What Is a Free Market Economy?

The United States has chosen to implement a market economy since the founding of the People's Republic of China. From the end of the 18th century to the middle and late 19th century, with the industrialization and the transition from agricultural to industrial countries, a market economy system of free competition was established. From the end of the 19th century to the beginning of the 20th century, free competition shifted to monopoly. In the 1930s, especially after the Second World War, a mixed economic system was established. Although it is difficult to say that the United States is still a free market economic system, it is not difficult to see its characteristics based on free competition. The United States implements a democratic republic, with the separation of three powers; the constitution grants state legislative powers and local autonomy; freedom and equality are an important part of American values, and the free market economic system is built on this value.

Free market economy model

Right!

The United States has chosen to implement a market economy since the founding of the People's Republic of China. From the end of the 18th century to the middle and late 19th century, with the industrialization and the transition from agricultural to industrial countries, a market economy system of free competition was established. From the end of the 19th century to the beginning of the 20th century, free competition shifted to monopoly. In the 1930s, especially after the Second World War, a mixed economic system was established. Although it is difficult to say that the United States is still a free market economic system, it is not difficult to see its characteristics based on free competition. The United States implements a democratic republic, with the separation of three powers; the constitution grants state legislative powers and local autonomy; freedom and equality are an important part of American values, and the free market economic system is built on this value.

Chinese name

Free market economy model

Foreign name

Free-market economic model

Types of

Economic model

Form

free market

The free market economic model is based on Adam Smith's classical political economics theory and the practice of the British Industrial Revolution in the mid-eighteenth century. It advocates that the state should interfere with private enterprises as little as possible and implement free economy and free trade. Enterprises have high risks and high profits; Emphasize individual freedom and oppose the state's formulation of economic development plans. The characteristics of the free market economic model are: the private economy is absolutely dominant and the proportion of state-owned economy is small; the concentration of private capital is high and the monopoly is strong; the spontaneous regulation of the market is large and the state has little intervention; High, highly mobile and highly competitive employment.

In the late 1970s and early 1980s, Mrs Thatcher of the United Kingdom came to power, and Reagan of the United States took over the White House. The two performed a miracle of the "New Anglo-Saxon Model" under neo-liberal ideology. Recent illustrations of the British-American free model. They privatized ownership, deregulated financial markets, and advocated liberalization in international trade. They led the United Kingdom and the United States out of or eased the economic difficulties at the time.

The free competition market model is conducive to the development of investment and productivity. It originated in the United Kingdom and reached its peak in the United States. The decision-making power accumulated in this model is mainly in private companies, which can freely and maximize the pursuit of short-term profit goals and obtain capital through financial markets; workers enjoy limited and legally prescribed income from labor and social rights; and believe in individuals And liberalism.

The post-war economic performance of the American model is a world leader. The main advantages are: highly flexible labor and product markets, low taxes, fierce competition, and shareholder capitalism-shareholders exert pressure on managers to maximize their profits. It can give full play to the advantages of market competition, and solve the problem of the power of resource allocation based on scientific and technological innovation and necessary government intervention. Enterprises are at the highest level in developed countries in terms of technology, management, products, and innovation in production methods.

The US free market economy model is the so-called consumer-oriented market economy model. It attaches great importance to the role of market forces in promoting economic development, and believes that the government can only play a secondary role in economic development. Advocating entrepreneurship, advocating market efficiency and criticizing government intervention, this market model is characterized by a higher liquidity of production factors. There are also unlimited legal litigation features in this model. Whether the government regulates or not is often aimed at whether it is in the interest of consumers, but less from the perspective of the producer. Social habits and government policies focus more on promoting private consumption and ignoring savings. This tendency is reflected not only in the behavior of individuals and businesses, but also in the large deficits of government public finances.

The United States does not have a national economic plan. Even in the economic and academic circles, there are different opinions on industrial policies generally accepted by many countries in the world. But some states and counties are preparing plans. Countries often influence the economy through government orders and purchases. The government also regulates certain sectors, such as energy, cutting-edge technology, agriculture and environmental protection. However, large companies have their own plan management systems, and generally have to prepare long-term development plans and sales plans.

The evolution and development of the US government's macroeconomic management have roughly gone through three stages:

1. The first phase from the founding of the United States in 1776 to the outbreak of the Civil War in 1860. At first, a state-based economic management system was formed. At this stage, a tax-based fiscal and taxation system was initially established. In 1782, the first bank in the United States, the North American Bank, was established. In 1791, the Congress passed a decree on the establishment of a national bank, which established the first country in the United States.

