What is a Market Economy?

Econolog (Arnold Kling): What is a Market Economy?

… It could be that my views of economic history are colored by ignorance. But one thing that is going on is that I have a very strict definition of a market economy.

1. Are most goods and services you consume (a) produced in large part by strangers; or (b) produced by someone in your household, clan, tribe, or village?

2. Think about goods or services that had to travel a long distance. If something was imported from a long distance, did it travel to you (a) guided solely by the price system; or (b) somewhere on the way was it moved by imperial command? If something ever was distributed as plunder or collected as tribute, then the fact that it eventually wound up for sale in a market does not make it a market economic transaction.

3. Do workers (a) labor by choice, with the ability to freely change occupations; or (b) is some important production done by subjects of authoritarian rulers, slaves, serfs, or members of a restricted caste?

To satisfy a strict definition of a market economy, one has to be able to answer (a) across the board. You need a wide trading system that takes advantage of specialization and comparative advantage. Moreover, the trading system must be based on approximate parity of political power, rather than on coercive exploitation.

Now, think about ancient Egypt, the Incas, Greece, Rome, the Muslim empire, the Silk Road, the Spanish empire in the New World, the early European empires in India and the Far East, or the antebellum South in the United States. Were there markets and was there trade? Absolutely. Did they meet the strict definition of a market economy? My sense is no.