Market economies are driven by supply and demand, not government decisions. They evolved from centuries of trading goods and negotiating prices. Some countries have planned economies, but many have moved towards market economies. Governments with market economies have a laissez faire attitude, but may take steps to influence price movements during recessions.
In a market economy, the cost of goods is driven by market dynamics such as supply and demand rather than the decisions of government policymakers. Most nations in the Western world such as the United States, Canada and Germany have a market economy and these types of economies are not uncommon in other parts of the world including Asia and Africa. Other nations tend to have mixed economies even though planned economies exist in some countries.
The concept of a market economy evolved centuries ago as people started trading goods such as grain, gold and wool. In many areas, peasants have been able to negotiate the prices of these commodities with each other, and this freedom to negotiate the cost of raw materials is at the heart of the modern market economy. The cost of some goods was once controlled by rulers or feudal chiefs, but during the 18th and 19th centuries those rules were relaxed in many areas and societies around the world moved to market economies.
During the 20th century, totalitarian communist regimes in Eastern Europe, Asia and parts of Africa came to believe that the market economy favored the wealthy and that the average citizen would benefit from a planned economy. In countries like the Soviet Union, China, and Albania, government agencies have taken it upon themselves to evaluate products and raw materials. In addition, wage controls were introduced, which often meant that skilled and unskilled workers were paid the same wages. Theoretically, everyone would have an equal opportunity to purchase the goods since wages and prices were the same across the nation.
In the latter part of the 20th century, civil unrest broke out in many nations that had planned economies. The authorities of some of these countries such as Hungary, Poland and Romania have decided to abolish the price controls and adopt the Western-style market economy. Due to logistical considerations and ideological beliefs, the governments of some other nations have decided to retain control of some aspects of the economy but to allow market forces to determine the prices of certain goods and services. Such nations are said to have a mixed economy.
Theoretically, the governments of nations with market economies have a laissez faire attitude, which means that politicians do not attempt to manipulate the direction of the economy. However, during times of recession, government agencies in many Western nations have taken steps to influence price movements. These measures include government agencies insuring mortgages in a way that encourages lenders to write out loans with the end result that home prices will either remain constant or rise. Critics of such action argue that governments should not take such measures in nations with true market economies, while supporters of such moves argue that such steps are occasionally necessary to prevent recessions from turning into economic depressions.
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