During this period, the development of Bank of America experienced a period of chaos. The Michigan Regulations of 1837 established a system that stipulates that anyone can apply for a bank license as long as certain conditions are met. Soon after, most states passed similar laws, and at that time there was an upsurge in American society to use the new banking law. In 1834, the total number of Japanese banks in Japan was 500, and in 1840 it increased to 9,000. In 1807, the United States passed a foreign trade embargo ban on the entry of British and French industrial products into the United States, which played a role in promoting the development of its own industry. From 1785 to 1832, the federal government promulgated six ordinances on land reclamation in the west, stimulated the development of agriculture, and adopted measures such as encouraging foreign skilled workers to move to the United States and rewarding inventions and creations to promote technological development.

2. Before the Civil War of 1861 and the Roosevelt administration came to power in 1933, it was the second stage of the US government's macroeconomic management. During this period, the United States established a fiscal and taxation system that focused on corporate and personal income taxes, and reformed the currency and banking system. In 1863, Congress passed the National Bank Regulations, stipulating the minimum amount of capital that a bank must have, and stipulating the use of bank funds and the issuance of banknotes.

Due to the inherent contradictions in the capitalist economic system and the lack of centralized management of the system, a financial crisis occurs in the United States almost every 10 years. Serious economic crises occurred in 1873, 1884, 1893, and 1907. The Federal Reserve System was established in 1913, and Congress authorized the Federal Reserve to control the country's circulation and loans. But Federal Reserve regulations have not changed the principle of free-run banks in the United States, and the number of banks continues to increase. By 1921, there were more than 30,000 banks operating nationwide. Bank failures continued throughout the 1920s. By the time of the economic crisis in the 1930s, the entire banking system was going to collapse.

3. After Roosevelt implemented the New Deal in 1933, the consumer-oriented market economy model in the United States entered a stage of gradual improvement. The government has largely abandoned traditional non-interventionist economic practices. Within 100 days of March 1933, Roosevelt undertook several important reforms by legislative and administrative means.

In terms of solving unemployment, the state has set up a civil protection group to recruit unemployed young people to engage in tree planting, afforestation, dam construction, soil and water conservation, and the construction of national and state parks to protect natural resources. ) Used to build public facilities such as airports, parks, roads, schools, and sewers to provide job opportunities for the unemployed; in agriculture, Congress passed the Agricultural Adjustment Act to control the amount of food produced by farmers and set up housing loan companies to protect the people In order to regulate the issuance of securities, the Securities Law was passed; the Tennessee River Basin Authority was established to promote and plan the development of underdeveloped areas; the Federal Emergency Rescue Law was passed, and so on. Since then, the government's macro-management system for intervention in the market economy has continued to improve and develop.

1. Fiscal budget system.

Before the 1930s, the United States implemented a free market economy. It believed that supply could create its own demand, and relying on market supply and demand relations, it could automatically adjust the economy. Therefore, the fiscal policy at that time was mainly to maintain the state budget's balance of payments, rather than using fiscal policy to regulate the economy.

Since the outbreak of the economic crisis from 1929 to 1933, British economist Keynes said: "The economy cannot automatically reach its output potential. Economic activity will remain at a level below the output potential, and measures to increase aggregate demand will be needed. To stimulate production and increase employment. "He advocated state intervention, believing that the economy could recover from the recession through the government's full employment policy. Many economists accepted Keynes's theory. In the future, US fiscal policy will no longer balance budget revenue and expenditure, but will instead aim to maintain price stability and promote full employment. Government budget revenue and expenditure, the tax structure and progressive income tax, unemployment insurance, etc., have all become important means for the U.S. government to invigorate the macro economy, adjust the relationship between the central and local governments, and help the government implement social goals (social goals that the market cannot solve) .

