Community and differences between the classical and modern market economy

The beginning of the doctrine of the market economy was laid by Adam Smith in his work «On the nature and cause of the wealth of nations» in 1776. Smith believes that the objective reason for the emergence of the market is the natural limitations of man's production capabilities. Adam Smith called the market an invisible hand. Smith's teaching was further developed in the works of the Austrian F. Hayek, who defined the market as one of the forms of a spontaneous social order.

The essence of the classical approach to understanding the market economy is reflected in the views of representatives of the classical economic school. Classic is a free market.

The free (classical) market is characterized by the following features:

• 1)    an unlimited number of market participants and free competition between

them;

• 2)    free access to all kinds of economic activities of all members of society;

• 3)    absolute mobility of factors of production, unlimited freedom of movement of capital and labor;

• 4)    the availability of absolutely complete information about the market (demand, supply, prices) for each participant;

• 5)    free prices established as a result of the interaction of supply and demand in the conditions of free competition;

• 6)    no participant in free competition is able to change the market situation at his own discretion;

• 7)    there is no monopoly and state regulation.

To a certain extent, one can say that the free market is a self-regulating mechanism. This mechanism is known to be a deficit-free market.

Any market, regardless of its specific type, is based on three main elements: price, demand and supply, competition.

The price is the language of the market, its signal system. The system of prices in a market economy plays the role of the main organizing force. The price is a reference point for the seller (producer) and the buyer (consumer). The price is growing - it is a signal to expand production, it is falling - a signal to reduce. In price all three approaches to setting the value of goods are reflected: marginal utility, production costs, supply and demand. The spontaneous action of market forces, however, leads to the establishment of socially necessary economic proportions. There is a regulating «invisible hand» that Adam Smith wrote about: «An entrepreneur has in mind only his own interest, pursues his own advantage, and in this case he is guided invisibly to a goal that is not at all his intention. interests, he often serves the interests of society more efficiently than when he consciously seeks to serve them»

In modern conditions, the economy is governed not only by the «invisible hand», but also by government levers, but the regulatory role of the market continues to remain, largely determining the balance of the national economy.

In its pure form, capitalism and the free market have never existed and probably will never exist. Freedom of the market has always been relative. Governments intervened in the market mechanism and sought to use it to achieve specific specific goals. Something was forbidden for sale, something was taxed, something was encouraged. With the development of society, the regulatory role of the state in organizing economic life increased. With the transition to machine production, this process began to take place particularly noticeably. At the turn of the nineteenth and twentieth centuries, it became evident that a large, highly concentrated production was simply not able to develop successfully without direct support from the state.

Because of these circumstances, - says the prominent American economist and sociologist P. Galbraith, today there can not be a free market of the times of A. Smith - and who calls for this - a person with a mental illness of a clinical nature.

Any system, along with advantages, has its drawbacks. With regard to the free market, these shortcomings are as follows:

• 1)    a free market leads to differentiation of incomes, and, consequently, of living standards of the population, does not provide social protection;

• 2)    can not provide the necessary amount of money for the development of production;

• 3)    does not create conditions for the realization of the right to work;

• 4)    does not guarantee full employment of the population;

• 5)    does not create incentives for the production of goods and services of collective use;

• 6)    does not create motivations for fundamental scientific research;

• 7)    does not protect the human habitat from contamination;

• 8)    the market is ready to meet any need, down to pathological.

The economy functioning on the basis of a free market is subject to unstable development (crises of overproduction, inflation, unemployment, social upheavals). The reason is that the coordination of the interests of consumers buying goods and producers occur only in the market, after the resources are expended and the goods are produced.