Market economy

What a market economy?

It's an economy in which the majority of economic decisions - in terms of production, consumption, employment and investment - are taken by individuals or by privately-owned companies, based on a supply and demand relationship. The role of the state is to enforce contracts, ensure a stable currency and maintain public order.

Where have you heard about the market economy?

The market economy is discussed whenever there is debate about a country's social and economic arrangements. It is an unavoidable subject in politics, the media and academia. The extent to which a particular society's economy ought to be market-driven is a constant topic for debate.

What you need to know about the market economy.

The bedrock principle of the free market economy is that people and private companies make better economic decisions than officials and politicians do. Adam Smith, an 18th Century philosopher even wrote about how the free market can self regulate with supply and demand, competition and self-interest.

Compared with the 20 years after the war, most developed countries have made significant moves towards the market economy in recent decades, with many state-owned industries being privatised.

But few, if any, jurisdictions can claim to have a pure market economy, with no economic role for the state. Education and health are services that could be provided on a totally market basis but are not. Bank bailouts during the financial crisis showed the state retains a role at times of economic emergency.

Find out more about the market economy.

To learn more about the market economy and how it functions, see our definition of public sector.