The United States implements a federal, state, and local three-level policy budget management system. The federal government's fiscal revenue accounts for about 60% of total revenue and local revenues account for about 40%. About 10% of the federal government's budget spending goes to state and local aid. In this way, the federal government can rely on its financial resources to intervene and influence the development of states and localities, and to a certain extent, promote the more balanced development of the national economy. Before 1932, state and local government subsidies from the federal government accounted for only 3% of total revenue. But after 1934, it started to rise to 13%, and the highest annual score (1979-1980) reached Z1.8%. Among the federal government's fiscal revenues, personal income tax, corporate income tax, and social insurance tax account for about 87% of all taxes (fiscal years 1988-1989). Among the revenues of state and local governments, various taxes account for more than 51% (fiscal years 1983-1984), and subsidies received from the federal government account for about 18%. The federal government's expenditures are mainly used for defense and international relations, followed by social insurance, which accounted for 27% and 25% of expenditures in the 1988-1989 fiscal year, respectively. State and local government fiscal expenditures are mainly used for education, roads, public welfare and public facilities.

The United States does not rely on industrial policies and national plans to intervene in economic activities, but rather expands the market and stimulates investment and production through the purchase of goods and services by the state. The main thing is military procurement, most of which are undertaken by the Ministry of Defense. The US Department of Defense also owns considerable state-owned assets. The rest is civil procurement. For example, government procurement in 1985 was $ 353.9 billion, of which military procurement accounted for 74%.

One of the potential causes of the economic crisis of the 1930s was the low income of farmers and workers, which caused a serious surplus of consumer goods. In light of this lesson, the US government attaches great importance to the protection of agriculture and has initiated planned interventions in agriculture. The Agricultural Adjustment Act was passed in 1933, creating a commodity credit company. It can borrow money from the Ministry of Finance to subsidize agriculture. The US government's initial intervention in agriculture was mainly due to the oversupply of agriculture and the implementation of production restriction measures. Since the 1970s, due to the shortage of agricultural products in the international market, the government temporarily stopped restricting farming, and instead promoted increased agricultural production, reduced "support prices", and promoted agriculture to market. Congress passed the Food Safety Act in 1985, which lowered the support prices for several agricultural products and promoted further competition in the agricultural market.

2. Bank financial system.

By the end of 1990, there were about 12,300 banks in the United States, the country with the largest number of banks in the world, but the average number of assets owned by each bank was not large. The US government's management of banks has gone through a process of centralization, decentralization and centralization. The bank was first established in 1782 and the earliest National Bank was established in 1791. The period from 1837 to 1863 was a period of free development for the Bank of the United States. At that time, commercial banks in the United States were registered in their states. Due to the lack of strict management of the banks in the states, a large number of banks closed down. The currency of state banks often becomes waste paper, causing great losses to ordinary people.

In 1863, the United States passed the National Bank Regulations, and in subsequent supplementary regulations, the National Bank system registered with the federal government was provided. The federal government has established a financial watchdog within the Ministry of Finance to control credit and manage banks. In order to stop the issuance of currency by state banks, a 10% tax is also levied on currency issuance by state-registered banks, making it unprofitable to issue bank notes. Many state banks immediately applied to change to national banks. Some banks had to close because of heavy taxes, and some survived by checking instead of currency. Thus in the US banking system, there is a dual-track system of federally managed banks and state-managed banks. During the economic crisis of 1929 to 1933, a large number of banks went bankrupt.

Roosevelt introduced the Banking Law from 1933 to 1935 to support reform of the banking system and centralize the powers of the Federal Reserve Bank. In this legal system, the leadership system and organization of the Federal Reserve Bank are specified. At present, the US government has three regulatory systems governing banks:

The consumer-oriented market economy is in continuous improvement and perfection. In the 1980s, the US government relaxed its intervention in the transportation industry (including aviation, automobile freight, and railways), pricing it according to market methods, and also relaxed its control over oil prices, and attached great importance to the use of market economic mechanisms to improve environmental protection. On the one hand, the United States is relaxing its intervention, while on the other it is facing competition from administratively oriented market economy countries, such as Japan, South Korea, and other newly industrialized countries. This raises some new questions.

Do I need to develop an industrial policy? Generally speaking, the values based on the United States are the so-called "life, freedom, and the pursuit of happiness". Therefore, the United States has always advocated the spirit of freedom of the enterprise without intervention. Since 1973, the annual growth rate of labor productivity has been only 0.8%, and in the 25 years before 1973, the annual growth rate of labor productivity was 2.5%. If the average annual productivity growth of 2.5% can be maintained, the average household income in the United States today should be $ 47,000, but now it is only $ 35,000. The director of the economic advisory committee selected by Clinton, Tessou, proposed that the United States also needs an industrial policy, especially in the field of high technology, but it is still opposed by some people in the US economic community.