to its creator, it too is a further development of the "concept of the social market economy, which has become weak in orientation in the competition between locations".

Real economic systems

In practice, very different forms of market economy exist. Due to the different economic and social or socio-political objectives, these differ in the extent to which property rights and personal rights are developed and in the extent and forms of state intervention. Examples include planification in France, the Swedish model in Scandinavia, Austrokeynesianism in Austria, and the social market economy in Germany. Michel Albert, in his book Capitalisme contre Capitalisme (1991) (German: Kapitalismus contra Kapitalismus), coined the term "Rhenish capitalism" for the capitalist market economy that exists primarily in Germany as well as in the Alpine countries and the Netherlands, and contrasted it with the "neo-American" model. In their book Varieties of Capitalism (2001), Peter A. Hall and David Soskice described two variants of market economies - "liberal market economies" and "coordinated market economies".