Criteria of Market Economy

Updated: 2006-10-09 16:11

III. Further Analysis on "Standardization of Governmental Behavior" and "Liberalization of Economic Entities"

The following paragraphs are to discuss the meanings and essential characteristics of standards by analyzing the two criteria "standardization of governmental behaviors" and "liberalization of economic entities".

"Standardization of governmental behavior" requires that government administrative system meets the requirements of market economy in dealing with the relationship between market and enterprises. In a word, are the resources of a country allocated by governmental administration or the market? The relevant criteria of market economy proposed by European and American countries do not require a theoretical model or a totally competitive market economy to judge other countries, and these countries also admit that there are various patterns and characteristics among market economy countries in the modern world.

In reality, "standardization of governmental behavior" is usually used to describe "government size and extent of intervention" in an approximate way. The concerns are the role and function of government in market economy, i.e., which one is better, a large government or a small government, or a powerful government or a weak government? The pivot is the relationship between government and market. The classic economists represented by Adam Smith preferred small governments emphasizing on the full market competition, while the Keynesian theory was in favor of large governments, claiming that effective demands could be expanded and the coordination of supply and demand could be achieved through government intervention, rather than through full competition. In terms of the modern market economy, Samuelson's neo-classic comprehensive theory has become the mainstream: combining government and market, a government should play a leading role in organizing and guiding on the basis of allocation of resources by market. The reallocation of resources through government intervention hereby is a supplementary way to resources allocation by market. According to Samuelson, the role of a government is: first, to establish a legal system; second, to formulate macro economy stabilization policies; third, to promote economic efficiency through influencing allocation of resources, and; fourth, to introduce a reasonable mechanism affecting income distribution. A government should avoid intervening market and enterprises, but can never abandon the responsibility of providing public goods and seeking for a favorable economic environment. These days, an economic entity practicing a market economy with full competition cannot be found, nor an economic entity practicing market economy completely under a government's shelter. As a result, the common ground is to shrink excessive government intervention, avoid monopoly, promote competition and institute a legal system.

The role of government in economy, however, varies with countries, development phases and economic issues. With respect to well--developed market economy countries, some governments exercise less direct economic intervention, but more indirect influence. Meanwhile, another situation happens: the more the government has state-owned enterprises, the more it depends on industrial policies. For instance, the US and the UK attach more importance to the role of market mechanism than Japan and Nordic countries, while Japan and France share more common grounds in development guidance plan and industrial policy. As for a transitional country like China, although government functions under a planned economy have been adjusted greatly, all round economic intervention has been turned into selective intervention, and more fair treatment has been given to various enterprises with different ownership by consolidating, respecting and safeguarding enterprises' independent management rights in line with legal system. The government is still required to play an important role right now for the purpose of reducing the government's role in the future. The reason is that a market economy system cannot be established without the government's guidance and support. Although a combination of appropriate government intervention and relative free market is widely observed in both well-developed countries and countries in transition, there are differences in the role of the government and the extent of governmental intervention. These differences are normal and a manifestation of the market economy corresponding to various stages.

All government behavior involves controlling. Should government control be beyond a certain limit, market efficiency would be definitely affected, and in the end, under the circumstance of protecting some people's interests and rights, it may lead to harming some other people's interests and rights to a great extent, and on the whole the economic freedom as well. Nevertheless, some control is required, which on the one hand can safeguard interests of social groups and the country, and at the same time push forward social progress and ensure that people freely enjoy their benefits. The rationale to measure market economy standard determines the rational judgment of the range and degree of government intervention in economy and the definition of differential margin when applying to various countries.


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