advantage and disadvantage of market economy

A market economy is an economy in which decisions regarding investment, production and distribution are based on supply and demand,and prices of goods and services are determined in a free price system. The major defining characteristic of a market economy is that decisions on investment and the allocation of producer goods are mainly made through markets.This is contrasted with a planned economy, where investment and production decisions are embodied in a plan of production.

A market economy has seven main characteristics: l) people buy what they want, but only if they can pay for it; 2) thus, money becomes necessary for life; 3) people are forced to do anything and to sell anything in order to get money; 4) maximizing profit rather than satisfying social needs is the aim of all production and investment; 5) discipline over those who produce the wealth of society is no longer exercised by other people (as in slavery and feudalism) but by money and the conditions of work that one must accept in order to earn money; 6) rationing of scarce goods takes place through money (based on who has more than others) rather than through coupons (based on who has worked harder or longer or has a greater need for the good); and 7) since no one is kept from trying to get rich and everyone is paid for what they do, people acquire a sense that each person gets (and has gotten) what he deserves economically, in short, that both the rich and the poor are responsible for their fates. A market economy has several important advantages and several major disadvantages: Among the advantages are :

1. Competition between different firms leads to increased efficiency, as firms do whatever is necessary—including laying off workers—to lower their costs;
2. Most people work harder (the threat of losing one's job is a great motivator);
3. There is more innovation as firms look for new products to sell and cheaper ways to do their work;
4. Foreign investment is attracted as word gets out about the new opportunities for earning profit;
5. The size, power, and cost of the state bureaucracy is correspondingly reduced as various activities that are usually associated with the public sector are taken over by private enterprises;
6. The forces of production, or at least those involved in making those things people with money at home or abroad want to buy, undergo rapid development;
7. Many people quickly acquire the technical and social skills and knowledge needed to function in this new economy;
8. A great variety of consumer goods become available for those who have the money to buy them; and
9. Large parts of the society take on a bright, merry and colorful air as everyone busies himself trying to sell something to someone else.

And the disadvantage are ;

a.             Distorted investment priorities, as wealth gets directed into what will earn the largest profit and not into what most people really need (so public health, public education, and even dikes for periodically swollen rivers receive little attention);

b.            Worsening exploitation of workers, since the harder, faster, and longer people work—just as the less they get paid—the more profit is earned by their employer (with this incentive and driven by the competition, employers are forever finding new ways to intensify exploitation);

c.             Overproduction of goods, since workers as a class are never paid enough to buy back, in their role as consumers, the ever growing amount of goods that they produce (in the era of automation, computerization and robotization, the gap between what workers produce—and can produce—and what their low wage allows them to consume has increased enormously);

d.            Unused industrial capacity (the mountain of unsold goods has resulted in a large percentage of machinery of all kinds lying idle, while many pressing needs—but needs that the people who have them can't pay for—go unmet);

e.             Growing unemployment (machines and raw materials are available, but using them to satisfy the needs of the people who don't have the money to pay for what could be made would not make profits for those who own the machines and raw materials—and in a market economy profits are what matters);

Once we have recognized all the main advantages and disadvantages of the market economy, and once we have had a chance to examine and compare them, there are three major questions that remain to be answered. First, is it possible to have the advantages of the market economy without the disadvantages? Both theory and empirical evidence argue strongly that the answer is "no". Even a quick perusal of Marx's analysis of how the market economy works reveals it as an organic whole in which each part serves as an internal aspect in the functioning of the others. Similarly, their effects, both good and bad entail one another; they are extended parts and/or necessary preconditions or effects of each other.

reference :

http://en.wikipedia.org/wiki/Market_economy

http://www.nyu.edu/projects/ollman/docs/china_speech2.php